NASD Defunct Firm Proposal


The Securities and Exchange Commission has invited public comment on a rule proposal from NASD Dispute Resolution that would institute default arbitration procedures for non-responding defunct firms and terminated personnel.

When the General Accounting Office disclosed in June 2000 (SAA 00-26) that many winning Claimants in arbitration do not collect on their winning awards, the NASD reacted with a group of proposals designed to address that perceived problem.

This proposal, filed with the Commission on February 1, 2002 (SAA 02-09) and announced in the Federal Register on May 1, 2002 (67 Fed. Reg. 84, p.21780; SEC Rel. 34-45816, dtd. 4/24/02), is the last in that series of corrective measures.

The Rule revision amends NASD Rule 10314, “Initiation of Proceedings,” to provide that, in certain circumstances, a non-responding party will be subject to expedited default procedures. Those procedures, described in a new subparagraph (e), apply to members who are terminated, suspended, expelled, cancelled, revoked (i.e., defunct) and associated persons whose registrations are terminated, revoked or suspended.

In those cases and where all Claimants in the case agree, the Director will appoint a single arbitrator who, without a hearing, will consider the documentary evidence and issue an Award. If there are other Respondents in the case who are not defunct/terminated, NASD-DR will deal with the bifurcated case under two different docket numbers “to avoid confusion.” The proposal does not state that the single arbitrator must be a different arbitrator from the ones who hear the “active Respondent” side of the case.

There appears to be no time limit on the right to request bifurcation and the question of separate fees for the two proceedings is not discussed, some areas do exist where comment could be helpful.

The purpose is to separate out those firms or persons who would not participate in the arbitration process in any case and to provide an expeditious, but fair manner for providing a resolution with respect to those parties. (ed: Although proposed in response to an investor protection matter, the new rule would appear to apply to intra-industry matters as well. Public comment on this proposal should be addressed to the SEC’s Secretary with six copies. Refer to File SR-NASD-2002-15 and submit before May 22, 2002.) (SAC Ref. No. 02-19-01)

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Mark J. Astarita is a veteran securities attorney representing investors and financial professionals nationwide in securities investigations and arbitrations. Have a question? Email him at, call his office at 212-509-6544, or visit The Securities Lawyer

Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.