Membership approval will include review of unpaid awards, and more.
A Rule proposal regulating the membership application process will make it more difficult for brokerage firms and associated persons to avoid paying arbitration Awards through the camouflage of reorganization. The transfer of assets from one brokerage firm to another or to a new entity is a legitimate means of transferring control and ownership, but it is also a means by which some brokerage firms and their principals cover their tracks and seek to avoid future liabilities or current debts to customers. By moving their assets under a new corporate roof, such people can often make collection more difficult and avoid the crushing impact of NASD enforcement efforts.
We reported on this proposal when it was first published by NASD for comment (SAA 02-32), but not since. It was filed with the SEC in January 2003 under File No. SR-NASD-2003-07 and published for comment in October 2003, after a single amendment. A second amendment followed and, without comment, the Rule changes were approved on December 22, 2003 (Rel No. 34-48969, published 68 Fed. Reg. 250, p. 75681, 12/31/03).
NASD Rule 1014, which lists certain factors, such as pending or past regulatory actions, that will be considered in the membership process, now includes pending arbitrations or civil actions against the applicant, as well as unpaid arbitration awards, or other adjudicated customer awards against the applicant or designated persons in control relationships with the member. There will also be a presumption that negative events relating to Rule 1014 will block membership approval, absent adequate rebuttal.
NASD Rule 1017 broadens and clarifies the categories of asset dispositions that will trigger the approval process. Any transfer of assets in bulk will require NASD approval, whether it is fashioned as an acquisition or otherwise, and the amount involved will be objectively fixed, using a 25% threshold test, instead of the more subjective substantially all in the previous rule.
Finally, Rule 1011 has been altered to include, for membership approval purposes, persons associated with the firm in control-type relationships, whether natural or corporate.
With these changes, NASD believes the new Rules will strengthen its ability to protect investors with pending claims, awards or judgments against NASD members, and to otherwise detect and prevent misconduct. The SEC states that the broadening of transactions subject to the approval process and the extension to any form of asset transfer should enhance the NASDs ability to ensure that such transactions do not result in a member or its owners insulating itself or themselves from the responsibility to pay existing or potential customer claims. (SAC Ref. No. 2004-05-02)
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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 - SECLaw.com, 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.