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Defunct firms can no longer enforce arbitration agreements

Among the initiatives NASD has taken in response to the GAO’s 2000 Report on unpaid Awards is a new rule closing its arbitration forum to defunct members.

The new rule, an amendment to NASD Rule 10301, was approved by the SEC in April (SAA 01-17). It prohibits a broker-dealer “whose membership has been terminated, suspended, canceled, or revoked, or that has been expelled from the NASD, or that is otherwise defunct, from enforcing a predispute arbitration agreement against a customer in the NASD forum, unless the customer agrees to arbitration in writing after the claim has arisen.”

Notice to Members 01-29, which issued earlier this month, explains that, as part of the implementation of this new Rule, NASD-DR will institute a procedure whereby customers are notified, prior to service of their claims, if a Respondent firm falls into one of the enumerated statuses (stati??). If so, the customers may elect “to proceed in arbitration, to file their claim in court, or to take no action.”

The rule change will apply to all claims served on or after June 11, 2001. (ed: Query about this new rule — “defunct,” according to American Heritage Dictionary, means “[h]aving ceased to exist or live.” Broadly defined, that could include any NASD member that files a BD-W. Might not customers with claims against NASD-only firms that have been acquired, for instance, be able to avoid arbitration through this Rule’s exception? The big firms would be unaffected, as the NYSE forum will likely be an alternate choice in the pre-dispute agreement.)


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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article. 


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