NASD Adds Customer Protections To Arbitration Settlements
he National Association of Securities Dealers (NASD) has added protections for customers who settle arbitration claims that they have brought to recover their investment losses. Customers who are contemplating settlement, as well as their attorneys, should familiarize themselves with these new protections.
In June, the NASD issued two NASD Notices to Members, NTM 04-43 and NTM 04-44. NTM 04-44 is entitled, "Settlement Agreements: Impermissible Confidentiality Provisions and Complaint Withdrawal Provisions in Settlement Agreements." That notice states that, as a result of some regulatory examinations, the NASD is concerned that recent settlement activities impede or have the potential to impede any separate NASD investigations and enforcement actions against brokers and brokerage firms. The NASD will not allow brokers and brokerage firms to impede investigations and enforcement actions, citing NASD Rule 2110, which requires high standards of commercial honor and just and equitable principles of trade.
There are three particular areas of concern. First, the presence of impermissible confidentiality provisions in settlement agreements. Despite previous pronouncements, the NASD notes that settlement agreements continue to "prohibit, limit or discourage" customers from disclosing settlement terms or the underlying facts of a dispute to the NASD or to other securities regulators. Such settlement restrictions must end.
Second, the NASD also cautions brokerage firms and brokers to discontinue the use of impermissible complaint withdrawal provisions in settlement agreements. These provisions require the customer to withdraw (as opposed to simply dismissing) the complaint filed with the NASD or other regulatory agency as a condition of the settlement. The NASD is concerned that these withdrawal provisions "have the potential to hamper NASD and other regulators from carrying out their regulatory mandates."
Third, the NASD advises brokerage firms and brokers to discontinue the practice of requiring customers to sign false, misleading or inaccurate affidavits concerning the facts underlying the customer complaint as a condition of settlement. The NASD states that this practice is impermissible and frustrates or otherwise impedes regulatory investigations and prosecutions.
Notably, the notice "strongly encourage[s]" brokerage firms to review and correct past settlement agreements that run afoul of these prohibitions. The NASD even suggests particular language for firms to use in contacting their customers.
The second NASD notice, NTM 04-43, is entitled, "Expungement: Members' Use of Affidavits in Connection with Stipulated Awards and Settlements to Obtain Expungement of Customer Dispute Information under Rule 2130." The term "expungement" refers to the process whereby a broker or brokerage firm files a court action seeking to remove all references to a customer complaint from the broker's (or brokerage firm's) national employment database, known as the Central Registration Depository.
This notice is in response to the NASD's recently discovering "instances in which [arbitration] claimants and respondents appear to be settling customer claims for monetary compensation to the claimant in return (at least in part) for a customer affidavit that absolves one or more of the respondents of responsibility for any alleged wrongdoing." The NASD notes that these affidavits appear to be inconsistent with the allegations of the arbitration claims as well as the terms of the settlement.
The NASD issues strong caution. Affidavits in which the content is the product of "bargained-for consideration as opposed to the truth" will subject brokerage firms and brokers to a panoply of sanctions, including possible disciplinary action as well as possible criminal sanctions!
The NASD announces that it will take three actions to address the concern. First, it will train arbitrators with respect to these new rules. Second, any brokerage firms and brokers requesting expungement from a court of law will have to provide the NASD with a copy of the original arbitration claim, all settlement documents and affidavits, as part of the new Rule 2130 procedure for seeking expungements. Third, NASD will consider bringing enforcement actions against brokerage firms and brokers who violate these new rules.
Arbitration settlements now will have less "strings attached". That's good news for investors settling their claims.
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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.
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