SECURITIES AND EXCHANGE COMMISSION
In the Matter of the Application of
PERPETUAL SECURITIES, INC.
For Review of Action Taken by the
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF
Failure to Pay Arbitration Award
Member firm of registered securities association failed to pay in full an arbitration award. Association suspended firm's membership indefinitely until the firm submits proof that it has satisfied or discharged the obligation, the parties have agreed to modify the award, the arbitration award has been modified or vacated by a court, or the award is the subject of a bankruptcy petition or has been discharged in bankruptcy. Held, appeal proceedings are dismissed.
Kevin K. Tung, for Perpetual Securities, Inc.
Marc Menchel, Alan B. Lawhead, and Vickie R. Olafson, for NASD
Appeal filed: November 29, 2002
Last brief received: March 12, 2003
Perpetual Securities, Inc., an NASD member firm, seeks review of NASD action. NASD suspended Perpetual's registration indefinitely pursuant to Article VI, Section 3 of the NASD By-Laws and NASD Procedural Rule 9514(g) on the ground that Perpetual failed to honor an arbitration award. The suspension is effective until Perpetual submits proof that: (1) it has paid the arbitration amount in full; (2) Perpetual and the arbitration claimants have entered into a settlement agreement; or (3) a bankruptcy petition is pending in the United States Bankruptcy Court or the arbitration award has been discharged in bankruptcy. We base our findings on an independent review of the record.
On November 14, 2000, an NASD arbitration panel issued an award holding Perpetual liable for the payment of $21,000. Perpetual filed a motion to vacate the arbitration award with the U.S. District Court for the Southern District of New York. The court denied Perpetual's motion to vacate the arbitration award holding that it did not have subject matter jurisdiction over the matter and granted the arbitration claimants' petition to confirm the arbitration award. On appeal, the U.S. Court of Appeals for the Second Circuit issued an opinion on May 9, 2002 affirming the district court's holding that it lacked subject matter jurisdiction, reversing the district court's decision to confirm the arbitration award, and remanding the case to the district court with instructions to dismiss the case for lack of subject matter jurisdiction.1
NASD advised Perpetual in a letter dated June 18, 2002 that its NASD membership would be suspended effective July 8, 2002 unless, prior to that time, it provided NASD with documentary evidence that: (1) it had made full payment of the award; (2) it had reached an agreement with the arbitration claimants on a payment schedule; (3) the award was modified or vacated by a court (or a motion to vacate or modify the award was pending before a court); or (4) a bankruptcy petition was pending in the United States Bankruptcy Court or the award had been discharged in bankruptcy. NASD informed Perpetual that it had a right to request a hearing on NASD's proposed suspension.
In a letter dated June 24, 2002, Perpetual's attorney advised NASD of the Second Circuit's judgment vacating the district court's confirmation of the arbitration claimants' award. The attorney asserted that, since the claimants had failed to confirm the award in a court of competent jurisdiction within one year from the date of the award, as required by the Federal Arbitration Act,2 Perpetual had no legal obligation to pay the award. Perpetual requested a hearing in a letter dated July 2, 2002.
At a pre-hearing conference on July 26, 2002, the parties agreed that there were no factual issues in dispute and that the case could be decided without a hearing. The only issue raised by Perpetual at the proceeding was the enforceability of the arbitration award under New York law. Perpetual's attorney conceded that his client: (1) had not paid the arbitration award; (2) had not reached a settlement agreement with the claimants; (3) had not had the award vacated (nor had a motion to vacate pending in any court); (4) had not filed a bankruptcy petition; and (5) did not claim that it was unable to pay the award.
Our review of Perpetual's appeal is governed by Section 19(f) of the Securities Exchange Act of 1934,3 which encompasses a self-regulatory organization ("SRO") determination to suspend the membership of a member firm.4 Section 19(f) directs that, if we find that "the specific grounds" on which the SRO based its action "exist in fact," that the SRO's determination was in accordance with its rules, and that those rules are, and were applied in a manner, consistent with the purposes of the Exchange Act, we must dismiss an appeal from theSRO's action unless we find that the action imposes an undue burden on competition.5
A. NASD's suspension was based on its finding that Perpetual has not paid in full the November 14, 2000 arbitration award. It is undisputed that Perpetual failed to pay any part of the arbitration award. We find that the specific ground on which NASD based its suspension -- failure to pay in full an arbitration award -- "exists in fact."
B. Rule 10330(h) of the NASD Arbitration Code requires that "[a]ll monetary awards shall be paid within thirty (30) days of receipt unless a motion to vacate has been filed with a court of competent jurisdiction." Article VI, Section 3 of the NASD's By-Laws authorizes NASD to initiate proceedings to suspend registration for failing to pay an arbitration award if a "timely motion to vacate or modify such award has not been made pursuant to applicable law or where such motion has been denied." Here, it is uncontroverted that Perpetual did not pay the arbitration award and it is further uncontroverted that a timely motion to vacate the award was denied by the district court and this denial was affirmed by the Second Circuit.
Rule 9511(a) of the NASD's Code of Procedure ("Code") provides for a proceeding to suspend the membership of a firm that has failed to comply with an arbitration award.6 Rule 9513(a) of the Code authorizes NASD to initiate the proceeding by issuing to the member firm a written notice that specifies the grounds for, and the effective date of, the suspension, and advises the firm of its right to file a written request for a hearing pursuant to Rule 9514. NASD's written notice to Perpetual complied with the requirements of Rule 9513(a).7 Finally, the Hearing Officer prepared a written opinion, as required by Rule 9514(g) of the Code, specifying his reasons for the suspension.
Perpetual argues that NASD lacked authority to suspend the firm because the arbitration award was not enforceable under New York law as it had not been confirmed by a court of competent jurisdiction within the state's one year statute of limitations for arbitration awards. This argument is groundless. There is no requirement under NASD's rules that an arbitration award be confirmed by a court before NASD can commence proceedings to suspend a member.8 Indeed, as we have previously noted, once an arbitration award is issued against an NASD member or associated person, it is the member's or associated person's obligation to promptly pay the award, not the arbitration claimant's obligation to confirm.9 Accordingly, we find thatNASD proceeded against Perpetual in accordance with its rules.10
C. We lastly conclude that the NASD rules at issue are, and were, applied in a manner consistent with the purposes of the Exchange Act. Honoring arbitration awards is essential to the functioning of the NASD arbitration system. Requiring members or associated persons to abide by arbitration awards enhances the effectiveness of the arbitration process.11 Perpetual has harmed the arbitration claimants by forcing them to wait for an extended period of time to satisfy their award. Inducing Perpetual to pay the award through suspension of its NASD membership furthers the public interest and the protection of investors.12
* * *
In sum, we find that the grounds on which Perpetual's indefinite suspension was based exist in fact, that the suspension was imposed in accordance with the NASD's rules, and
that the rules are and were applied in a manner consistent with the purposes of the Exchange Act. Accordingly, we dismiss Perpetual's appeal.
An appropriate order will issue.13
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, GOLDSCHMID, ATKINS, and CAMPOS).
Jonathan G. Katz
In the Matter of the Application of
PERPETUAL SECURITIES, INC.
For Review of Action Taken by the
ORDER DISMISSING APPEAL OF ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION
On the basis of the Commission's opinion issued this day, it is
ORDERED that the appeal filed by Perpetual Securities, Inc. be, and it hereby is, dismissed.
By the Commission.
Jonathan G. Katz
|1||Perpetual Securities, Inc. v. Tang, 290 F.3d 132 (2d Cir. 2002).|
|2||9 U.S.C. § 9.|
|3||15 U.S.C. § 78s(f).|
|4||The Commission previously has held that Section 19(f) governs its review of SRO action imposing an indefinite suspension, where that suspension is contingent on the fulfillment of a condition, such as the payment of an arbitration award. See William J. Gallagher, Securities Exchange Act Rel. No. 47501 (Mar. 14, 2003), 79 SEC Docket 3071, 3078; Tony R. Smith, Exchange Act Rel. No. 43748 (Dec. 20, 2000), 73 SEC Docket 3806, 3809; Frank R. Rubba, 53 S.E.C. 670, 673 (1998).|
|5||Perpetual does not claim, and we see no basis for concluding, that its suspension imposes an unnecessary or inappropriate burden on competition.|
|6||Article VI, Section 3 of the NASD By-Laws permits NASD, after 15 days written notice, to suspend the registration of any person for failure to comply with a written and executed arbitration award obtained in connection with an arbitration or mediation submitted for disposition pursuant to NASD rules.|
|7||As noted above, Perpetual waived its right to a hearing when the parties agreed at their July 26, 2002 pre-hearingconference that there were no factual issues in dispute and that the case could be decided without a hearing.|
|8||The confirmation procedure under the Federal Arbitration Act, 9 U.S.C. § 9, is designed to confer upon the prevailing party the right to pursue satisfaction of the award through the court. Although judicial confirmation of an arbitration award is important for collection purposes under the Federal Arbitration Act, it is not required for purposes of recognizing the validity of the award. In re Robinson, 265 B.R. 722, 731 (2001), aff'd, 326 F.3d 767 (6th Cir. 2003).|
|9|| See Daniel Joseph Avant, 52 S.E.C. 442, 446 (1995); James M. Bowen, 51 S.E.C. 1152, 1154 n.10 (1994).
Perpetual seeks to distinguish Avant and Bowen from the instant case by noting that the respondents in those cases failed to move to vacate the awards within the time period provided under the NASD Code of Arbitration while, in this case, Perpetual filed a motion to vacate within the required time period. However, this distinction is irrelevant. Under Article VI, Section 3 of the NASD By-Laws, NASD is authorized to suspend a member "where a timely motion to vacate . . . has been denied." As noted previously, Perpetual's motion to vacate was denied by the Second Circuit.
Perpetual and NASD have offered conflicting interpretationsof New York's laws regarding the confirmation of arbitration awards. However, it is unnecessary for us to delve into this dispute. It is NASD's rules that govern this matter.
|10|| Perpetual asserts that the NASD Hearing Officer erred by assuming that Perpetual became obligated to pay the arbitration award when the district court denied its motion to vacate - a fact, it contends, that is not evidenced in the record. In support of its contention, Perpetual has attached an exhibit to its brief that purports to show that Perpetual had filed a bond in August 2001 to stay the district court's judgment.
The significance of this argument is unclear. NASD did not commence this proceeding against Perpetual until more than a month after the Second Circuit had denied Perpetual's appeal of the district court's rejection of its motion to vacate the arbitration award. Thus, the stay was not in effect at the time the NASD proceeding began.
|11||Gallagher, 79 SEC Docket at 3078; Smith, 73 SEC Docket at 3812; Herbert Garrett Frey, 53 S.E.C. 146, 153 (1997).|
|12||Perpetual complains of the unfairness of the arbitration claimants' demand for interest on the award and at the rate of interest sought. However, NASD Arbitration Rule 10330(h) clearly states that "[a]n award shall bear interest from the date of the award . . . if not paid within thirty (30) days of receipt, [or] if the award is the subject of a motion to vacate which is denied." The rule goes on to declare that"[i]nterest shall be assessed at the legal rate, if any, then prevailing in the state where the award was rendered, or at a rate set by the arbitrator(s)." As an NASD member, Perpetual is presumed to know and understand the NASD rules. See Carter v. SEC, 726 F.2d 472, 474 (9th Cir. 1983). Authorizing the assessment of interest for awards not paid within 30 days also serves the purpose of encouraging prompt payment of awards which enhances the effectiveness of the arbitration process. We, therefore, find no merit in Perpetual's complaint.|
|13||We have considered all of the contentions advanced by the parties. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed herein.|
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