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A New York bankruptcy court ordered a former member of the "National Association of Securities Dealers (NASD) to arbitrate its dispute with a current NASD member, because membership status is determined by the rules in effect at the time a dispute arises.
In re Continental Broker-Dealer Corp., No. 04-85318-JBR, No. 807-08003-JBR, 2007 WL 1412430 (Bankr. E.D. N.Y. May 9, 2007) involved former NASD member Continental Broker-Dealer Corp. (the "debtor" in a bankruptcy case) and current NASD member GunnAllen Financial, Inc. (GunnAllen), which debtor Continental accused of harming its business by luring away employees and customers.
The NASD, in its recently enacted "New Code," explicitly binds members and "former members" to the terms of its arbitration agreement. However, even if the "Old Code" applied – as the Court ruled it did – debtor Continental would still be bound to arbitrate.
Agreeing with the majority of courts to consider the issue, the Court held that "NASD membership status for purposes of determining the application of the NASD's arbitration requirement must be determined at the time of the events giving rise to the dispute."
More specifically, since the "Old Code" expressly called for arbitration of disputes over termination, a literal reading that former members could not be compelled to arbitrate would "defeat the rule's clear intent." Similarly, plaintiffs could routinely avoid mandatory arbitration simply by canceling their membership with NASD prior to filing suit for their grievances, again thwarting the clear intent of the NASD code.
Given that both parties are bound by the "Old Code" and by the terms of the Federal Arbitration Act, the Court required the dispute be arbitrated before the NASD.
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