Firm Agreements With Customers Not To Testify In NASD Proceedings
TO: All NASD Members and Other Interested Persons
It has come to the NASD's attention that some members are engaging in a practice with regard to settling customer complaints that may involve violations of Article III, Section 1 and Article IV, Section 5 of the NASD Rules of Fair Practice. The staffs of several NASD district offices have encountered difficulties in investigating potential violations by members because of the reluctance of customers to cooperate with NASD investigations after they have executed settlement agreements with members. The situation apparently occurs most frequently when a customer complains to a firm, and the firm offers the customer a monetary settlement in exchange for executing a written agreement that the customer will neither bring suit against the firm nor testify against it in connection with the incident in question.
This problem has occurred in a significant number of instances and may or may not be the result of deliberate efforts on the part of certain members to undermine NASD investigations. In some eases, the agreements that customers are asked to sign are drafted to be all-encompassing but do not specifically refer to NASD proceedings. When questioned, however, the firms apparently do not disagree with customers who interpret the agreements as precluding their cooperation with the NASD. In other cases, NASD staff members have been concerned that some firms obtain settlement agreements from customers that are specifically designed to have the effect of precluding NASD investigations. In either case, NASD enforcement action is hampered.
It is not the NASD's intent to impede members from obtaining general releases from customers in grievance matters, except insofar as such agreements can be construed as precluding customers from cooperating in NASD investigations. In the NASD's view, a member's use of any agreement that impedes an NASD investigation of possible rule violations may in itself constitute a rule violation.
As a general matter, the practice could be viewed as unethical and therefore a violation of Article III, Section 1 of the NASD Rules of Fair Practice. More specifically, a member's execution of an agreement that precludes any party from cooperating with an NASD investigation could be found to constitute a violation of Article IV, Section 5 of the NASD Rules of Fair Practice* as a failure to make information available to the NASD in connection with an investigation. Members are therefore cautioned against executing agreements that may prevent any customer or other party from providing information, documents or testimony, or otherwise cooperating with the NASD in its investigations of alleged violations.
Questions or comments regarding this notice may be directed to either Dennis C. Hensley or Eugene Bleier, NASD Office of the General Counsel, (202) 728-8287.
Frank J. Wilson
Executive Vice President and General Counsel
* The text of Article IV, Section 5 appears in the NASD Manual at ¶2205.