[Federal Register Volume 60, Number 143 (Wednesday, July 26, 1995)]
[Notices]
[Pages 38384-38386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18285]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35990; File No. SR-NASD-95-25]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
Mediation of Disputes

July 19, 1995.
    On June 6, 1995,\1\ the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\2\, and Rule 19b-4 thereunder.\3\ The proposed rule change 
amends the Code of Arbitration Procedure (``Code'')\4\ by adding a new 
Part IV to set forth rules to govern the administration of mediation 
proceedings (``Mediation Rules'') and by amending Sections 37, 43 and 
44 of the Code\5\ to add fee and other provisions relating to the 
administration of mediation proceedings.

    \1\ The NASD amended the proposed rule change subsequent to its 
original filing on May 19, 1995. Amendment No. 1 was a minor 
technical amendment, the text of which may be examined in the 
Commission's Public Reference Room. See Letter from Suzanne E. 
Rothwell, Associate General Counsel, NASD, to Mark P. Barracca, 
Branch Chief, Over-the-Counter Regulation, Division of Market 
Regulation, SEC (June 2, 1995).
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ NASD Manual, Code of Arbitration Procedure, (CCH) 
Paras. 3701 et seq.
    \5\ NASD Manual, Code of Arbitration Procedure, Part III, Secs. 
37, 43 and 44, (CCH) Paras. 3737, 3743, 3744.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was provided by issuance of a Commission release 
(Securities Exchange Act Release No. 35830, June 9, 1995) and by 
publication in the Federal Register (60 FR 31522, June 15, 1995). No 
comment letters were received. This order approves the proposed rule 
change.
    More than 5,500 arbitration cases were filed with the NASD in 
calendar year 1994, which represents 82 percent of all securities 
arbitrations filed in all arbitration for a combined (including the 
American Arbitration Association) and 86 percent of all arbitrations 
filed with self-regulatory organizations. The volume of arbitration 
cases has been growing dramatically since the U.S. Supreme Court 
recognized the enforceability of predispute arbitration agreements with 
respect to claims arising under the Act\6\ and under the Securities Act 
of 1933.\7\

    \6\ Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 
(1987).
    \7\ Rodriguez de Quijas v. Shearson/American Express, Inc. 490 
U.S. 477 (1989).
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    As the volume of arbitrations has increased, cases have grown more 
complex and time-consuming such that some of the advantages of 
arbitration as a low cost and swift alternative to litigation are 
disappearing. This has led to interest in other forms of alternative 
dispute resolution that may be less expensive than adversarial 
proceedings in arbitration or in court. A goal of mediation is to 
explore and come to a settlement of an outstanding dispute without 
resort to adversarial adjudication.

Amendments to Existing Rules

    Record of Sessions. Section 37 of the Code has been amended by 
adding a new paragraph (b) to prohibit keeping a verbatim record of any 
mediation session conducted pursuant to the proposed rules. The NASD 
believes that a verbatim record is not consistent with the methods of 
mediation: a free-flowing and confidential exchange of views, opinions, 
proposals and admissions.
    Fees. Sections 43 and 44 of the Code have been amended to include 
fees for NASD mediation sessions. The administrative fees of the NASD 
set forth in new Subsection 43(i) and 44(j) for administering a 
mediation will be charged only when there is no Association arbitration 
pending. When there is no arbitration pending, the NASD will charge 
each party $150 under new Subsection 43(i) to administer the mediation 
of a public customer matter and will charge each party $250 under new 
Subsection 44(j) to administer the mediation of an industry matter.
    The fees will be assessed for each matter submitted to mediation. 
Pursuant to new Section 51, discussed below, a matter is deemed 
submitted to mediation when the Director of Mediation\8\ has received 
an executed mediation Submission Agreement from all parties.\9\

    \8\ New Section 50 provides for the appointment of a Director of 
Mediation (``Director'') to administer mediations. See infra text 
accompanying n. 10.
    \9\ The NASD is developing a standard form mediation Submission 
Agreement. A copy of the Submission Agreement will be provided to 
all parties.
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    In addition, new Subsections 43(j) and 44(k) obligate the parties 
to pay all of the mediator's charges, including travel and other 
expenses. The Submission Agreement will set forth the mediator's 
charges and these charges will be apportioned equally among the parties 
unless they agree otherwise. The NASD will estimate initially the 
mediator's charges based on the anticipated length of the session or 
sessions. The parties will be required to deposit their proportional 
share of such estimated charges with the NASD prior to the first 
mediation session.
    The NASD's standard mediator charges will be $150 per hour, 
although the parties may agree to pay different charges for a 
particular mediator. The NASD intends to make its best efforts to make 
mediators available at the specified hourly rate; however, some 
qualified mediators may decline to serve unless compensated at a higher 
rate.
    Finally, the mediator's hourly fee for joint sessions (except for 
the first session) and separate sessions will be assessed for each half 
hour or portion thereof. In addition, the mediator's hourly rate for 
separate meetings will be apportioned equally among all parties without 
regard to the actual amount of time each party has spent with the 
mediator because all parties should benefit equally from the mediator's 
efforts in meeting with each party even if the mediator spends more 
time with one than the other.

[[Page 38385]]


Mediation Rules

    General Scope and Authority. New Section 50 establishes the scope 
and authority of the Mediation Rules. This Section provides that the 
Mediation Rules will apply to mediations administered by the 
Association and calls for the designation of a Director to administer 
mediations. Section 50 also specifies that the Director will consult 
the National Arbitration Committee (``Committee'') on administering the 
NASD mediation program. The Committee, as necessary, may make 
recommendations concerning the administration of the mediation program 
to the Director and recommend amendments to the rules to the NASD 
Board, Finally, Section 50 states that neither any mediator nor the 
NASD shall have any authority to compel a party to submit to mediation 
or to settle a matter. This last provision is intended to clarify the 
voluntary nature of mediation.\10\

    \10\ The NASD has stated that it intends to solicit 
participation in mediation by approaching parties to arbitration 
cases to advise them about mediation, explain the program and its 
merits and explore whether mediation might meet the needs of the 
parties. These efforts are intended to increase the number of 
matters submitted to mediation and reduce the number of matters 
submitted to arbitration.
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    Submission of Eligible Matters. New Section 51 provides that any 
matter, or part of a matter (such as procedural issues), eligible for 
arbitration under the Code may be mediated. The Director has the sole 
authority to determine the eligibility of any particular matter for 
mediation. New Section 51 also provides that a matter will be deemed 
submitted when the Director has received an executed mediation 
Submission Agreement from each party. The submission of a matter will 
trigger the obligation to pay applicable fees and will trigger the 
NASD's activities in finding a mediator and making arrangements for 
facilities for the mediation.
    As noted above, the NASD has stated that it intends to solicit 
participation in mediation by approaching parties to arbitration cases 
to advise them about mediation, explain the program and its merits and 
explore whether mediation might meet the needs of the parties. Parties 
may volunteer to mediate a matter even if the Director has not 
solicited indications of interest in mediation. If a party expresses 
interest in mediating a matter, the Director will seek commitments to 
participate from other parties. If commitments are obtained from all 
parties, either orally or in writing, the Director will forward a 
mediation Submission Agreement to the parties for execution.
    Stay or Delay of Arbitration Pending Mediation. New Section 52 
provides that any arbitration pending at the time of a mediation will 
not be stayed or delayed unless the parties agree. This provision is 
intended to prevent gamesmanship through the use of mediation as a 
delaying tactic.
    Mediator Selection. New Section 53 provides for the appointment of 
mediators and permits parties to select a mediator from a list supplied 
by the Director, or to obtain, on their own, a non-NASD mediator. If 
the parties do not act to select a mediator, the Director will assign a 
mediator. The parties also will be provided with information relating 
to the mediator's employment, education, and professional background, 
as well as information on the mediator's experience, training, and 
credentials as a mediator. Section 53 also requires mediators to comply 
with the same background disclosure requirements as arbitrators.\11\

    \11\ See NASD Manual, Code of Arbitration Procedure, Part III, 
Sec. 23, (CCH) para. 3723.
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    Finally, new Subsection 53(c) prohibits a mediator from serving as 
an arbitrator or from representing any party to a mediation in any 
subsequent arbitration proceeding relating to the subject matter of the 
mediation. A mediator functions as a third party neutral who assists 
parties in exploring the strengths and weaknesses of their case. 
Mediation can function effectively only if parties can fully trust the 
mediator to provide impartial guidance and not to divulge confidential 
information disclosed. Parties are unlikely to trust a mediator if that 
mediator is permitted to serve as an arbitrator or represent a party to 
a mediation in a subsequent adversarial proceeding relating to the 
subject matter of the mediation. With respect to judicial proceedings, 
state law, attorney codes of ethics, and mediator codes of conduct \12\ 
should provide sufficient protection for parties in judicial forums.

    \12\ The American Bar Association (``ABA'') is considering draft 
mediator standards of conduct. Draft Standard III states in 
pertinent part that ``[w]ithout the consent of all parties, a 
mediator shall not subsequently establish a professional 
relationship with one of the parties in a related matter, or in an 
unrelated matter under circumstances which would raise legitimate 
questions about the integrity of the mediation process.''
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    Liability Limitation. New Section 54 provides for the limitation of 
liability of mediators, the Association, and its employees, for any act 
or omission in connection with a mediation administered by the NASD 
under the rules.
    Ground Rules. New Subsection 55(a) states that Section 55 sets 
forth standard Ground Rules governing mediations and permits the 
parties to amend any of the Ground Rules at any time. The Subsection 
also provides that the Ground Rules are intended to be standards of 
conduct for the parties and for the mediation. Parties will be able to 
tailor the ground rules governing their mediation to meet their needs.
    New Subsection 55(b) states that mediation is voluntary and that 
parties may withdraw from a mediation at any time prior to the 
execution of a settlement agreement by giving written notice of 
withdrawal to the mediator, the other parties, and the Director. This 
provision is intended to clarify that, while the goal of mediation is 
to explore and settle outstanding disputes, if possible, the proposed 
rules are process oriented, not result oriented. Mediation is wholly 
voluntary and any party may withdraw from a mediation at any time and 
for any reason, or for no reason at all.
    New Subsection 55(c) establishes that the mediator's role is to act 
as a neutral and impartial facilitator, without authority to impose 
decisions or a settlement on the parties.
    New Subsection 55(d) requires that the parties and their 
representatives meet jointly with the mediator, in person or by 
conference call as determined by the mediator or by mutual agreement of 
the parties. The mediator will facilitate through joint sessions, 
caucuses and/or other means, discussions between the parties on the 
subject matter of the mediation.
    New Subsection 55(d) also provides that the mediator will determine 
the procedure for the mediation. Under this subsection, parties would 
agree to cooperate with the mediator in conducting the mediation 
expeditiously, to make reasonable efforts to be available for mediation 
sessions, and to be represented at all sessions either in person or by 
a representative with authority to settle the matter. This subsection 
is intended to avoid common obstacles to expeditious, effective 
mediation and it sets forth rules that are intended to prevent 
gamesmanship and discourage dilatory conduct.
    New Subsection 55(e) permits the mediator to meet with and 
communicate separately with each party, provided the mediator notifies 
the other parties. This is intended to permit the mediator to pursue a 
candid discussion with all parties of the issues and priorities in the 
dispute and the strengths and weaknesses of their positions. However, 
Subsection 55(g), discussed below, bars the mediator from disclosing 
one party's 

[[Page 38386]]
confidential information to another party without authorization.
    New Subsection 55(f) sets forth the goal of mediation--to explore 
and come to a good faith settlement of an outstanding dispute without 
resort to adversarial adjudication. This Subsection also permits 
parties to negotiate directly outside the mediation process.
    New Subsection 55(g) provides that mediation is intended to be 
private and confidential. This Subsection obligates the parties and the 
mediator not to disclose or otherwise communicate anything disclosed 
during the mediation in any other proceeding, unless authorized by all 
other parties to the mediation. The Subsection permits disclosure if 
compelled by law, which provides for situations when a party is 
subpoenaed or when there are regulatory requirements, such as the 
disclosures required in Form U-4 or under Article IV, Section 5 of the 
Rules of Fair Practice.\13\ This Subsection also provides expressly 
that the fact that a mediation occurred is not confidential.

    \13\ NASD Manual, Rules of Fair Practice, Art. IV, Sec. 5 (CCH) 
para. 2205.
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    New Subsection 55(g) also makes clear that the confidentiality 
provisions will not operate to shield from disclosure documentary or 
other information that the Association or any other regulatory 
authority would be entitled to obtain or examine in the exercise of its 
regulatory responsibilities. Accordingly, the fact that documentary or 
other information had been disclosed during the course of a mediation 
would not render it confidential or shield it from disclosure to the 
NASD or an opposing party in civil litigation where it otherwise would 
be available to these parties.
    In addition, the Subsection bars the mediator from disclosing one 
party's confidential information to another party without 
authorization, which memorializes a standard practice of mediators.
    The Commission finds that the proposed rule change is consistent 
with the provisions of Section 15A(b)(6) of the Act \14\ because the 
rule change will protect investors and the public interest by providing 
a voluntary alternative to adversarial adjudication of disputes that 
may result in lower-cost, quicker resolution of disputes. The proposed 
rule change approved today provides a forum for a non-binding 
discussion by all interested parties, and a form of dispute resolution 
that can be more effective than direct negotiations and that increases 
the likelihood of early settlement of a dispute at cost savings.

    \14\ 15 U.S.C. 78o-3.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that File No. SR-NASD-95-25 be, and hereby is, approved, effective 
August 1, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18285 Filed 7-25-95; 8:45 am]
BILLING CODE 8010-01-M