[Federal Register Volume 65, Number 101 (Wednesday, May 24, 2000)]
[Notices]
[Pages 33602-33606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-13068]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42792; File No. SR-NASD-00-11]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc., 
Amending Its Mediation Fee Structure

May 17, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 9, 2000, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its wholly owned subsidiary, 
NASD Regulation, Inc. (``NASD Regulation''), filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by NASD Regulation. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation proposes to amend the Code of Arbitration Procedure 
(``Code'') of the NASD to encourage the use of mediation, increase 
revenue by adjusting mediation fee schedules, and permit parties to 
agree to stay arbitrations in order to mediate their claims. The text 
of the proposed rule change follows. Proposed new language appears in 
italics; proposed deletions appear in brackets.
* * * * *
Rule 10205. Schedule of Fees for Industry and Clearing Controversies
    (a)-(i) No change.
    [(j) Each party to a matter submitted to a mediation administered 
by the Association where there is no Association arbitration proceeding 
pending shall pay an administrative fee of $250. The parties to a 
mediation administered by the Association shall pay all of the 
mediator's charges, including the mediator's travel and other expenses. 
The charges shall be specified in the Submission Agreement and shall be 
apportioned equally among the parties unless they agree otherwise. Each 
party shall deposit with the Association their proportional share of 
the anticipated mediator charges and expenses, as determined by the 
Director of Mediation, prior to the first mediation session. Mediator 
charges, except travel and other expenses, are as follows:
    (1) Initial Mediation Session: $600 or four (4) times the 
mediator's hourly rate agreed by the parties and the mediator; and
    (2) Additional Mediation Sessions: $150 per hour, or such other 
hourly rate agreed by the parties and the mediator.]
* * * * *
Rule 10332. Schedule of Fees for Customer Disputes
    (a)-(h) No change.
    [(i) Each party to a matter submitted to a mediation administered 
by the Association where there is no Association arbitration proceeding 
pending shall pay an administrative fee of $150.]
    [(j) The parties to a mediation administered by the Association 
shall pay all of the mediator's charges, including the mediator's 
travel and other expenses. The charges shall be specified in the 
Submission Agreement and shall be apportioned equally among the parties 
unless they agree otherwise. Each party shall deposit with the 
Association their proportional share of the anticipated mediator 
charges and expenses, as determined by the Director of Mediation, prior 
to the first mediation session. Mediator charges, except travel and 
other expenses, are as follows:
    (1) Initial Mediation Session: $600 or four (4) times the 
mediator's hourly rate agreed to by the parties and the mediator; and
    (2) Additional Mediation Sessions: $150 per hour, or such other 
hourly rate agreed to by the parties and the mediator.]
* * * * *
Rule 10403. Arbitration Proceedings
    (a) Unless the parties agree otherwise, the submission of a matter 
for mediation shall not stay or otherwise delay the arbitration of a 
matter pending under this Code. When the parties agree to stay the 
arbitration in order to mediate the claim, the arbitration proceeding 
shall be stayed, notwithstanding any provision to the contrary in this 
Code.
    (b) If mediation is conducted through NASD Regulation, no 
adjournment fees will be charged for staying the arbitration proceeding 
in order to mediate.\3\
* * * * *
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    \3\ Note: the reference to NASD Regulation will be changed to 
NASD Dispute Resolution, Inc., when such new subsidiary becomes 
operational.

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[[Page 33603]]

Rule 10407. Mediation Fees

    (a) Filing Fees: Cases Filed Directly in Mediation.
    Each party to a matter submitted directly to a mediation 
administered by the Association shall pay an administrative fee to the 
Association in the amounts indicated in the schedule below, unless such 
fee is specifically waived by the Director of Mediation.

------------------------------------------------------------------------
                                         Customer
                                            and       Member     Total
         Amount in controversy          associated     fee        fees
                                        person fee
------------------------------------------------------------------------
$.01-$25,000..........................         $50       $150       $200
$25,000.01-$100,000...................         150        300        450
Over $100,000.........................         300        500        800
------------------------------------------------------------------------

    (b) Filing Fees: Cases Initially Filed in Arbitration.
    When a matter is initially filed an arbitration and subsequently 
submitted to a mediation administered by the Association, each party 
shall pay an administrative fee to the Association in the amounts 
indicated in the schedule below, unless such fee is specifically waived 
by the Director of Mediation.

------------------------------------------------------------------------
                                         Customer
                                            and       Member     Total
         Amount in controversy          associated     fee        fees
                                        person fee
------------------------------------------------------------------------
$.01-$25,000..........................          $0         $0         $0
$25,000.01-$100,000...................         100        150        250
Over $100,000.........................         250        500        750
------------------------------------------------------------------------

    (c) Mediator Fees and Expenses.
    The parties to a mediation administered by the Association shall 
pay all of the mediator's charges, including the mediator's travel and 
other expenses. The charges shall be specified in the Submission 
Agreement and shall be apportioned equally among the parties unless 
they agree otherwise. Each party shall deposit with the Association its 
proportional share of the anticipated mediator charges and expenses, as 
determined by the Director of Mediation, prior to the first mediation 
session.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. NASD Regulation has prepared summaries, set 
forth in Sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed rule change is designed to encourage the use of 
mediation, especially in smaller cases, and to adjust mediation fee 
schedules. This proposed adjustment would be a first step toward making 
the NASD Regulation Mediation Program (``Mediation Program'') 
financially self-sustaining. The proposed rule change would also permit 
parties to stay arbitrations by agreement in order to mediate the 
claim, and would eliminate the adjournment fees when parties conduct 
their mediation through NASD Regulation.
    The NASD will announce the effective date of the proposed rule 
change in a Notice to Members to be published no later than 60 days 
following Commission approval. The effective date will be 30 days 
following publication of the Notice to Members announcing Commission 
approval.
    Background. In 1995, NASD Regulation initiated a mediation program 
to provide an additional dispute resolution option for parties.\4\ 
Mediation is an informal, non-binding, voluntary process in which an 
impartial person, trained in facilitation and negotiation techniques, 
helps the parties reach a mutually acceptable resolution. What 
distinguishes mediation from other forms of dispute resolution--
principally, arbitration and litigation--is that the mediator does not 
impose a resolution on the parties, but rather works with the parties 
to create their own resolution. The settlement resulting from 
mediation, rather than arbitration or litigation, often saves the 
parties substantial time and expense.
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    \4\ See Securities Exchange Act Release No. 35990 (July 19, 
1995), 60 FR 38384 (July 26, 1995), (SR-NASD-95-25).
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    The goal of the Mediation Program is to provide public customers, 
member firms, and associated persons with an alternative and effective 
means for resolving their disputes. Since its inception in 1995, over 
3,500 cases have been submitted to the Mediation Program. By 1999, 
parties in twenty percent of all arbitration cases filed with NASD 
Regulation used mediation to help resolve their disputes.
    The Mediation Program has been extremely successful, in terms of 
both settlement rates and customer satisfaction. Approximately eighty 
percent of the mediations settle within 60 to 90 days of the parties' 
formal agreement to mediate. Parties that used the Mediation program 
consistently express satisfaction with their experience, including 
those who have not ultimately reached full agreement. Sometimes parts 
of a dispute are resolved in mediation, leaving fewer issues to be 
resolved in arbitration. During the mediation, leaving fewer

[[Page 33604]]

issues to be resolved in arbitration. During the mediation process, the 
parties and their representatives gain a better understanding of their 
case. Improved lines of communication often place the parties in a 
better position to settle the case at a later stage.
    The features that have contributed to the success of the Mediation 
Program include:
     The mediators on the roster are highly qualified and 
experienced. Prior to admission to the roster, mediators are carefully 
screened by NASD Regulation staff and by members of the National 
Arbitration and Mediation Committee. Formal multi-day mediator training 
and experience as a mediator are requirements of service. NASD 
Regulation's 850 mediators represent a cross-section of people from 
diverse cultures, professions, and backgrounds. Many have extensive 
knowledge of securities law and industry practices, and many are also 
arbitrators with training and experience in resolving securities 
matters.
     The NASD Regulation staff in the Office of Dispute 
Resolution (``ODR'') performs a number of administrative services to 
facilitate the mediation. The staff works diligently to educate parties 
on the mediation process, to encourage them to mediate, to assist them 
in finding the best mediator for their case, and to ensure that the 
process runs smoothly. When one party expresses an interest in 
mediation, the ODR will contact the other party or parties, explain the 
mediation process, and answer any questions that arise. The ODR staff 
are trained to explain the benefits of mediation and to help bring all 
parties to the table. After conferring with the parties, the ODR will 
propose a list of several neutrals from its roster of experienced 
mediators who seem consistent with the parties' needs. The list is 
accompanied by a complete profile of each mediator. The parties may 
select their mediator from that list or ask for additional lists. The 
parties may also choose another mediator not on the list or from 
outside the Mediation Program roster. The staff works with the mediator 
and the parties to select a mutually convenient date and location for 
the mediation.
     Participation in the Mediation Program is voluntary. 
Parties choose whether, and at what point in the course of their case, 
to enter mediation.
     The Mediation Program is flexible and controlled by the 
engaged parties, who control the process, schedule, and outcome of the 
dispute. Parties may mediate before filing a formal claim or pleading 
in arbitration, or at any stage of the arbitration process. They may 
submit all or some of the issues in dispute to mediation, including 
selected substantive or procedural issues such as the extent, nature, 
and schedule of discovery. The first session can be scheduled in a 
matter of days or weeks. Meetings can be conducted in person in over 50 
cities in the United States and abroad, by telephone, video conference, 
or by any other method to which the parties and the mediator agree.
     Mediating through NASD Regulation is cost-effective. Most 
mediations are successfully concluded in less than a single day, 
resulting in lower attorney fees for the parties. Parties that choose 
to mediate may also avoid the fees for an arbitration hearing if they 
can settle before proceeding to a hearing. Finally, parties in 
mediation benefit by avoiding the discovery costs typically associated 
with other forms of dispute resolution.
    Operating the Mediation Program. The Mediation Program is currently 
subsidized. There are fifteen employees, located in five offices, in 
ODR's mediation department. For 1999, the total direct expenses for the 
Mediation Program were approximately $960,000, compared to $100,000 in 
direct revenues, resulting in an annual program deficit of $860,000. 
Because the Mediation Program has continued to grow steadily since its 
inception, NASD Regulation believes that this is an appropriate time to 
change the mediation fee structure.
    The objective of the proposed rule change is to take preliminary 
steps toward making the Mediation Program financially self-sustaining 
while still keeping mediation as a cost-effective alternative to 
arbitration for parties with claims of any dollar value. NASD 
Regulation estimates that the proposed mediation fee package would 
generate income of $640,000 on an annual basis, assuming a level number 
of case filings. These funds would be used to help offset the 
operational costs of the Mediation Program and to ensure the 
continuation of this valuable service. In addition, the fee adjustments 
should add incentives for parties to mediate smaller cases.
    In addition to filing this proposed rule change, NASD Regulation 
has recently instituted another revenue-increasing measure which did 
not require a change to the Code. Mediators on the roster of the 
Mediation Program individually set the fees they charge parties on each 
case. The rates are usually hourly and vary depending upon a given 
mediator's background, experience, and reputation. NASD Regulation then 
assesses a fee for each hour that the mediator bills the parties. This 
fee defrays a part of the costs the ODR incurs in providing services to 
mediators to administer the case.
    Formerly, NASD Regulation charged mediators a fee of $25 for each 
hour the mediator billed the parties. This fee was significantly less 
than the charges of other dispute resolution providers, including those 
of the American Arbitration Association and JAMS, and will remain 
significantly less even with the enhanced fees. Effective April 3, 
2000, NASD Regulation has eliminated the flat rate in favor of a 
sliding rate tied to the mediator's hourly compensation. This fee 
schedule, in addition to other changes, is designed to encourage 
mediators to charge lower rates for small claims and to agree to handle 
some cases pro bono. The new rates are as follows:

------------------------------------------------------------------------
          Mediator's hourly rate                 NASD regulation fee
------------------------------------------------------------------------
Pro Bono..................................  None.
Up to $99.99..............................  $25.
$100 to $199.99...........................  $35.
$200 and over.............................  $50.
------------------------------------------------------------------------

    Reduced Fees for Smaller Claims. NASD Regulation is committed to 
making mediation attractive to customers with smaller claims, that is, 
claims with less than $25,000 in dispute. Mediation is especially well-
suited to resolving small disputes. However, with most mediators' 
hourly rates at $150 or more, mediation costs may exceed the parties' 
cost (exclusive of attorneys' fees) to arbitrate smaller claims. During 
1997 and 1998, fewer than ten percent of all mediations involved claims 
of less than $25,000.
    NASD Regulation has recently asked its mediators to help reduce the 
cost of mediation for small cases by agreeing to charge reduced rates 
to mediate cases involving claims of $25,000 or less. Specifically, it 
has suggested that mediators agree to charge $50 an hour for mediations 
where the amount in dispute is less than $25,000.
    Mediators may set a limit on the number of reduced fee medications 
they will conduct during a year. After a mediator serves the designated 
number of times, ODR staff will not propose his or her name for 
mediation of small claims for the remainder of the year, unless the 
mediator is willing to serve on more cases at the reduced rate.
    Summary of Proposed Rule Change. The rules setting mediation filing 
fees are currently contained in Rules 10205 and 10332 of the Code, 
which primarily address intra-industry and customer arbitration fees, 
respectively. NASD Regulation proposes to delete the provisions 
relating to mediation fees

[[Page 33605]]

from the arbitration sections of the Code, and to include them in the 
Rule 10400 Series that pertains to mediation. Specifically, NASD 
Regulation would create a new rule, Rule 10407, entitled ``Mediation 
Fees.''
    The proposed rule change includes three components. First, new Rule 
10407(a) would replace the current flat fee with a sliding-scale 
schedule of fees for cases filed directly in mediation. Second, new 
Rule 10407(b) would require parties to pay a mediation case filing fee 
when they choose to use the Mediation Program after having initiated 
arbitration. Third, Rule 10403(a) would be changed to make clear that 
the parties in arbitration can agree to stay the proceeding in order to 
mediate their claims, and new Rule 10403(b) would be added to provide 
an incentive to use the Mediation Program rather than an alternative 
forum when mediation takes place after an arbitration has been filed.
    Mediation Case Filing Fees for Cases Filed Directly in Mediation: 
Rule 10407(a). About fifteen percent of the 850 mediation cases filed 
annually are filed directly in mediation and result in a mediation 
administrative fee charged to parties. NASD Regulation currently 
charges $150 per party for customer cases and $250 per party for intra-
industry cases, irrespective of the amount in dispute. These fees are 
currently found in Rules 10205(j) and 10332(i).
    NASD Regulation proposes to replace the flat fee with a sliding 
scale fee schedule in new Rule 10407(a). The schedule has one column of 
filing fees for customers and associated persons, and another column 
for member firms. The filing fees are lowest for the smallest claims 
but increase as the amount in controversy increases.\5\
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    \5\ NASD Regulation currently has a sliding scale schedule in 
place for arbitration fees. See NASD Rules 10205 and 10332.
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    Customers in mediation whose cases involve up to $25,000 in 
controversy would be charged only $50, rather than the present filing 
fee of $150. This is another measure that is intended to encourage the 
use of mediation for smaller claims. For claims between $25,000 and 
$100,000, customers would pay a filing fee of $150, the same as in the 
current model. However, when the claim exceeds $100,000, customers 
would pay a $300 filing fee. As noted, this same schedule also applies 
to claims made by associated persons.
    Fees also are adjusted for members. Under the proposed rule, for 
cases up to $25,000 in controversy, members would continue to pay $150, 
which is the current flat rate for a customer dispute, but is lower 
than the current $250 flat rate for intra-industry disputes. For claims 
between $25,000 and $100,000, the charge for members would increase to 
$300, slightly higher than the current intra-industry rate under the 
flat fee schedule. For claims exceeding $100,000, the member fee would 
increase to $500. For all claims, regardless of the amount in dispute, 
customers and members would pay less under the proposal than the 
corresponding filing fees for arbitration.
    Mediation Case Filing Fees for Cases Initially Filed in 
Arbitration: Rule 10407 (b). For cases first filed in arbitration that 
later go to mediation--which amount to about eighty-five percent of all 
the NASD Regulation mediations--NASD Regulation currently waives all 
mediation case filing fees for the parties, as stated in Rules 10205(j) 
and 10332(i). NASD Regulation proposes to eliminate the fee waiver for 
all cases over $25,000 and to charge mediation filing fees to parties 
choosing mediation after the arbitration case is already filed.
    The ORD's mediation staff incurs expenses that are distinct from 
those incurred by its arbitration staff. For cases filed in arbitration 
first, the mediation staff expends a great deal of time educating the 
parties about the mediation alternative and attempting to encourage the 
parties to agree to mediate. NASD Regulation staff expends these 
efforts to encourage parties to mediate because mediation generally 
saves the parties costs and time. Settlement rates for mediation have 
been consistently high and parties have reported a high level of 
satisfaction with the process.
    Arbitration fees currently cover arbitration case administrative 
tasks, but they do not cover the expenses of the mediation staff. 
Eliminating the fee waiver would recover some of the resources expended 
by the mediation staff in attempting to move cases from arbitration to 
mediation.
    Consistent with its other efforts to increase the incentives for 
parties to mediate claims under $25,000, NASD Regulation would not 
impose any filing fee for converted small cases under the new Rule 
10407(b). NASD Regulation believes it is beneficial to resolve these 
claims through mediation because of the cost savings to the parties 
involved.
    NASD Regulation proposes to reduce the mediation filing fee for 
cases between $25,000 and $100,000 in order to induce members and 
investors to choose mediation. Members' filing fees for converted 
cases, found in Rule 10407(b), would be fifty percent less than for a 
case that is first filed in mediation, found in Rule 10407(a). 
Similarly, fees for customers would be reduced by $50.
    In matters involving more than $100,000 in dispute, the proposed 
mediation filing fee for members is equal to the fee for a case that is 
first filed in mediation. Investors would get the benefit of a small 
reduction in fees for cases converted to mediation from the arbitration 
docket.
    Mediator Fees and Expense: Rule 10407(c). The rule language 
regarding mediator fees and expenses contained in Rules 10205(j) and 
10332(j) would be moved to Rule 10407(c). The rule language would 
remain unchanged, with one exception. NASD Regulation proposes to 
delete the final sentence in Rules 10205(j) and 10332(j), respectively, 
specifying mediator charges. NASD Regulation has found that mediators 
do not charge the parties fees for ``mediation sessions,'' as indicated 
in the rule. Rather, mediators charge for the actual hours of services 
they provide. Therefore, NASD Regulation proposed to delete the final 
sentence in Rules 10205(j) and 10332(j) when it moves the other 
relevant language to new Rule 10407(c).
    Proposed Changes to Rule 10403. NASD Regulation proposes to amend 
Rule 10403 of the Code in two ways. First, by adding language to Rule 
10403(a) to make it clear that parties who agree to submit a matter for 
mediation can also agree to stay the arbitration. The parties can do so 
notwithstanding Rule 10319, the rule that gives arbitrators discretion 
whether to stay an arbitration proceeding. This rule change would 
benefit the parties to a proceeding by saving them time and money and 
by relieving them of the problems of proceeding in two arenas at the 
same time. Moreover, this change is consistent with the approach of 
other alternative dispute resolution providers.
    Second, NASD Regulation proposes to add a new provision, Rule 
10403(b), that encourages the use of the NASD Regulation Mediation 
Program. Whenever the mediation is conducted through NASD Regulation, 
the parties would avoid payment of arbitration adjournment fees.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act, which 
requires, among other things, that the Association's rules must be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. NASD

[[Page 33606]]

Regulation believes that the proposed rule change is in the public 
interest because it will encourage the use of mediation, especially for 
small claims.

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer periods to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. by order approve such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to file number SR-NASD-00-11 and 
should be submitted by June 14, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-13068 Filed 5-23-00; 8:45 am]
BILLING CODE 8010-01-M