[Federal Register Volume 65, Number 161 (Friday, August 18, 2000)]
[Notices]
[Pages 50582-50584]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-21072]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43147; File No. SR-NASD-00-11]


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

August 11, 2000.

I. Introduction

    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''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to amend certain 
aspects of NASD Regulation's mediation program. The proposed rule 
change was published for comment in the Federal Register on May 24, 
2000 \3\ and no comments were received. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 42792 (May 17, 
2000), 65 FR 33602 (May 24, 2000).
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II. Description of the Proposal

    NASD Regulation proposes to amend its Code of Arbitration Procedure 
(``Code'') to increase revenue by adjusting the mediation fee schedules 
and to permit parties to agree to stay arbitrations in order to mediate 
their claims. The proposed rule change also would eliminate the 
adjournment fees when parties conduct their mediation through NASD 
Regulation. NASD Regulation believes that the proposal would encourage 
the use of mediation and be a first step toward making the NASD 
Regulation mediation program financially self-sustaining.
    NASD Regulation initiated a mediation program in 1995 to provide an 
additional dispute resolution option for parties.\4\ According to NASD 
Regulation, the goal of the mediation program is to provide public 
customers, member firms, and associated persons with an alternative and 
effective means of 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. NASD 
Regulation believes that a settlement that results 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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Summary of Proposal

    The mediation program is currently subsidized. 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 preserving it as a cost-effective 
alternative to arbitration for parties with claims of any dollar value.
    The rules establishing mediation filing fees are currently 
contained in Rules 10205 and 10332 of the Code, which address intra-
industry and customer arbitration fees, respectively. NASD Regulation 
proposes to delete the provisions relating to mediation fees from the 
arbitration sections of the Code, and to include them in the Rule 10400 
Series that pertains to mediation. 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

[[Page 50583]]

the proceeding in order to mediate their claims.

Mediation Case Filing Fees for Cases Filed Directly in Mediation: Rule 
10407(a)

    According to NASD Regulation, about 15% of the mediation cases 
filed annually are filed directly in mediation. NASD Regulation 
currently charges $150 per party for customer cases and $250 per party 
for intra-industry cases, regardless of the amount in dispute. These 
fees are 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 and associated persons in mediation whose cases involve 
up to $25,000 in dispute would be charged only $50, rather than the 
present filing fee of $150. For claims between $25,000 and $100,000, 
customers and associated persons would pay a filing fee of $150. When 
the claim exceeds $100,000, customers and associated persons would pay 
a $300 filing fee.
    Fees also are adjusted for members. Under the proposed rule, for 
cases up to $25,000 in dispute, members would 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)

    According to NASD Regulation, about 85% of the mediation cases 
filed annually are first filed in arbitration and later go to 
mediation. In these cases, NASD Regulation currently waives all 
mediation case filing fees for the parties, as stated in Rules 10205(j) 
and 10332(i). NASD Regulation now proposes to charge mediation filing 
fees to parties choosing mediation after the arbitration case is 
already filed for cases over $25,000.
    According to NASD Regulation, arbitration fees currently cover 
arbitration case administrative tasks, but they do not cover the 
expenses of the mediation staff. NASD Regulation believes that imposing 
a fee would allow them to recover some of the costs incurred by the 
mediation staff in attempting to move cases from arbitration to 
mediation. However, 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 converting small cases under the 
new Rule 10407(b).
    Because NASD Regulation would like to continue to encourage members 
and investors to choose mediation, members' filing fees for these 
converted cases would be fifty percent less than the fee for a case 
that is first filed in mediation, and fees for customers would be $50 
less. Further, in matters involving more than $100,000 in dispute, the 
proposed mediation filing fee for members would be equal to the fee for 
a case that is first filed in mediation.

Mediator Fees and Expenses: Rule 10407(c)

    The rule language regarding mediator fees and expenses contained in 
Rules 10205(j) and 10332(j) will 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 the 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).

Staying Arbitration During Mediation: Rule 10403

    NASD Regulation proposes to amend Rule 10403 of the Code in two 
ways. First, NASD proposes to add 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, which gives arbitrators discretion to stay an arbitration 
proceeding. NASD Regulation believes that 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, according to NASD Regulation, 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.

Conclusion

    NASD Regulation estimates that the proposed changes to the 
mediation fee schedule 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 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 it 
believes did not require a change to the Code. Formerly, NASD 
Regulation charged mediators on the roster of the mediation program a 
fee of $25 for each hour the mediator billed the parties. Effective 
April 3, 2000, NASD Regulation eliminated the flat rate in favor of a 
sliding rate tied to the mediator's hourly compensation. This new fee 
schedule is designed to encourage mediators to charge lower rates for 
small claims and to agree to handle some cases pro bono.
    NASD Regulation has also 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. 
In addition, mediators may set a limit on the number of reduced-fee 
mediations they will conduct during a year.

Effective Date

    The NASD will announce the effective date of the proposed rule 
change in a Notice to Members, which will be published no later than 60 
days following Commission approval. The effective date will be 30 days 
following publication of the Notice of Members announcing Commission 
approval.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is

[[Page 50584]]

consistent with the requirements of the Act and the rules and 
regulations thereunder that govern the NASD.\6\ The Commission finds 
that the proposal is consistent with Section 15A(b)(6) of the Act,\7\ 
which requires, among other things, that the Association's rules 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. The Commission also finds 
that the proposal is consistent with Section 15A(b)(5) of the Act,\8\ 
which requires that the rules of an association provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
members and other persons using any facility of the association.
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    \6\ In approving this rule change, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \7\ 15 U.S.C. 78o-3(b)(6).
    \8\ 15 U.S.C. 78o-3(b)(5).
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    The Commission believes that the proposal is consistent with 
Section 15A(b)(6) of the Act \9\ because it provides an alternative and 
generally less expensive form of dispute resolution. According to NASD 
Regulation, most mediations are successfully conducted in less than a 
single day and typically result in lower attorney fees for the parties. 
Further, parties who use mediation as compared to arbitration may save 
money by avoiding discovery costs.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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    In addition, the proposal is consistent with Section 15A(b)(5) of 
the Act \10\ because it is reasonably designed to allow NASD Regulation 
to recover its costs in administering the mediation program. NASD 
Regulation represents that the mediation program is subsidized and 
results in an annual program deficit of $860,000. NASD Regulation 
estimates that the amended fee schedule will generate annual income of 
$640,000, and believes that these funds should help offset the 
operational costs of the mediation program. Most of this new revenue 
will come from fees imposed on parties who first choose arbitration and 
then switch to mediation. In the past, these parties were not charged a 
fee when they switched to mediation, even though NASD Regulation 
represents that it incurs expenses through these switches. Based on 
these representations and the fact that parties with small claims will 
be charged little or no fees to use mediation, the Commission finds 
that proposal equitably allocates fees among its customers, broker-
dealers, and associated persons, and is reasonable under the 
circumstances.
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    \10\ 15 U.S.C. 78o-3(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-NASD-00-11) is hereby 
approved.
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    \11\ 15 U.S.C. 78s-(b)(2).

For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-21072 Filed 8-17-00; 8:45 am]
BILLING CODE 8010-01-M