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”)
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.
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
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.
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.
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.
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).
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.
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
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.
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.
After careful review, the Commission finds that the proposed rule change is
The Commission believes that the proposal is consistent with Section 15A(b)(6) of the Act
In addition, the proposal is consistent with Section 15A(b)(5) of the Act