01-541. Self-Regulatory Organizations; New York Stock Exchange, Incorporated; Order Approving Proposed Rule Change To Amend Arbitration Rules Regarding Pilot Programs for Mediation and Administrative Conferences

December 29, 2000.

I. Introduction

On September 29, 2000, the New York Stock Exchange, Inc. (“NYSE” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “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 amending and extending the pilot programs for mediation and administrative conferences. Notice of the proposal appeared in the Federal Register on November 17, 2000.^[3] The Commission received no comments on the proposal. This order approves the proposed rule change.

II. Description

The Exchange proposes to amend and extend the pilot programs under NYSE Rules 638 and 639 for mediation and administrative conferences. The Exchange is amending and extending the pilot programs to continue to offer mediation as a way for parties to settle cases earlier with lower costs.^[4] The Exchange believes that the administrative conference allows the arbitrators to intervene early in the case to set deadlines and resolve preliminary procedural issues. The Exchange is also proposing to amend both pilot programs to include a greater number of cases by lowering the threshold amount to $250,000 from $500,000.

Since November of 1998, the Exchange has sponsored a pilot mediation program. Under the pilot program, a single mediation session of up to four hours is conducted in all cases not involving public customers submitted for arbitration where the amount of the claim is $500,000 or more. The Exchange pays the mediator up to $500 for this single mediation session. There are no costs assessed to the parties unless they select a mediator whose rate is higher or if the parties agree to go beyond the single session. The Exchange represents that of the cases mediated under this provision of the pilot, approximately 31 percent (15 of 48) have settled before arbitration. Further, the Exchange believes that early settlements reduce costs and provide a greater measure of party satisfaction.

Under the pilot, mediation is also available in cases involving public customers where the claim is $500,000 or more upon agreement of the parties. These cases also qualify for the Exchange's $500 incentive payment to the mediator. In all other cases, mediation is available at the parties' own expense. The Exchange, however, will provide the parties with a list of mediators, will assist in facilitating the parties' agreement to mediate and will make its conference room facilities available for the mediation.

To evaluate the pilot, the staff of the Exchange met with mediators and lawyers who participated in mediation under the pilot. Based on the evaluators' comments and the settlement rate, the Exchange is proposing to extend the pilot for two years, as amended.

To encourage greater use of mediation, the Exchange proposes to amend the mediation pilot program to include all cases within a lowered threshold of claims of $250,000 or more. The Exchange represents that most commentators supported the pilot's provision that a single mediation session of up to four hours be conducted in all cases with claims of $250,000 or more. The Exchange believes that this process relieves the parties from having to suggest mediation because the Exchange rule provides for it. Further, the Exchange represents that many parties believe that the other side will view their suggestion to mediate as a sign of weakness. The Exchange believes that this process also assists counsel in getting their clients to consider mediation by making it part of the arbitration process—with little or no cost to them.

As amended, all cases with claims of $250,000 or more will be included in the pilot. This includes case involving public customers. The Exchange believes the pilot's inclusion of customer cases may lead to more and earlier settlements. The Exchange represents that under the present pilot, where the parties have elected to mediate, 78.9 percent (15 to 19) of the customer cases with claims over $500,000 have settled before arbitration.

Under the present pilot, a single mediation session of up to four hours is conducted. The process is voluntary process and neither the Exchange nor the mediator can require a party to mediate. The mediation may last less than four hours or the parties may refuse to participate at all. The pilot's only requirement is that the Director of Arbitration arrange for the mediation. The Director will delegate to the Exchange's staff the tasks of sending the parties a list of mediators and selecting a mediator from the list if the parties do not agree to a mediator. If the parties object to all the names on the list, the Director will appoint a mediator from outside the list. Once the parties or the Director selects a mediator, the Director will schedule the mediation and advise the parties. The mediator may contact the parties to preliminarily discuss the case. The pilot does not require the parties to do anything they do not wish to, including exchange information or documents; and there is no required pre-mediation exchange of exhibits. The Exchange's goal of scheduling mediation is to encourage the parties to try to resolve the dispute as quickly and efficiently as possible. Unless the parties otherwise agree, mediation will not delay the arbitration.

The Exchange will continue to pay the mediator's fee for one session, up to $500, in cases where the rule provides that a single mediation session is to be conducted. The Exchange represents that many commentators noted that the Exchange's provision for a single mediation session and incentive payment of the mediator's fee, up to $500, is helpful in encouraging their clients to agree to try mediation. Further, the Exchange represents that the average mediation settles or reaches an impasse after approximately two sessions.

The Exchange is also proposing to allow parties to mediate without first filing for arbitration. The current pilot only applies to cases already filed with the NYSE for arbitration. Allowing the parties to mediate prior to filing an arbitration may save the parties some costs of arbitration. The party requesting mediation will be required for arbitration under Rule 629 for claims of the same amount. If the case does not settle after mediation, the Exchange will apply the fee to the non-refundable filing fee for arbitration. The parties are also required to pay the mediator's fee and agree on how the fee will be shared. The parties' agreement to mediate will not toll the time limitation for submission of a claim to arbitration.

As under the original pilot, cases with claims for less than $250,000 may also be mediated when the parties agree. However, in these cases the parties are responsible for payment of the entire mediator's fee. The Exchange represents that during the pilot program, where the parties have agreed to mediate claims below $500,000, 76 percent (16 of 21) have settled.

Since November of 1998, the pilot program has provided for an administrative conference with the parties and arbitrators in cases over $500,000. The conference allows the arbitrators to set deadlines early in the case and resolve preliminary issues with the aim of expediting the arbitration. The Exchange represents that to date, 124 administrative conferences have been conducted and most commentators supported the administrative conference with certain changes. The Exchange is proposing to amend and extend the pilot for two years.

In order to expedite a greater number of claims, the Exchange is proposing to lower the threshold for administrative conferences from $500,000 to $250,000. The Exchange is also proposing that, be default, the chairperson of the panel conduct the conference by telephone. The Exchange believes that this will allow the staff to schedule the conference earlier because it will involve coordinating the schedules of fewer persons. In cases involving public customers, a public arbitrator will conduct the administrative conference unless the public customer requests, in writing, a securities arbitrator. The Chairperson shall have discretion to conduct the conference in-person and may request that all of the arbitrators attend the conference. Under the amended pilot, the Director of Arbitration will schedule the conference 90 days after service of the Statement of Claim, rather than 30 days after the answer is filed. The additional period of time is intended to permit the parties to frame the issues for the administrative conference. The administrative conference pilot does not affect the parties' right to request a pre-hearing conference to resolve discovery disputes and other preliminary matters under NYSE Rule 619.

III. Discussion

After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange ^[5] and, in particular, the requirements of Section 6 and the rules and regulations thereunder.^[6] Specifically, the Commission believes the proposal is consistent with the Section 6(b)(5) requirements that the rules of an exchange be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts, and, in general, to protect investors and the public interest. In particular, the Commission believes that the proposed rule change will continue to help ensure that NYSE members, member organizations, and the public have a fair and impartial forum for the resolution of their disputes.

Mediation is a method of dispute resolution where a mediator attempts to facilitate a settlement of the dispute. The Commission believes that it is reasonable and consistent with the Act to extend mediation to more cases because it may result in savings of time and money for a greater number of parties. The Commission notes that the Exchange is amending and extending this pilot program based on its evaluation of the effectiveness of the current pilot program. The Exchange represents that lowering the threshold to claims of $250,000 or more and including cases involving public customers may lead to more and earlier settlements. In addition, the Exchange represents that early settlements reduce costs and increase party satisfaction.

The Commission believes that it is consistent with the Act to require an administrative conference between the parties and the arbitrators in cases where the amount of the claim is $250,000 or more, to expedite the arbitration process and reduce costs of the arbitration. An administrative conference early in the process will allow the arbitrators to intervene to establish discovery schedules, resolve discovery disputes and other preliminary matters, and to attempt to narrow the issues in dispute and avoid costly contests over procedural matters. The Commission believes that reducing the threshold for administrative conferences from $500,000 to $250,000 should provide these benefits to a greater number of claims. Further, the procedural amendments to the pilot program should expedite the process for conducting administrative conferences.

It is therefore ordered, pursuant to section 19(b)(2) of the Act,^[7] that the proposed rule change (SR-NYSE-00-39) is approved. The mediation program, NYSE Rule 638, and the administrative conference rule, NYSE Rule 639, are each approved on a two-year pilot basis through December 30, 2002.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[8]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  17 CFR 240.19b-4.

2.  15 U.S.C. 78s(b)(1).

3.  Securities Exchange Act Release No. 43538 (November 9, 2000), 65 FR 69596.

4.  The Commission approved the Exchange's mediation program and administrative conference rule on a two-year pilot basis through November 20, 2000. See Securities Exchange Act Release No. 40695 (November 19, 1998), 63 FR 65834 (November 30, 1998). On October 31, 2000, the Exchange's current pilot programs for mediation and administrative conferences were extended for an additional six months. See Securities Exchange Act Release No. 43496, (October 31, 2000).

5.  In approving this rule, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

6.  15 U.S.C. 78f.

7.  15 U.S.C. 78s(b)(2).

8.  17 CFR 200.30-3(a)(12).