[Federal Register Volume 62, Number 230 (Monday, December 1, 1997)]
[Notices]
[Pages 63580-63589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31392]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39346; File No. SR-NASD-97-79]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc.,
Relating to Fees and Hearing Session Deposits for the Arbitration of
Claims by Public Investors, Members and Associated Persons
November 21, 1997.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on October
29, 1997,\1\ the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') 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 the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ The NASD submitted Amendment No. 1 to the proposed rule
filing on November 14, 1997, the substance of which is incorporated
into this notice and the proposed rule filing. See letter from John
M. Ramsay, Deputy General Counsel, NASD Regulation, to Katherine A.
England, Assistant Director, Market Regulation, Commission, dated
November 12, 1997 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation is proposing to amend Rules IM-10104, 10205 and
10332 of the NASD's Code of Arbitration Procedure (``Code'') to
increase the arbitrator honoraria and the arbitration filing fees and
hearing session deposits for intra-industry and public investor
arbitrations administered by NASD Regulation. Below is the text of the
proposed rule change. Proposed new language is in italics; proposed
deletions are in brackets.
IM-10104. Arbitrator's Honorarium
All persons [serving on panels of arbitrators pursuant to Rule
10104 of] selected to serve as arbitrators pursuant to the
Association's Code of Arbitration Procedure shall be paid an honorarium
for each hearing session (including a prehearing conference) in which
they participate [while in the performance of said duties].
The honorarium shall be $[150]200 for [a single] each hearing
session [, $225 for a double session], $50 for travel to a canceled
hearing, and $[50]75 per day additional honorarium to the chairperson
of the panel. The honorarium for a case not requiring a hearing [is $75
per case] shall be $125.
10205. Schedule of Fees for Industry and Clearing Controversies
(a) At the time of filing a Claim, Counterclaim, Third Party Claim,
or Cross-Claim in an industry or clearing controversy which is required
to be submitted to arbitration before the Association as set forth in
Rule 10201, above, a party who is a member shall pay a non-refundable
filing fee and shall remit a hearing session deposit to the Association
in the amounts stated in paragraph (k) unless such fee or deposit is
specifically waived by the Director of Arbitration. A party who is an
associated person shall pay a non-refundable filing fee and shall pay a
hearing session deposit in the amounts specified for customer claimants
in Rule 10332. If the associated person is a joint claimant with a
member, the member shall pay a non-refundable filing fee and shall pay
a hearing session deposit in the amounts specified in paragraph (k) of
this Rule. Where multiple hearing sessions are required, the
arbitrator(s) may require any of the parties to make additional hearing
deposits for each additional hearing session. In no event shall the
amount deposited by all parties per hearing session exceed the amount
of the largest initial hearing deposit made by any party under the
paragraph (k) below.
(b) No change.
(c) No change.
(d) No change.
(e) If the dispute, claim, or controversy does not involve,
disclose, or specify a money claim, the non-refundable filing fee
assessed on a party who is a member shall be $500. If the dispute,
claim, or controversy does not involve, disclose, or specify a money
claim, the hearing session deposit to be remitted by a party shall be
$1000 [$600]. These amounts may be adjusted by the Director of
Arbitration or the panel of arbitrators may require the maximum amount
specified in the schedule [$1,000].
(f) No change.
(g) No change.
(h) No change.
(i) If an eligible matter is submitted for arbitration as a large
and complex case, under the procedures set forth in Rule 10334, or
under procedures agreed upon by the parties, following the
Administrative Conference specified in Rule 10334(b), the fees and
deposits for such matter shall be those set forth in the schedule of
fees for claims over $10,000,000 [$5,000,000].
(j) No change.
(k) Schedule of Fees
[[Page 63581]]
Schedule of Fees
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Deposit for cases Hearing Session Deposit
Amount in dispute (exclusive to be decided on -----------------------------------------
of interest and expenses) Claim filing fee the paper record One
[simplified1] arbitrator1[2] Three arbitrators2[3]
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$.01-$1,000................... $200 [500] $25 [75] $25 [300] NA
$1,000.01-$2,500.............. $300 [500] $50 [75] $50 [300] NA
$2,500.01-$5,000.............. $400 [500] $125 [75] $125 [300] NA
$5,000.01-$10,000............. $500 $250 [75] $250 [300] NA
$10,000.01-$25,000............ $750 $300 $450 NA
$25,000.01-$30,000............ $1,000 [500] NA $450 [300] $-600
$30,000.01-$50,000............ $1,000 [500] NA $450 [300] $-600
$50,000.01-$100,000........... $1,000 [500] NA $4503[3004] $750 [600]
$100,000.01-$500,000.......... $1,000 [500] NA $4503[3004] $-1,125 [750]
$500.000.01-$1,000,000........ $1,250 NA $4503 $1,200
$1,000,000.01-$5,000,000...... $2,000 [500] NA $4503[3004] $1,200 [1,000]
[Over]$5,000,000.01-$10,000.00 $2,500 [500] NA $4503[3004] $1,200[1,500]
0.00.
Over $10,000,000.............. $5,000 NA $4503 $1,200
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[\1\ Simplified Arbitration (Without Hearing)]
\1\[2] The dispute is resolved by o[O]ne a[A]rbitrator per hearing session, including pre-hearing conferences.
[(Per hearing session)]
\2\[3] The dispute is resolved by t[T]hree [or more] a[A]rbitrators per hearing session. [(Per hearing session)]
\3\[4] Fee applies only to p[P]re-hearing c[C]onferences [Only] with a single arbitrator.
10332. Schedule of Fees for Customer Disputes
(a) No change.
(b) No change.
(c) No change.
(d) No change.
(e) If the dispute, claim, or controversy does not involve,
disclose, or specify a money claim, the non-refundable filing fee for a
public customer shall be $250 and the non-refundable filing fee for an
industry party shall be $500[.00]. The hearing session deposit to be
remitted by a party shall be $1000 [$600] or such greater or lesser
amount as the Director of Arbitration or the panel of arbitrators may
require, but shall not exceed the maximum amount specified in the
schedule [$1,000].
(f) No change.
(g) No change.
(h) If an eligible matter is submitted for arbitration as a large
and complex case under the procedures set forth in Rule 10334, or under
procedures agreed upon by the parties, following the Administrative
Conference specified in Rule 10334(b), the fees and deposits for such
matter shall be those set forth in the schedule of fees for claims over
$10,000,000 [$5,000,000].
(i) No change
(j) No change
(k) Schedule of Fees
For purposes of the schedule of fees, the term ``claim'' includes
Claims, Counterclaims, Third Party Claims, and Cross-Claims. Any such
claim made by a customer or associated person is treated as a customer
claim for purposes of the schedule of fees. Any such claim made by a
member [or associated person of a member] is an industry claim.
Customer or Associated Person Claimant
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Deposit for cases Hearing session deposit
Amount in dispute (exclusive to be decided on -----------------------------------------
of interest and expenses) Claim filing fee the paper record One arbitrator Three arbitrators
[simplified \1\] \1\[2] \2\[3]
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$.01-$1,000................... $ 25 [ 15] $ 25 [15] $ 25 [ 15] NA
$1,000.01-$2,500.............. $ 25 $ 50 [25] $ 50 [ 25] NA
$2,500.01-$5,000.............. $ 50 $125 [75] $125[100] NA
$5,000.01-$10,000............. $ 75 $250 [75] $250 [200] NA
$10,000.01-$25,000............ $125 [100] $300 [NA] $450 NA
$25,000.01-$30,000............ $150 NA $450[300] $ 400
$30,000.01-$50,000............ $175 [120] NA $450[300] $ 600[ 400]
$50,000.01-$100,000........... $225 [150] NA $450 \3\[300 \4\] $ 750[ 500]
$100,000.01-$500,000.......... $300 [200] NA $450 \3\[300 \4\] $1,125[ 750]
$500,000.01-$1,000,000........ $375 [250] NA $450 \3\[300 \4\] $1,200[1,000]
$1,000,000.01-$3,000,000...... $500 NA $450 \3\ $1,200
$3,000,000.01-$5,000,000...... $600 NA $450 \3\ $1,200
[Over]$5,000,000.01-$10,000,00 $600 [300] NA $450 \3\[300 \4\] $1,200[1,500]
0.
Over $10,000,000.............. $600 NA $450 \3\ $1,200
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[\1\ Simplified Arbitration (Without Hearing)].
\1\[2] The dispute is resolved by o[O]ne a[A]rbitrator per hearing session, including pre-hearing conferences.
[(Per Hearing Session)].
\2\[3] The dispute is resolved by t[T]hree [or more] a[A]rbitrators per hearing session. [(Per hearing
session)].
\3\[4] Fee applies only to p[P]re-hearing c[C]onferences [Only] with a single arbitrator.
[[Page 63582]]
Member [Industry] Claimant
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Deposit for cases Hearing Session Deposit
Amount in dispute (exclusive to be decided on -----------------------------------------
of interest and expenses) Claim filing fee the paper record Three arbitrator \1\
arbitrators \2\ [3] [simplified \1\] One [2]
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$.01-$1,000................... $200 [500] $25 [75] $25 [300] NA
$1,000.01-$2,500.............. $300 [500] $50 [75] $50 [300] NA
$2,500.01-$5,000.............. $400 [500] $125 [75] $125 [300] NA
$5,000.01-$10,000............. $500 $250 [75] $250 [300] NA
$10,000.01-$25,000............ $750 $300 $450 NA
$25,000.01-$30,000............ $1,000 [500] NA $450 [300] $600
$30,000.01-$50,000............ $1,000 [500] NA $450 [300] $600
$50,000.01-$100,000........... $1,000 [500] NA $450 \3\[300 \4\] $750 [600]
$100,000.01-$500,000.......... $1,000 [500] NA $450 \3\[300 \4\] $1,125 [750]
$500,000.01-$1,000,000........ $1,250 NA $450 \3\ $1,200
$1,000,000.01-$5,000,000...... $2,000 [500] NA $450 \3\[300 \4\] $1,200 [1,000]
[Over] $5,000,000.01- $2,500 [500] NA $450 [300 \4\] $1,200 [1,500]
$10,000,000.
Over $10,000,000.............. $5,000 NA $450 \3\ $1,200
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[\1\ Simplified Arbitration (Without Hearing)]
\1\ [\2\] The dispute is resolved by o[O]ne a[A]rbitrator per hearing session, including pre-hearing
conferences. [(Per Hearing Session)]
\2\ [\3\] The dispute is resolved by t[T]hree [or more] a[Arbitrators per hearing session. [(Per hearing
session)]
\3\ [\4\] Fee applies only to p[P]re-hearing c[C]onferences [Only] with a single arbitrator.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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. The self-regulatory organization
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
Background and Introduction
NASD Regulation is proposing to amend the NASD's Code of
Arbitration Procedure to increase the filing fees and hearing session
deposits charged to public investors, member firms and associated
persons for arbitrating disputes under the Code. In addition, NASD
Regulation is proposing to increase the honoraria paid to
arbitrators.\2\
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\2\ This rule filing replaces SR-NASD-97-39, in which NASD
Regulation originally proposed the amendments to the filing fees and
hearing session deposits that are contained in this filing. As
discussed below, in this filing NASD Regulation has modified some of
the fee changes proposed in SR-NASD-97-39 to align the fees charged
more closely with the Office of Dispute Resolution's (``Office'')
average costs of administering arbitration proceedings. In addition,
the budget, revenue and cost figures used throughout this filing
reflect the most current information about the arbitration process.
Since SR-NASD-97-39 was filed, the NASD has completed its 1998
budget process. The Office's revised 1998 revenue and expense
figures from the 1998 Budget (set forth in Table 1) reflect
significant savings resulting from the NASD's ``Reinvesting for Our
Future'' program. This program required NASD departments to identify
areas within their operations where savings could be achieved. In
addition, the Office's 1997 revenue and cost experience through the
end of September 1997, and including the new member surcharges
implemented on July 1, 1997, caused NASD Regulation to revise the
Office's projected 1998 revenues and costs. The revised revenue and
cost projections are reflected in this rule filing.
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In support of the proposed rule change, below is a discussion of
NASD Regulation's arbitration program operating costs and revenue, new
initiatives for improving the arbitration program, and a general
description of filing fees, hearing session deposits and forum fees
charged in arbitration proceedings. In addition, the development of the
proposed fee increases is described. Finally, a narrative description
of the proposed rule change is provided.
Operating Costs and Revenue. NASD Regulation's Office of Dispute
Resolution (``Office''), and its predecessors, have been administering
arbitrations for the Association since 1969. Since 1972 NASD Members
have been required to submit disputes to arbitration upon the request
of a customer, another member or an associated person. Submission of
claims to arbitration by public investors was largely voluntary until
1987 and, as a result, the program handled a relatively small number of
cases each year. Following the United States Supreme Court's 1987
decision in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220,
96 L.Ed.2d 185, 107 S.Ct. 2332, affirming the enforceability of
customer predispute arbitration agreements, the arbitration caseload
grew rapidly and the program now handles more than 6,000 cases
annually.
The Office's operating costs have been funded from filing fees
(charged to any party filing a claim in arbitration), forum fees
(charged for each hearing session held in an arbitration and allocated
by the arbitrators in the award to the parties), and, more recently,
member surcharges (charged to any member named in a claim and to any
member when an employee of the member is named in a claim). The
difference between the revenue collected in fees and the cost of
administering the program has been made up from the general member
assessment revenue collected by the Association from all of its
members. As the number of cases has grown, and the cost and complexity
of administering arbitration proceedings have increased, NASD
Regulation has sought to increase the fees in order to shift the costs
of the program primarily to its member users. In 1994, for example,
NASD Regulation began charging members a non-refundable fee if the
member or an associated person of the member was named in an
arbitration proceeding--the ``member surcharge.''
In spite of the effort to shift the costs to service users, the
Office is not collecting sufficient user revenue to cover its costs.
For example, as the table below illustrates, in 1996 the cost of the
dispute resolution program exceeded fee
[[Page 63583]]
revenue by $11.3 million. For 1997, even with the implementation of
substantial increases in the member surcharge and an increase in
revenue due to increases in the arbitration caseload, the cost will
exceed revenue by $16 million. For 1998, even if the proposed changes
are approved and implemented, the cost of the program will exceed
revenue by $6.1 million.
Table 1.--Revenues vs. Expenses
[In thousands of dollars]
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1998
Projected
(includes 1998
1997 member Projected
Projected surcharge (with member
(with member and surcharge,
1995 Actual 1996 Actual surcharge arbitrator arbitrator
increase honorarium honorarium
effective 7/ increase, increase and
1/97) but without fee
fee increases)
increase)
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Revenue................................... $9,664 $13,275 $16,000 $23,110 $29,100
Expenses.................................. $17,826 $24,617 $31,988 $35,128 $35,158
Net....................................... ($8,162) ($11,342) ($15,988) ($12,058) ($6,058)
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The revenue shortfall in the program is currently made up from
general assessment revenue; however, NASD Regulation is developing
further increases in the member-user fees to close the budget gap.
There will not be any further increases in fees charged to public
investors in the foreseeable future.
New Initiatives to Improve the Arbitration Program. In January
1996, the NASD's Arbitration Policy Task Force (``Task Force'')
released its report on Securities Arbitration Reform. The Task Force's
report made numerous recommendations to improve the arbitration
process. Some of the recommendations, such as early appointment of
arbitrators, have been implemented. Other recommendations, such as
selecting arbitrators by a list selection method, involve significant
technological changes and changes in the way the Office administers
arbitration cases. And still others, like increasing arbitrator
honoraria to attract and retain qualified arbitrators, involve
permanent increases in the NASD's costs of operating the program.
Since the report was released, NASD Regulation has been engaged in
a major effort to implement the numerous Task Force recommendations.
The Office also has other initiatives underway to improve the
arbitrator process. These include improving case processing and
administration by, among other things, upgrading the computerized case
tracking system and hiring additional staff. Some of the changes, such
as increasing arbitrator honoraria and implementing list selection of
arbitrators, will result in permanent increases in the cost to the NASD
of administering the dispute resolution program, while others, such as
improving case tracking, should result in savings. Implementing these
changes will substantially improve the fairness and efficiency of the
arbitration process. Finally, the growth rate in NASD Regulation's
arbitration case load over the last ten years, and the increasing
length and complexity of arbitration cases, are generating additional
cost pressures on the Office in its continuing efforts to meet the
needs of users of the dispute resolution services.\3\
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\3\ The number of cases filed with NASD Regulation's Office of
Dispute Resolution in the first five months of 1997 is up 16 percent
over the same period in 1996. The number of cases filed annually has
risen from 2,886 in 1987 to an estimated 6,247 in 1997 based on the
number of cases filed in the first nine months of 1997, a 116
percent increase. NASD Regulation projects that over 6,900 cases
will be filed in 1998, an increase of 139 percent over 1987.
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The amendments to the fee schedules proposed in this rule change
will serve to close some of the user revenue gap that currently exists
in funding the Office's direct costs of providing arbitration services.
However, the revenue from the proposed fee increases on public
investors will not be used to fund the development of new systems or
the implementation of the Task Force's recommendations. The exception
to this is the early appointment of arbitrators, a Task Force
recommendation that has already been implemented, and the proposed
increases in arbitrator honoraria, which will be an increase in the
Office's direct cost of administering arbitrations. Both of these
initiatives directly benefit public investors, the first by improving
the efficiency of arbitration, the second by attracting and retaining a
higher caliber of willing, committed arbitrators.
General Description of Filing Fees, Hearing Session Deposits and
Forum Fees. The fees and deposits for arbitration proceedings fall into
three categories: (1) filing fees (including member surcharges); \4\
(2) hearing session deposits; and (3) forum fees.
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\4\ Member surcharges imposed pursuant to Rule 10333, are
intended to shift some of the costs of the dispute resolution
program to the members who are actually named in cases and,
therefore, are the primary users of the program.
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Filing fees are submitted by the party filing a claim. Filing fees
are required for all claims, including cross-claims, counterclaims and
third party claims. For example, if a public investor files a claim
against two members, the investor pays a filing fee specified in Rule
10332 for public investor claimants based on the aggregate amount
claimed. If one member then files a counterclaim against the public
investor, the member pays the filing fee specified in Rule 10332 for
industry claimants based on the aggregate amount claimed in the
counterclaim. If the member then files a cross-claim against the other
member firm respondent or a third party claim against another member,
the member pays another filing fee as specified in Rule 10332 for
industry claimants based on the aggregate amount claimed in the cross-
claim and the member who is a third party respondent pays a member
surcharge based on the aggregate amount claimed in the third party
claim. The members each pay one member surcharge when they are brought
into the case, whether through a claim, counter-claim, cross-claim or
third party claim.
A hearing session deposit is required for arbitrations where
hearings will be held and is intended as an advance payment for the
Office's cost of conducting one hearing session. If the arbitrators
determine that several
[[Page 63584]]
hearing sessions may be necessary, Rule 10332(a) permits them to order
the parties to make additional hearing session deposits. The cost of
conducting a hearing session includes arbitrator compensation and
travel expenses, hearing conference rooms, and staff work and expenses.
All parties are required to pay the hearing session deposits specified
in Rules 10205 and 10332. Any member firm filing a cross-claim,
counterclaim, or third party claim against a public investor must pay
the hearing session deposits specified for industry claimants in Rule
10332. In addition, if a case is settled or withdrawn more than eight
days before a hearing is held, the hearing session deposit is refunded;
in the Office's experience this occurs two-thirds of the time.
Forum fees are NASD Regulation's charges that are assessed by the
arbitrators to the parties for conducting hearings where evidence and
testimony is presented. The fees are based on the number of hearing
sessions scheduled and conducted. Thus, forum fees can be assessed even
if there is no final award. Forum fees assessed by the arbitrators are
paid to NASD Regulation, not to the arbitrators, and the arbitrators'
compensation is not affected by the amount of forum fees assessed or
collected. The arbitrators can assess forum fees for each hearing
session up to the maximum hearing session deposit that the party is
required to pay under Rule 10332. For example, under the proposed rule
change, the hearing session deposit for a public investor with a
$100,000 claim is $750. Therefore, if an arbitration took four hearing
sessions (two full days), the arbitrators could assess a maximum of
$3,000 in forum fees.\5\ The arbitrators can assess the forum fees
evenly between the parties, or apportion the fees in any other manner,
including assessing all forum fees against one party. The arbitrators
can also determine to assess only part of the forum fees against one
party (the respondent, for example) and not assess any forum fees
against another party (the claimant, for example). Any forum fee
assessed against any party is reduced by the amount of hearing session
deposits already paid by the party.
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\5\ Arbitrators assess forum fees in the award. The Office keeps
track of the number of hearing sessions held, the hearing session
charge to be applied and any other fees paid or incurred (such as
filing or postponement fees and hearing session deposits) and
advises the arbitrators. The arbitrators then determine how much of
the fees, if any, each party will be responsible for paying,
sometimes setting forth liability for the fees in percentages and
specifying individual or joint and several liability for the fees.
Finally, the award will set forth the specific amounts of fees owed
by each party.
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Development of Proposed Fee Increases
As a result of the continuing growth of the program and the current
and projected operating revenue shortfalls, NASD Regulation determined
that changes to the funding mechanisms were necessary. Moreover, as
discussed below, the fees collected under the current schedule do not
come close to covering the NASD's costs of providing the arbitration
service. In order to ensure that the changes were appropriate to the
goals of the program and fair to its users, NASD Regulations
established guidelines for fee increases and analyzed the program to
identify the cost of each service.\6\ In addition, NASD Regulation
identified the member users of the program.
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\6\ The NASD Regulation Board of Directors formed a Subcommittee
on Arbitration Fees to examine the current revenue, cost and fee
structure, and to recommend changes. The Subcommittee was composed
of three public members (James E. Burton, CalPERS; Bonnie Guiton
Hill, Times-Mirror Corp.; and William S. Lapp, Esq., Lapp, Laurie,
Libra, Abramson & Thomson, board member of the Public Investors
Arbitration Bar Association and member of NASD Regulation's National
Arbitration and Mediation Committee (NAMC)) and three securities
industry members (Raymond E. Wooldridge, Southwest Securities Group,
Inc., NAMC member and Chairman of NAMC's Finance Subcommittee, and
former Vice-Chairman of NASD Regulation's Board of Directors; Philip
S. Cottone, Rutherford, Brown & Catherwood, Inc., Chairman of NAMC
and former member of NASD Regulation's Board of Directors; and O.
Ray Vass, Merrill, Lynch, Pierce, Fenner & Smith, Inc., member of
NASD Regulation's Membership Committee).
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In 1996, case volume for the entire program (public investor and
intra-industry arbitration) was analyzed to obtain a profile of the
users of arbitration services and to project the impact of future fee
changes upon member firms.\7\ This analysis revealed that only 753
firms (14 percent) out of approximately 5,500 NASD member firms had
been parties to arbitration cases. Of these 753 firms, 88 firms (12
percent) accounted for over 50 percent of the case volume. Each of
these 88 firms reported revenues in excess of $100 million on their
FOCUS filings.\8\ In contrast, firms that reported revenues of less
than $500,000 accounted for only 9 percent of NASD member firms and
less than 3 percent of the total projected case load. Thus, a small
number of large firms are involved in more than 50 percent of all
arbitration cases. NASD Regulation considers these firms to be the
primary and most frequent member users of the service and, therefore,
believes it is appropriate for any fee changes to shift member costs to
these member users. The proposed rule changes, including the changes to
the member surcharge adopted in July 1997, largely accomplish this
goal. In addition, any future changes to the fee structure will
transfer any additional costs to these primary users of the program.
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\7\ See Table 3, infra, for a summary of the analysis.
\8\ FOCUS Reports (Financial and Operational Combined Uniform
Single Reports) are submitted to the NASD pursuant to SEC Rule 17a-5
by member firms to report on the member's net capital and general
financial position.
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The Office has analyzed the overall flow of revenue from users of
the arbitration services for the twelve months ending August 31, 1997.
After calculating filing and other fees with forum fees actually paid
by public investors and refunds received by public investors, the data
show that public investors currently are assessed approximately $3.5
million of $15.3 million in fee revenue collected from users. This is
23 percent of the total fee revenue. Although the time periods are not
directly comparable, the revenue contribution of public investors over
the twelve months ended August 31, 1997 is less than 12 percent of the
$29.8 million calendar year 1997 projected total cost of running the
dispute resolution program. Public investors, however, file
approximately 80 percent of the new claims filed with the Office each
year. Moreover, even though some of these revenue contribution figures
will vary because of differences in case volume, forum fee allocations
and other factors, NASD Regulation believes that the total relative
revenue contributions of public investors and members will not change
substantially after the proposed fee changes are approved.
Overall, NASD Regulation expects that the fee changes proposed in
this rule filing and the member surcharge changes implemented earlier
in 1997 will generate approximately $11.5 million in additional
revenue. The combination of increases in fees (filing fees, member
surcharges and hearing session deposits) charged to members will
generate $8.4 million in additional revenues (73 percent of total
additional revenues to be generated by the fee changes). Even with this
additional revenue, the Office will continue to incur operating
shortfalls of more than $6.1 million.
Guidelines for Proposed Fee Increases. In developing the proposed
rule change, NASD Regulation identified several important principles to
guide its decisions on the appropriate fees for the arbitration service
it provides:
The current ratio of public investor fees to member fees
should not change. Currently public investors pay approximately 23
percent of the
[[Page 63585]]
arbitration service fees and members pay 77 percent.
The fees should not create a financial barrier to prevent
a public investor from seeking arbitration. The maximum fee charged to
public investors should not exceed the direct costs of providing the
service and public investors should be permitted to ask the Office to
waive the fees in circumstances of financial hardship.
The fees for a public investor to file a case in
arbitration (the filing fee plus hearing session deposit) must be less
or no more than the initial fee charged to the member named in the
aribration (the member surcharge).
The revenue contribution plan should, to the extent
possible, impose costs on the member firms that use the program.
Any fee increases for public investors should be allocated
to reduce the revenue shortfall for direct arbitration services alone.
Additional fee increases to cover revenue shortfalls for other dispute
resolution programs and indirect operating costs would be assessed to
member users of the dispute resolution programs.
Activity-Based Cost Analysis. In order to understand better the
costs of administering the dispute resolution program, NASD Regulation,
assisted by the accounting firm of Coopers & Lybrand, conducted an
activity-based costing study to identify more accurately the Office's
current costs and link specific activity costs to the services
provided. This study identified fifty-two separate arbitration service
activities and determined the total direct cost of performing each
activity.
In addition to providing the Office with a better understanding of
particular activities and costs, the study also provided a program-wide
perspective of the raw average costs and average fees collected in both
simplified and standard arbitration cases. The study showed, on a per
occurrence basis, the costs associated with activities such as: (1)
receiving and processing claims; (2) analyzing and serving claims; (3)
selecting arbitrators; (4) scheduling hearings; and (5) conducting
hearing sessions. The analysis has permitted the Office to extrapolate
its likely costs for 1998 and compare them to the revenue expected.
This ``Break-Even Analysis'' is attached to this filing as Exhibit 2
and is discussed below.
The raw average costs for particular activities have been
identified by breaking down the work of the Office into discrete
functions, such as ``Receiving Claims.'' The cost of performing these
discrete functions is then identified by totaling the staff hours and
other expenses devoted to the function. The number of occurrences of
the function are then identified and counted. The number of times the
receiving claims function occurs matches the number of claims filed
with the Office each year. The number of occurrences of the function is
then divided into the total cost to derive the per occurrence cost of
the function, or the raw average cost. The average cost of each
function can be multiplied by the number of times it occurs in each
case and added to all of the other functional costs of a case to
produce the average cost of a hypothetical case.
The costs associated with particular cases, however, fall along a
wide spectrum depending on the nature of the case. Cases that are
settled shortly after being filed usually cost little to administer.
Cases that involve numerous and complex issues, numerous pre-hearing
rulings and conferences with the arbitrators, lengthy hearings and,
finally, an award are more costly to administer than other cases. The
Office has also found that the larger the amount in dispute, the more
costly the case is to administer because there are usually more parties
involved (which makes communication more costly and time consuming),
there are more motions and other disputes to resolve, and prehearing
conference and hearing logistics are more complicated. This wide
spectrum of costs is the reason that the Office imposes graduated fees
in two stages: filing fees and forum fees (the latter are partly
prepaid through hearing session deposits).
Finally, NASD Regulation notes that the activity-based cost
analysis is a useful analytical tool for budgeting and planning;
however, it should not be relied upon to produce guaranteed cost
figures. The actual costs of providing the services can and will vary
due to factors that are unpredictable and beyond NASD Regulation's
ability to control.
Proposed Rule Changes
In view of the foregoing, NASD Regulation is proposing to amend the
schedules of fees (including hearing session deposits) for both intra-
industry and public investor disputes to support the improvement of the
arbitration service administered by the Office and to shift the cost of
administering the service to the users.
The filing fee and hearing session deposit changes proposed in this
rule filing are discussed in four separate categories: (1) filing fees
for claims by public investors against members (``Public Investor-
Member Disputes''); (2) filing fees for claims by members against
public customers (``Member-Public Investor Disputes'') or other members
or associated persons (``Intra-industry Disputes''); \9\ (3) hearing
session deposits in all cases between public investors and members, and
in intra-industry cases; and, (4) miscellaneous changes. Also discussed
are NASD Regulation's proposed changes to the arbitrator honorarium
schedule. NASD Regulation believes the changes, taken together, will
maintain the current ratio of funding of the arbitration service
between public investors and members.\10\
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\9\ The proposed rule change treats associated persons of
members like public customers for purposes of fees. See discussion,
infra.
\10\ For the twelve month period ending August 31, 1997, the net
revenue contribution of public investors was approximately $3.5
million. (Net revenue contribution is calculated by identifying the
fees paid, including hearing session deposits and postponement fees,
less the refunds and reallocations through assessment of costs, such
as forum fees.) The net revenue contribution of members was $11.8
million. NASD Regulation is projecting that the combined additional
revenue generated by the proposed fee increases in this rule filing
and the increased member surcharge already in effect will be
approximately $11.6 million. While it is not possible to predict
accurately the 1998 net revenue contributions of public investors
and members, NASD Regulation intends for the proposed increases to
maintain the same ratio of public investor/member net revenue
contributions.
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Filing Fees: Public Investor-Member Disputes. NASD Regulation is
proposing to amend Rule 10332 to increase the filing fee for disputes
between a public investor claimant and a member respondent by an
average of 50 percent in most brackets (fees are based on the amount in
dispute, and a range of amounts in dispute (e.g., $50,000.01 to
$100,000) to which a particular fee applies is referred to as a
bracket) and add three new brackets to graduate further the fee
schedule. For example, the old bracket of fees for claims of $10,000.01
to $30,000 has been divided into two brackets; one from $10,000.01 to
$25,000 with a new filing fee of $125 (versus $100 for the old
bracket), and another from $25,000.01 to $30,000 with a new filing fee
of $150. The old bracket was divided to take into account the new
ceiling for simplified arbitration cases, which was raised from $10,000
to $25,000.\11\ The largest filing fee increases are for the largest
cases; the filing fee for claims of more than $10,000,000 is being
raised 100 percent from $300 to $600.\12\
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\11\ See note 1, supra.
\12\ See Table 2, infra.
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Using the costs identified in the activity-based costing study,
NASD Regulation believes that in 1998 the average direct cost
associated with processing a simplified arbitration case
[[Page 63586]]
from beginning to end will be approximately $412. For a standard case
the cost from filing through all activities up to the prehearing
conference will range from $353 through at least $630. The activity
categories used to calculate average claim processing costs were: (i)
receipt/assignment of cases; (ii) check processing; (iii) analyzing
claims; (iv) serving claims; (v) processing answers; (vi) processing
motions; (vii) processing counterclaims; and (viii) conducting
discovery (except for prehearing conferences to resolve discovery
issues). Activity costs that were not included, among others, were; (i)
recruiting and training of arbitrators; (ii) qualifying arbitrators;
(iii) mediation; and (iv) NASD corporate oversight and transfer pricing
of services from other departments.
For a simplified arbitration case the proposed customer filing fee
for a $10,000 claim is $75, plus a proposed $250 simplified arbitration
fee, for a total of $325, versus average costs for simplified cases of
$412. Because there are no hearings in such cases, much of the Office's
cost is associated with activities from processing the claim up through
presenting it to the arbitrator for a decision. By contrast, in cases
where hearings are conducted, the hearings constitute by far the
largest portion of the cost.
NASD Regulation is proposing filing fees designed to cover as much
of the actual costs of the arbitration process from filing up to the
prehearing conference as is possible without erecting barriers to entry
into arbitration. For a standard case in which more than $100,000 is in
dispute and three arbitrators are appointed, the proposed customer
filing fee is $300, while the Office's average expenses for
administering the case from filing up to the pre-hearing conference
will be at least $477. The margins for large bracket cases are smaller,
but the proposed fees do not exceed the actual average cost to provide
the service.
NASD Regulation's ``Break-even Analysis'' (attached as Exhibit 2)
illustrates how the Office's costs of administering an arbitration
correlate to the revenues obtained through filing fees and hearing
session deposits using 1998 figures and the proposed fee increases.\13\
The analysis uses the activity categories identified in the activity-
based costing study. For each type of activity the Office's total cost
of performing the activity (serving claims, for example) is divided by
the number of times the particular activity occurs to produce an
approximate average cost for each occurrence of the activity. These
activities and their costs are then charted sequentially as they would
likely occur in a case to produce a hypothetical cumulative cost at
each major stage of a case. This average cost is charted against the
fee revenue received in a case. As noted above, however, NASD
Regulation does not regard the analysis as a guarantee that in each
case each step in the process will cost no more than the average
predicted by the analysis.
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\13\ Exhibit 2 to the proposed rule filing presents examples of
how the proposed filing fees and forum fees would apply in
particular types of cases and the Office's average costs of
administering arbitration proceedings in such cases. The figures in
the line ``Net of revenues--cost'' show the loss the Office will
incur in the example when the Office's costs are subtracted from the
revenues collected. Similarly, the final figure in each example
shows how much the Office would lose in such cases after the
Office's total costs are subtracted from the revenues collected,
including forum fees. In addition, for comparison purposes, Exhibit
2 includes the current forum fees that would be charged for the type
of case in each example. Because the cost figures set forth in
Exhibit 2 are averages, parties should not regard them as predictive
of the actual cost of administering their case.
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The analysis shows that well before a preheating conference is held
the claim filing fee revenue has been used up and, after an award is
rendered following a hearing, all of the fee filing revenue and forum
fees that could be collected in a case have been expended. The analysis
takes into account that some activities (processing motions, for
example) will occur several times in a case. In addition, the costs of
some activities (notably, holding hearings) vary greatly so that,
although it is possible to establish an average cost for the activity,
the cost of the activity in a particular case could be substantially
higher or lower than the average. Finally, in the Office's experience,
the cost of some activities tends to vary by the amount in dispute,
with larger cases tending to cost more to administer at certain stages
than smaller cases. The Office believes that the cost variance may
result from the increased contentiousness of the litigants when there
are significant damages in dispute and there are sometimes larger
numbers of parties involved in cases where large amounts are in
dispute.
While the proposed increases in filing fees and hearing session
deposits are expected to generate $3.1 million in additional revenue
from public investors, the increase will be spread over more than 5,000
cases and should not discourage claimants from seeking relief. For
example, in cases where more than $50,000 is in dispute (approximately
16 percent of the public investor cases filed with the Office), the
filing fee is increasing $75 from $150 to $225. The increase of $75
represents less than 2/10 of 1 percent of the amount in dispute.\14\
The filing fee increases in other brackets are similarly small relative
to the amount in dispute:
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\14\ By contrast, the filing fees of the American Arbitration
Association (``AAA'') range from $300 to $4,000, depending on the
amount in dispute. In addition, the AAA's rules require the parties
to pay arbitrator honorariums and other costs of an arbitration
proceeding.
[[Page 63587]]
Table 2.--Percentage Increase in Customer Filing Fees
----------------------------------------------------------------------------------------------------------------
Increase as
Old filing Proposed Dollar Percent percent of
fee new filing amount of increase amount in
fee increase dispute
----------------------------------------------------------------------------------------------------------------
$.01-1,000.00.................................. $15 $25 $10 66.67 1.000
$1,000.01-2,500................................ 25 25 0 0.00 0.000
$2,500.01-5,000................................ 50 50 0.000 0 0.000
$5,000.01-10,000............................... 75 75 0 0.00 0.000
$10,000.01-25,000.............................. 100 125 25 25.00 0.250
$25,000.01-30,000.............................. 100 150 50 50.00 0.200
$30,000.01-50,000.............................. 120 175 55 45.83 0.183
$50,000.01-100,000............................. 150 225 75 50.00 0.150
$100,000.01-500,000............................ 200 300 100 50.00 0.100
$1,000,000.01-3,000,000........................ 250 500 250 100.00 0.025
$500,000.01-3,000,000.......................... 250 375 125 50.00 0.025
$3,000.01-5,000,000............................ 250 600 350 140.00 0.012
$5,000.01-10,000,000........................... 300 600 300 100.00 0.005
Over $10,000.000............................... 300 600 300 100.00 0.005
----------------------------------------------------------------------------------------------------------------
Filing Fees: Member-Public Investor Disputes and Intra-Industry
Disputes. NASD Regulation also is proposing to amend Rule 10332 to
increase the filing fees where a member files a claim against a public
investor. The current filing fee is $500 for all brackets. NASD
Regulation is proposing to substitute a graduated filing fee beginning
at $200 for claims of $1,000 or less up to $5,000 for claims over
$10,000,000. By graduating the fee schedule, the filing fees are
assessed proportionately on the members based on the size of the claim.
Thus, while the filing fees for large claims would increase
substantially, the filing fees for small claims would actually
decrease. The fairness of the fee schedule to members with small claims
is enhanced by decreasing fees for claims of $5,000 or less.
NASD Regulation also is proposing to amend Rule 10205 to increase
and graduate the filing fees for intra-industry disputes. Currently,
the filing fees are $500 regardless of the amount in dispute. NASD
Regulation is proposing to graduate the filing fee from $200 for claims
of $1,000 or less up to $5,000 for claims exceeding $10,000,000 in
order to make the filing fee fairer to claimants with small claims.
As noted above, in addition to the filing fee and hearing session
deposit increases proposed in this rule filing, NASD Regulation has
increased substantially the surcharge on members named as respondents
in an arbitration proceeding.\15\ Taken together, the surcharges and
proposed fee increases on members in both public-investor and intra-
industry cases are expected to generate $8.4 million in additional
revenue, or 73 percent of the total revenue generated. The specific
impact on members is shown below:
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\15\ Rule filing SR-NASD-97-40, filed for immediate
effectiveness on June 12, 1997, and effective July 1, 1997, steeply
graduated and increased the surcharge on members from a maximum of
$500 under the old schedule to $3,600 under the new schedule.
Table 3.--Impact of Fee Increases (Including Surcharges) on Member Firms
----------------------------------------------------------------------------------------------------------------
Number of Estimated
Capitalization of firm Number of cases (est. Percent of impact Impact per
firms 1998) total (1998) firm
----------------------------------------------------------------------------------------------------------------
$1 Billion +................................... 19 2495 36.18 $3,000,000 $157,895
$100 Million-$1 Billion........................ 69 1062 15.40 1,300,000 18,841
$50 Million-$100 Million....................... 48 531 7.70 650,000 13,542
$25 Million-$50 Million........................ 83 751 10.90 900,000 10,843
$10 Million-$25 Million........................ 117 766 11.11 950,000 8,120
$1 Million-$5 Million.......................... 303 1069 15.50 1,300,000 4,290
$500,000-$1 Million............................ 49 111 1.61 150,000 3,061
Less Than $500,000............................. 65 111 1.61 150,000 2,308
----------------------------------------------------------------
Total.................................... 753 6896 100.00 8,400,000 11,155
----------------------------------------------------------------------------------------------------------------
The average increase in cost to member firms for each case will be
$1,218.
NASD Regulation is proposing increases in member-user contributions
to the dispute resolution process because member firms have indicated
that arbitration is their preferred forum for resolving public
investor-member disputes through the predispute arbitration agreements
that are typical of broker-customer business relationships.
Accordingly, the proposed fee increases assess the costs on the actual
users of the program.
Hearing Session Deposits. NASD Regulation also is proposing to
amend Rules 10205 and 10332 to increase the hearing session deposits
\16\ for all cases by no more than 50 percent in most brackets (in the
lowest brackets increases from $15 to $25, and $25 to $50, represent 67
and 100 percent
[[Page 63588]]
increases, respectively) and to add three new brackets to graduate
further the hearing session deposit schedule. For example, the old
bracket of fees for claims of $10,000.01 to $30,000 has been divided
into two brackets, one from $10,000.01 to $25,000 with a new hearing
session deposit of $450 \17\ (compared to $300 for the old bracket) for
a single arbitrator, and another from $25,000.01 to $30,000 with a new
hearing session deposit of $450. In the $25,000.01 to $30,000 bracket
the hearing session deposit for three arbitrators will be $600
(compared to $300 for the old bracket). The hearing session deposit for
claims of $5,000,000.01 or more is being reduced to $1,200.
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\16\ Hearing session deposits are required before NASD
Regulation will schedule a hearing unless waived by the Director due
to financial hardship. The amount deposited is offset against the
actual hearing costs incurred. If a case is settled, dismissed, or
withdrawn more than eight business days before a hearing was
scheduled to occur, the hearing session deposit is refunded.
\17\ Under the new ceilings for single arbitrator claims without
a hearing, claims up to $25,000 may be resolved by a single
arbitrator on the pleadings alone. In such cases, a hearing session
deposit is not required. Thus, the new $450 hearing session deposit
for such cases only applies in the event the claimant requests a
hearing.
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The proposed new hearing session deposits are based on the results
of the activity-based costing study which showed that, for cases
requiring hearings, NASD Regulation's projected average cost to provide
hearings in 1998 will be approximately $1,200 per hearing session. The
activities used in computing this cost include arbitrator expenses and
compensation, hearing room expenses, taping expenses, and staff work
and expenses. The Office's experience also shows, however, that the
costs of conducting hearings varies significantly with the amount in
dispute and the number of parties involved. This is because staff
attorneys may need to attend some or all of the hearing sessions, staff
coordination of logistics may be more difficult and complicated, and
staff communication with the parties may be more involved and time-
consuming. Moreover, the hearing session deposits have been graduated
from a relatively low level for cases in lower brackets up to the
actual average cost of conducting hearings because NASD Regulation
believes that charging claimants the full cost of conducting hearings
in relatively small cases could discourage some public investors from
seeking relief.
In addition, the proposed rule change makes the hearing session
deposits for particular brackets the same among all types of cases;
public investor vs. member, member vs. public investor and intra-
industry. This is being done because NASD Regulation believes the
hearing session deposit, and by extension the forum fees, should not
exceed the Office's actual costs, and such costs are, on average,
approximately the same for all types of cases, even if they may vary by
the amount in dispute or the number of parties involved. As a result of
this change, the hearing session deposit will be the same without
regard to whether a public investor or a member filed the initial
claim.
Miscellaneous Changes. NASD Regulation is proposing to amend Rule
10205(a) to provide that if the claimant is an associated person, he or
she will pay the filing fee and hearing session deposit specified for
public customers. However, if the associated person is a joint claimant
with a member, the member will pay the filing fee and hearing session
deposit specified for industry claimants. NASD regulation is also
proposing to amend Rules 10205(e) and 10332(e) to increase the hearing
session deposit from $600 to $1000, or an amount specified by the
Director or the arbitrators not exceeding the maximum hearing session
deposit specified in the rules, for claims where the amount in dispute
is not disclosed by the claimant in the Statement of Claim.\18\
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\18\ In cases where the claimant is seeking a remedy other than
damages (recision, for example) and does not specify damages, the
staff will attempt to establish the market value of the securities
which are the subject matter of the claim before resorting to the
default fee specified in paragraph (e) of the two rules.
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Finally, Rules 10205(i) and 10332(h) are proposed to be amended to
provide that the filing fees and hearing session deposits for large and
complex cases brought under Rule 10334 \19\ will be those specified for
cases exceeding $10,000,000. There are a few significant and distinct
costs associated with such cases, including the Administrative
Conference, the number of hearing sessions, pre-hearing issues to be
resolved and customized arbitration procedures that may be requested by
the parties.
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\19\ Rule 10334 (the rule for large and complex cases) has been
extended for five years and the use of the procedures is now
entirely voluntary. See Securities Exchange Act Release No. 39024
(September 5, 1997), 62 FR 47856 (September 11, 1997).
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Arbitrator Honoraria. NASD Regulation is proposing to amend IM-
10104 to increase the honoraria paid to arbitrators. The honorarium
will be increased from $150 to $200 for each hearing session, with an
additional $75 per day for the chairman of the panel. Thus, the
Office's honorarium cost for a panel of three arbitrators for one
hearing session is $675. The honorarium for a prehearing conference
will be $200. The honorarium for a case not requiring a hearing will be
$125.
2. Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(5) of the Act \20\ in
that the proposed rule change provides for the equitable allocation of
reasonable charges among members and other persons using the
Association's arbitration facility because it further graduates the fee
schedules and requires users, especially member firm users, to absorb a
reasonable share of the costs of operating the arbitration program.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD does not believe that the proposed rule change will impose
any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the 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 period 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 the 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
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 at
[[Page 63589]]
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 No. SR-NASD-97-79 and should
be submitted by December 22, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc 97-31392 Filed 11-28-97; 8:45 am]
BILLING CODE 8010-01-M
