[Federal Register Volume 64, Number 39 (Monday, March 1, 1999)]
[Notices]
[Pages 10041-10050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4955]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41056; File No. SR-NASD-97-79]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Approval to Proposed Rule Change Relating
to Fees and Hearing Session Deposits for the Arbitration of Claims by
Public Investors, Members and Associated Persons
February 16, 1999.
I. Introduction
On October 29, 1997, 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 Rules IM-
10104, 10205 and 10332 of the NASD's Code of Arbitration Procedure
(``Code'') to increase the arbitration filing fees, hearing session
deposits, and arbitrator honoraria for intra-industry and public
investor arbitrations administered by NASD Regulation.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ This rule filing replaced SR-NASD-97-39, in which NASD
Regulation originally proposed amendments to the filing fees and
hearing session deposits.
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Notice of the proposed rule change, together with the substance of
the proposal, was published for comment in Securities Exchange Act
Release No.
[[Page 10042]]
39346 (November 21, 1997), 62 FR 63580 (December 1, 1997). Forty-three
comment letters were received on the proposal.\4\ The NASD responded to
comments on February 12, 1998, February 24, 1998 and March 31, 1998.\5\
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\4\ See letters from Daniel A. Ball, Lewis, Goldberg & Ball, to
Margaret H. McFarland, Deputy Secretary, Commission, dated December
3, 1997 (``Letter 1''); Erwin Cohn, Cohn & Cohn, to Margaret H.
McFarland, Deputy Secretary, Commission, dated December 3, 1997
(``Letter 2''); J. Boyd Page, Page & Bacek, to Margaret H.
McFarland, Deputy Secretary, Commission, dated December 11, 1997
(``Letter 3''); Diane A. Nygaard, The Nygaard Law Firm, to Margaret
H. McFarland, Deputy Secretary, Commission, dated December 10, 1997
(``Letter 4''); Gary M. Berne, Stoll, Stoll, Berne, Lokting &
Schlachter, P.C. to Margaret H. McFarland, Deputy Secretary,
Commission, dated December 4, 1997 (``Letter 5''); Martin R. Galbut,
Galbut & Conant, to Margaret H. McFarland, Deputy Secretary,
Commission, dated December 4, 1997 (``Letter 6''); Robert Dyer,
Allen, Dyer, Doppelt, Milbrath & Gilchrist, P.A., to Margaret H.
McFarland, Deputy Secretary, Commission, dated December 4, 1997
(``Letter 7''); Neal J. Blaher, Law Office of Neal J. Blaher, to
Margaret H. McFarland, Deputy Secretary, Commission, dated December
3, 1997 (``Letter 8''); (there is no Letter 9); Patricia A. Shub,
Patricia A. Shub, P.A., to Margaret H. McFarland, Deputy Secretary,
Commission, dated December 10, 1997 (``Letter 10''); Michael R.
Casey, Casey and Molchan, to Margaret H. McFarland, Deputy
Secretary, Commission, dated December 10, 1997 (``Letter 11''); Mark
A. Tepper, Mark A. Tepper, P.A., to Margaret H. McFarland, Deputy
Secretary, Commission, dated December 11, 1997 (``Letter 12''); J.
Pat Sadler, Sadler & Associates, P.C., to Margaret H. McFarland,
Deputy Secretary, Commission, dated December 8, 1997 (``Letter
13''); Philip M. Aidikoff and Robert A. Uhl, Aidikoff & Uhl, to
Margaret H. McFarland, Deputy Secretary, Commission, dated December
12, 1997 (``Letter 14''); Martin L. Feinberg, to Jonathan G. Katz,
Secretary, Commission, dated December 10, 1997 (``Letter 15'');
James E. Beckley, James E. Beckley and Associates to Jonathan G.
Katz, Secretary, Commission, dated December 19, 1997 (``Letter
16''); Public Investors Arbitration Bar Association (``PIABA''),
dated December 11, 1997 (``Letter 17''); Barry D. Estell, to
Margaret H. McFarland, Deputy Secretary, Commission, dated December
4, 1997 (``Letter 18''); James E. Beckley, Securities Industry
Conference on Arbitration (``SICA''), to Jonathan G. Katz,
Secretary, Commission, dated December 10, 1997 (``Letter 19'');
Andrew O. Whiteman, Hartzell & Whiteman, LLP, to Margaret H.
McFarland, Deputy Secretary, Commission, dated December 11, 1997
(``Letter 20''); Seth E. Lipner, Deutsch & Lipner, to Margaret H.
McFarland, Deputy Secretary, Commission, dated December 11, 1997
(``Letter 21''); Harold J. Bender, to Margaret H. McFarland, Deputy
Secretary, Commission, dated December 9, 1997 (``Letter 22''); Emily
Feldman, to Margaret H. McFarland, Deputy Secretary, Commission,
dated December 10, 1997 (``Letter 23''); Lawrence Sullivan, to
Margaret McFarland, Deputy Secretary, Commission, dated December 10,
1997 (``Letter 24''); Joseph C. Long, Professor of Law, to Margaret
H. McFarland, Deputy Secretary, Commission, dated December 11, 1997
(``Letter 25''); Joseph D. Sheppard III, Carnahan, Evans, Cantwell &
Brown, P.C., to Margaret H. McFarland, Deputy Secretary, Commission,
dated December 19, 1997 (``Letter 26''); Robert D. Mitchell,
Mitchell Law Offices, to Margaret H. McFarland, Deputy Secretary,
Commission, dated December 12, 1997 (``Letter 27''); Peter R. Cella,
Duignan & Cella, to Jonathan G. Katz, Secretary, Commission, dated
December 15, 1997 (``Letter 28''); Diane Nygaard, The Nygaard Law
Firm, to Jonathan G. Katz, Secretary, Commission, dated December 30,
1997 (``Letter 29''); Don K. Leufven, Alonso & Cersonsky, P.C., to
Margaret H. McFarland, Deputy Secretary, Commission, dated December
12, 1997 (``Letter 30''); James E. Beckley, James E. Beckley and
Associates, to Jonathan G. Katz, Secretary, Commission, dated
December 30, 1997 (``Letter 31''); Jonathan H. Colman, to Jonathan
G. Katz, Secretary, Commission, dated December 22, 1997 (``Letter
32''); Joel E. Davidson, Senior Vice President and Deputy General
Counsel, PaineWebber, Inc., to Margaret H. McFarland, Deputy
Secretary, Commission, dated January 9, 1998 (``Letter 33''); Scot
D. Bernstein, Law Offices of Scot D. Bernstein, to Jonathan G. Katz,
Secretary, Commission, dated January 22, 1998 (``Letter 34''); Tracy
Pride Stoneman, Susemihl & McDermott, P.C., to Margaret H.
McFarland, Deputy Secretary, Commission, dated December 17, 1997
(``Letter 35''); Richard P. Ryder, Securities Arbitration
Commentator, to Jonathan G. Katz, Secretary, Commission, dated
January 16, 1997[sic] (``Letter 36''); Paul J. Dubow, Senior Vice
President and Senior Deputy General Counsel, Dean Witter, Discover &
Co., to Jonathan G. Katz, Secretary, Commission, dated January 28,
1998 (``Letter 37''); James E. Beckley, James E. Beckley and
Associates, to Jonathan G. Katz, Secretary, Commission, dated
January 21, 1998 (``Letter 38''); Morton Levy, to Jonathan G. Katz,
Secretary, Commission, dated January 27, 1998 (``Letter 39''); Neal
J. Blaher, to Guy P. Fronstin, Staff Attorney, NASD Regulation,
dated December February 6, 1998 (``Letter 40''); Neal J. Blaher to
Guy P. Fronstin, Staff Attorney, NASD Regulation, dated February 6,
1998 (``Letter 41''); Robert Dyer, Allen, Dyer, Doppelt, Milbrath &
Gilchrist, to Linda Fienberg, Executive Vice President of Dispute
Resolution, NASD Regulation, dated March 2, 1998 (with attached
letter from Neal J. Blaher to Guy P. Fronstin, Staff Attorney, NASD
Regulation, dated February 25, 1998) (``Letter 42''); (there is no
Letter 43); Richard P. Ryder, Securities Arbitration Commentator, to
Jonathan G. Katz, Secretary, Commission, dated September 17, 1998
(``Letter 44''); and Seth E. Lipner, Secretary, PIABA, to Arthur
Levitt, Chairman, Commission, dated October 14, 1998 (``Letter
45'').
\5\ See letters from John M. Ramsey, Vice President and Deputy
General Counsel, NASD Regulation, to Katherine A. England, Assistant
Director, Division of Market Regulation, Commission, dated February
12, 1998 (``Response One''), February 24, 1998 (``Response Two''),
and March 31, 1998 (``Response Three'').
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II. Description
Background and Introduction
NASD Regulation is proposing to amend the Code to increase the
filing fees and hearing session fees 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. The fees and deposits for arbitration
proceedings fall generally into three categories: (1) Filing fees; (2)
hearing session fees; and (3) member surcharges. This filing does not
concern member surcharges.
Filing fees are submitted by the party filing a claim and are
required for all claims, including cross-claims, counterclaims and
third party claims. These fees pay some NASD Regulation's average
direct costs of administering the early stages of an arbitration
case.\6\
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\6\ Average direct costs are discussed further infra.
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Hearing session fees may be assessed by the arbitrators for each
hearing session held in a case.\7\ Arbitrators decide who will pay
these fees in their award at the end of the case. Claimants have to
deposit with NASD Regulation the hearing session fee for the first
hearing when they file their claim,\8\ and arbitrators may request that
either party submit additional deposits of hearing session fees as the
case progresses. A hearing session deposit is intended as an advance
payment for the first, or a subsequent, hearing session. If pays some
of NASD Regulation's average direct cost of conducting a hearing
session.
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\7\ A hearing session is any meeting between the parties and the
arbitrator(s) that lasts four hours or less, including a pre-hearing
conference with an arbitrator.
\8\ NASD Regulation staff can waive the initial filing fee and
hearing session deposit if the claimant demonstrates financial
hardship.
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Under the existing fee structure and these proposed fees, NASD
Regulation is subsidizing through fees on members only and through
general revenues the cost of administering arbitration cases for
investors with small and moderate claims.
Proposed Rule Change
NASD Regulation is proposing to amend the schedules of fees for
both intra-industry and public investor disputes. The filing fees and
hearing session deposit changes proposed 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\ hearing session fees and deposits in all cases between
public investors and members, and in intra-industry cases; and (4)
miscellaneous changes. NASD Regulation also proposes changes to the
arbitrator honorarium schedule.
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\9\ The proposed rule change treats associated persons of
members like public customers for purposes of fees.
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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 \10\ and add three new brackets
to graduate further the fee schedule.\11\ The proposed filing fees
[[Page 10043]]
range from $25 to $600, while the current filing fees range from $15 to
$300.
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\10\ Fees are based on the amount in dispute, and ``bracket''
refers to a range of amounts in dispute (e.g., $50,000.01 to
$100,00) to which a particular fee applies.
\11\ 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 (compared to
$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. See Securities Exchange Act
Release No. 38635 (May 15, 1997), 62 FR 27819 (May 21, 1997) (SR-
NASD-97-22). The largest filing fee increases are for the largest
cases; for example, the filing fee for claims of more than
$10,000,000 is being raised 100 percent from $300 to $600.
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Filing Fees: Member-Public Investor Disputes and Intra-Industry
Disputes. NASD Regulation is proposing to amend Rule 10332 to change to
the filing fees when 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) and ending at $5,000 (for claims over
$10,000,000).
NASD Regulation is also 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) to $5,000 (for claims over $10,000,000).
Fees for Hearing Sessions. NASD Regulation is proposing to amend
Rules 10205 and 10332 to increase the hearing session fees that can be
assessed for each hearing session held in a case. The proposal
increases the initial deposits required for all cases, and adds three
new brackets to graduate further the hearing session deposit
schedule.\12\ In addition to the initial hearing session deposit
required when a case is filed, the hearing session deposit schedule is
used by the arbitrators to assess fees for each of the hearing sessions
held in case, which together with other miscellaneous costs are
referred to as forum fees. The hearing session deposits range from $25
to $1,200. Hearing session fees are the same within brackets for public
investor-member, member-public investor, and intra-industry cases.
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\12\ For example, the old bracket for claims of $10,000.01 to
$30,000 has been divided into two bracket, one from $10,000.01 to
$25,000 with a new hearing session deposit of $450 (compared to $300
for the old bracket) for 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 from $1,500.
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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. In order to encourage parties
to identify, when possible, the dollar amounts involved in a case, NASD
Regulation is also proposing to amend Rules 10205(e) and 10332(e) to
increase the hearing session deposit for claims where the amount in
dispute is not disclosed by the claimant in the Statement of Claim. The
fee will be increased from $600 to either $1,000 or an amount specified
by the Director of Dispute Resolution or the arbitrators, not to exceed
the maximum hearing session deposit specified in the rules.\13\
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\13\ In cases where the claimant is seeking a remedy other than
damages (recision, for example) and does not specify damages, NASD
Regulation has stated that its staff will attempt to establish the
market value of the securities that are the subject matter of the
claim before resorting to the higher maximum default fee specified
in paragraph (e) of the two rules.
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Finally, NASD Regulation is proposing to amend Rules 10205(i) and
10332(h) to provide that the filing fees and hearing session fees for
large and complex cases brought under Rule 10334 \14\ will be those
specified for cases exceeding $10,000,000. In support of the fees for
cases administered under the large and complex case rules, the NASD has
stated that there are significant and distinct costs associated with
such cases, including an administrative conference, multiple hearing
sessions, pre-hearing issues to be resolved and customized arbitration
procedures that may be requested by the parties.
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\14\ Rule 10334 (the rule for large and complex cases) was
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 per arbitrator for each hearing
session, with an additional $75 per day for the chairperson of the
panel. The Office of Dispute Resolution's honorarium cost for a panel
of three arbitrators for one hearing session under the proposed
schedule is $675. The honorarium for a pre-hearing conference will be
$200. The honorarium for a case not requiring an oral hearing will be
increased from $75 to $125.
Direct Costs of Administering Arbitration Cases
NASD Regulation states that the fees proposed in this rule filing
were developed to recover much of its average direct costs for
administering arbitration cases. In developing the proposed fee
increases, NASD Regulation reports that it identified the average costs
attributable to such activities as receiving, processing, analyzing,
and serving claims, selecting arbitrators, and scheduling and
conducting hearings.\15\ The proposed filing and hearing session fees
do not pay for NASD Regulation's general costs for administering the
arbitration department, including costs for arbitrator recruitment and
training, computer systems, office space, senior management and legal
services. Instead, these fees are designed to cover the actual costs
incurred by NASD Regulation in administering particular cases. NASD
Regulation estimates that the revenue from the proposed filing and
hearing session fees will total about 68% of its average direct costs
for administering cases.\16\
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\15\ NASD Regulation described its cost analysis, noting in part
that the cost of these functions was identified by totaling the
staff hours and other expenses devoted to the function. Also, the
number of occurrences of the function was counted. The total cost
was divided by the number of occurrences to derive the average cost.
\16\ While its latest budget figures suggest that the filing and
hearing session fees may pay for approximately 68% of its direct
costs of arbitrating disputes, NASD Regulation's actual experience
with revenue received as of June 4, 1998 suggests that the fees may
pay approximately 50% of the direct costs. See letter from Elliott
Curzon, Assistant General Counsel, NASD Regulation, to Robert A.
Love, Special Counsel, Division of Market Regulation, Commission,
dated June 4, 1998.
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In particular, NASD Regulation states that the filing fees were
designed to cover much of the actual costs of the arbitration process
from filing up to the pre-hearing conference. These costs include the
processing, analyzing and serving of claims, and selecting arbitrators.
In lower bracket cases, NASD Regulation states that the filing fees are
lower than its cost of providing the service, and in larger bracket
cases, the filing fees approach but do not exceed its average cost of
providing the service. The costs generally increase as the amount in
controversy increases.
Similarly, NASD Regulation states that the hearing session fees are
designed to cover some of the actual costs of administering a hearing.
The cost of conducting a hearing session includes arbitrator
compensation and travel expenses, hearing conference rooms, and the
cost and expenses of NASD Regulation staff directly involved
[[Page 10044]]
in the case. NASD Regulation states that its analysis indicates the
projected average cost to provide a single hearing session is $1,200.
The hearing session fees proposed in this filing for three person
panels are graduated, from $600 (for cases involving $25,000.01 to
$30,000) to $1,200 (for cases above $500,000).\17\
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\17\ Hearing session fees for smaller cases, with a single
arbitrator, are between $25 and $450.
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III. Summary of Comments
The Commission received 43 comment letters on the proposed rule
change, of which 40 opposed the proposed rule change and three favored
it.\18\ The NASD responded to comment letters.\19\
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\18\ See supra note 4.
\19\ See supra note 5.
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Increasing Fees Will Deter Investors
Many of the commenters argue that the arbitration fees are already
too high,\20\ and that the proposed increase in fees will deter
investors from filing claims and impair investors' ability to obtain
compensation.\21\ One commenter suggests that the proposed fee
increases could cause claimants to underestimate or not include damages
in their claims in an effort to avoid paying the higher filing
fees.\22\ Two of the commenters, investors with claims in arbitration,
state that it was a burden for them to file a claim under the current
fee structure.\23\ One of them also states that she could have gone to
court at a lower cost but was prevented from doing so because of her
arbitration contract.\24\ One commenter argues that the fee increase
would destroy confidence in the system.\25\ In addition, commenters
state that arbitration proceedings are already more expensive than
filing an equivalent claim in court.\26\ One commenter states that
because NASD Regulation will be charging hearing session fees for the
pre-hearing conferences, firms could delay proceedings by engaging in
elaborate motion practice and requesting pre-hearing conferences on a
variety of motions, which could impose an additional financial burden
on public customers.\27\
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\20\ See Comment Letter Nos. 7 (``The NASD fees are already too
high, considering the lack of fairness in the procedures''); 17; and
26.
\21\ See Comment Letter Nos. 1 (``Raising the cost of
arbitration increases the financial risks that investors must bear.
Investors will be deterred further from filing claims.''); 3 (``We
are extremely concerned that proposed fee increases will hurt
investors' ability to obtain recovery for legitimate damages * *
*.''); 4; 11; 17; 18; 20; 21; 22; 32; 34 (``Fear of filing fees
should not deprive public customers of access to justice, yet that
is exactly what will be brought about by the NASD's proposal.'');
35; and 39.
\22\ See Comment Letter No. 32.
\23\ See Comment Letter Nos. 23 and 24.
\24\ See Comment Letter No. 23.
\25\ See Comment Letter No. 16.
\26\ See Comment Letter Nos. 2; 11; 15; 16; 18; and 34.
\27\ See Comment Letter No. 10.
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In support of the proposed rule filing, one commenter argues that
the cost of arbitration is still less than cost of litigation because a
plaintiff incurs filing fees in court and is subject to significant
out-of-pocket expenses for deposition transcripts, court reporters and
transcripts, and travel associated with depositions.\28\ That commenter
also argues that requiring a claimant to incur some meaningful expense
would weed out frivolous claims but not discourage valid claims.
Finally, the commenter argues that others' claims of undue burden are
overstated because he has never encountered a claimant who stated the
current fee was not affordable or who asked the commenter's firm to pay
the filing fee.
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\28\ See Comment Letter No. 33. In contrast, one commenter
opposes the proposed rule stating that the argument that litigation
is more expensive is weakened by innovations in court procedures
such as limits on the length of depositions and sanctions for
delays. See Comment Letter No. 16.
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In its response to the comment letters, NASD Regulation states that
it does not believe that the increased filing fees will constitute a
deterrent to arbitration because they remain a small portion of the
amounts alleged as damages (below one percent) and because the Director
of Dispute Resolution can waive the fees upon a demonstration of
financial hardship.\29\
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\29\ See NASD Response One. NASD Regulation also adds that if
the arbitrators assess forum fees against a party that its staff
knows is laboring under a financial hardship, that information will
be considered in connection with its decision whether to initiate
collection efforts.
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NASD Regulation responds to the concern about the expense of pre-
hearing conferences by stating that these conferences may save parties
money because they may avoid or reduce time-wasting disputes over
discovery, evidence, presentations and similar matters. NASD
Regulation, which bases its views on feedback from parties and
observations by staff, also states it will continue to monitor the pre-
hearing conference process to evaluate its effectiveness.
Securities Industry Should Pay for Fee Increases
Many securities firms ensure that any future disputes they may have
with customers will be handled in arbitration through the use of
predispute arbitration clauses in their customer agreements. Numerous
commenters argue that the securities industry should pay most, if not
all, of the proposed fee increase \30\ because it costs the industry
less money to handle its cases in arbitration,\31\ rather than in
court.\32\ For example, one commenter argues that the securities
industry should bear any fee increases to cover NASD Regulation budget
deficits because of the cost savings it receives by avoiding both jury
trials and the higher fees charged by the American Arbitration
Association (``AAA'').\33\ Two commenters argue that, because customers
are compelled to use NASD arbitration by their brokerage firms, it is
unfair to require them to deposit as much as half of the projected cost
of arbitration (which they state is possible under the proposed fee
increase) in order to pursue their claims.\34\ Another commenter argues
that the NASD's high expenses are a consequence of the industry's
successful efforts to compel arbitration at the NASD or other self-
regulatory organizations (``SROs''). The commenter maintains that it is
inappropriate to combine the industry's ability to choose arbitration
over litigation in the courts with an NASD requirement that customers
who use the forum must contribute to maintaining it.\35\ Two commenters
assert that NASD Regulation did not follow the recommendation in
Securities Arbitration Reform, Report of the Arbitration Policy Task
Force to the Board of Governors, National Association of Securities
Dealers, Inc. (January 1996) (``Task Force Report''), which stated that
members should pay most of the costs of arbitration, while investors
should only pay a small share of an increase in fees.\36\
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\30\ See Comment Letter Nos. 3; 6; 7; 11; 15; 20; 21; 25; 26;
28; 30; 32; 34.
\31\ See Comment Letter Nos. 7; 26; and 34 (``The securities
industry gets the benefits of forced arbitration of disputes. There
is nothing wrong with the securities industries paying for that
benefit through its trade organization.'').
\32\ See Comment Letter Nos. 6; 11; 15; 17; 20; 25 (``if the
brokerage industry wants * * * to mandate a specific private system,
the industry should be willing and required to bear virtually the
entire expense of that system''); 28; and 32.
\33\ See Comment Letter No. 30.
\34\ See Comment Letter Nos. 10 and 11.
\35\ See Comment Letter No. 8.
\36\ See Comment Letter Nos. 3 (``the expense of this increase
should be borne by the securities industry as recommended by the
NASD's Arbitration Policy Task Force''); 16; and 17.
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In support of the proposed rule change, two commenters argue that
members already bear most arbitration costs, and that the current ratio
of member and customer fees is maintained in the proposed fee
increases.\37\ In addition, one commenter argues that the industry
should not pay 100% of the fee increase because
[[Page 10045]]
claimants, as well as the industry, benefit from arbitration. The
commenter noted in particular that claims in arbitration are resolved
more quickly than claims in litigation.\38\
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\37\ See Comment Letter Nos. 33 and 37.
\38\ See Comment Letter No. 37.
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NASD Regulation responds that the proposed rule change, in
combination with previous rule changes increasing member surcharges and
adding a process fee for members only,\39\ ensures that the securities
industry will continue to pay most of the costs of arbitration.\40\
NASD Regulation states that the notice of the proposed rule change \41\
demonstrates that the industry will bear the majority of the costs of
operating the arbitration program and that the customer's portion of
the costs will continue to be relatively modest. Moreover, NASD
Regulation responds that the assertion that some members may enjoy
indirect savings from arbitration as a result of lower litigation
costs, settlements, or judgments does not provide a basis under the Act
for disapproving the proposed rule change. NASD Regulation asserts that
the appropriate basis for Commission approval of the proposed rule
change is whether the proposed fees provide for the equitable
allocation among the users of the arbitration program of reasonable
fees.
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\39\ See Securities Exchange Act Release No. 38807 (July 1,
1997), 62 FR 36858 (July 9, 1997) (increasing a member surcharge
each time a member firm or associated person becomes a party to an
arbitration case) and Securities Exchange Act Release No. 39504
(December 31, 1997), 63 FR 1134 (January 8, 1998) (SR-NASD-97-96)
(imposing a process fee on members who are parties in arbitration
proceedings).
\40\ See NASD Responses One and Three.
\41\See Securities Exchange Act Release 39346 (November 21,
1997), 62 FR 63580 (December 1, 1997).
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NASD Regulation argues that claimants also enjoy substantial
savings in arbitration because, for example, arbitration takes less
time than litigation.\42\ It also points out that appeals of decisions
are rare, involve narrower grounds and are less likely to succeed, and
that claimants avoid the expense of depositions and similar costs
associated with discovery in litigation. Finally, NASD Regulation
states that arguments concerning whether mandatory arbitration is
appropriate should not be addressed by the Commission in this rule
filing, and that the Supreme Court has expressly upheld the
enforceability of predispute contracts to arbitrate disputes between
investors and broker-dealers.\43\
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\42\ See NASD Responses One and Two.
\43\ See NASD Response One, citing Shearson/American Express,
Inc. v. McMahon, 482 U.S. 220 (1987) (``McMahon'').
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Commenters also argue that the increase in the allocation of fees
is significant in percentage terms, and in the dollar amount an
investor will have to pay in filing and forum fees.\44\ Another
commenter states that the NASD should consider the historical
allocation of expenses, not the historical revenue split, between
member users and investors/individual employee users.\45\ The NASD
responds that its filing demonstrates that the proposed fees are
reasonable because the filing and hearing session fees pay only for a
portion of the average direct costs of providing arbitration services
to the parties.\46\
---------------------------------------------------------------------------
\44\ See Comment Letter Nos. 17 (``the increase is significant
in percentage terms and dollar terms'') and 28.
\45\ Comment Letter No. 36.
\46\ See NASD Response One. In addition, NASD Regulation
discussed the general costs and revenues of its program in response
to this comment.
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Arbitration Contracts
Several of the commenters suggest that the fee increases in the
proposed rule change would undermine the rationale underlying the
Supreme Court's decision in McMahon, which holds that predispute
agreements to arbitrate claims between customers and broker dealers
under the Act are enforceable.\47\ Commenters also argue that
arbitration is supposed to be an inexpensive and speedy alternative to
litigation, and question how that could continue to be true after the
proposed fee increases.\48\ NASD Regulation responds that arbitration
will continue to be more economical than litigation in light of the
complexity of court litigation, especially discovery costs.\49\
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\47\ See Comment Letter Nos. 4; 17; and 48.
\48\ See Comment Letter Nos. 8 (``[A]rbitration was--and is--
intended as a speedy and inexpensive alternative to litigation.'')
and 34 (``[T]he arbitration concept was originally sold as an
inexpensive alternative to traditional litigation. The proposed
filing fee increases may not appear large to the professionals who
will review them; but they are huge to elderly public customers who
are living on fixed incomes and have lost the bulk of their life
savings.'') (emphasis in original).
\49\ See NASD Response One.
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Administration of the Arbitration Process
Several commenters assert that the proposed rule change does not
address problems with the administration of the arbitration process,
and that the Commission should not approve the proposed rule change
until NASD Regulation has addressed these problems.\50\ Specifically,
commenters cite concerns about submitting materials to arbitrators,\51\
scheduling,\52\ the arbitrator selection process,\53\ the discovery
process,\54\ and the telephone system.\55\
---------------------------------------------------------------------------
\50\ See Comment Letter Nos. 5; 20; and 21.
\51\ See Comment Letter No. 5.
\52\ See Comment Letter Nos. 5; 20; and 21.
\53\ See Comment Letter Nos. 5; 21; and 35. The Commission notes
that it has recently approved a proposed rule change filed by the
NASD relating to the selection of arbitrators under a new list
selection process. See Securities Exchange Act Release No. 40555
(October 14, 1998), 63 FR 56670 (October 22, 1998).
\54\ See Comment Letter Nos. 20; 21 (``Problems with the
discovery process and the abuse thereof * * * have gone unaddressed
in these amendments.''); and 26.
\55\ See Comment Letter Nos. 20 and 21.
---------------------------------------------------------------------------
In response, NASD Regulation states that the commenters who argue
that the forum is less efficient than courts by comparing arbitration
fees to court fees and expenses fail to make a proper comparison. NASD
Regulation points to the significant tax subsidy that supports public
courts, the large administrative overhead of the court system, and the
cost to parties added by the complexity of court litigation. NASD
Regulation also states that arbitration is a private forum whose costs
must be paid for either by its sponsor or users. It states that it is
more equitable to fund arbitration with revenue from member firm users
rather than from general assessments against all members. NASD
Regulation also states that the overwhelming majority of the costs of
the forum will be paid by member users of the forum and not by
investors.
In support of the proposed rule change, one commenter states that a
fee increase is necessary for NASD Regulation to perform adequately its
administrative function because it will help maintain the efficiency of
the arbitration process and upgrade arbitrator training.\56\
---------------------------------------------------------------------------
\56\ See Comment Letter No. 37.
---------------------------------------------------------------------------
Fees May Make Arbitration Unaffordable for Some People
Commenters also argue that the proposed fee increases, if
implemented, could deny investors equal protection under the law or due
process because arbitration would be mandatory, but too expensive for
investors.\57\ Two
[[Page 10046]]
commenters argue that to increase the fee to investors would create a
system of justice available only to the rich.\58\
---------------------------------------------------------------------------
\57\ See, e.g., Comment Letter Nos. 1 (``[M]any of our clients
are denied equal protection under the law because they do not have
the financial means to pay for NASD arbitration.''); 12 (``[A]dding
additional costs to the Claimant * * * will result in more Claimants
being denied fair and reasonable access to the arbitration process *
* *. This appears to raise very serious equal protection
arguments.''); 13 (``As long as brokerage firms are allowed to force
public customers into SRO sponsored arbitration any increase in fees
raises equal protection and antitrust issues.''); 16; 18; and 25
(``[T]he customer is required to surrender his right to litigate * *
* in court * * * in favor of a private system which he does not want
and which, if the fee increases are granted, he will be required to
bear a substantial financial burden to support * * *. Such a
condition * * * presents a situation where the customer is actually
being denied equal protection of the law.'').
\58\ See Comment Letter Nos. 3 and 4.
---------------------------------------------------------------------------
NASD Regulation responds that the fees remain a low percentage of
the damages claimed, and that NASD Regulation may waive fees and
deposits if a customer demonstrates financial hardship.\59\ NASD
Regulation also responds that mandatory arbitration, which the Supreme
Court has upheld, is not at issue in this proposed rule change.
---------------------------------------------------------------------------
\59\ See NASD Responses One and Three.
---------------------------------------------------------------------------
Non-SRO Alternative
Several commenters suggest that NASD Regulation adopt a rule that
would allow investors the choice of resolving their disputes at a non-
SRO forum, and point that PIABA has submitted a petition to the
Commission on this point. They argue that such a rule would eliminate
the need for an increased budget or fees for two reasons: first,
because many claimants would choose the AAA,\60\ which they argue is a
better forum than NASD Regulation; \61\ and second, because the
appropriate fees for NASD Regulation's arbitration services can only be
determined when its arbitration forum is required to compete with other
arbitration forums.\62\ In addition, one commenter suggests that the
NASD's arbitration expense projections are high compared with the AAA
expenses.\63\ In support of the proposed rule change, one commenter
argues that the AAA fees are substantially higher than the proposed
fees, and that ``claimants' bar is willing to pay higher fees if it
deems it to be in its best interest.'' \64\
---------------------------------------------------------------------------
\60\ See Comment Letter Nos. 7; 26; 27; and 30 (``The American
Arbitration Association alternative would be a means of reducing the
caseload and the budget deficit of the NASD.'').
\61\ See Comment Letter Nos. 14; 20 (``AAA's case administration
is much, much better * * *. The letter notes also that ``the cost of
the AAA is much higher * * *''); 27; and 35.
\62\ See Comment Letter No. 13.
\63\ See Comment Letter No. 36.
\64\ See Comment Letter No. 37.
---------------------------------------------------------------------------
In response, NASD Regulation states that enabling investors to take
their claims to AAA would not address commenters' concerns about the
cost of arbitration because AAA is no less expensive and is not
subsidized by member firms.\65\ It also states its understanding that
AAA does not waive its fees in cases of financial hardship. NASD
Regulation also submitted a comparison of NASD Regulation and AAA fees
and charges for customer arbitrations, stating that ``NASD arbitration
charges under the proposed new fee schedule will generally be
substantially less than the AAA's charges for comparable cases.'' \66\
In addition, NASD Regulation states that the issue of the widespread
use of arbitration contracts raised by the commenters is not before the
Commission in connection with this rule filing.
---------------------------------------------------------------------------
\65\ See NASD Response One.
\66\ See letter from John M. Ramsey, Vice President and Deputy
General Counsel, NASD Regulation, to Katherine A. England, Assistant
Director, Division of Market Regulation, Commission, dated August
18, 1998.
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Arbitrator Honoraria
One commenter argues that the arbitrator honoraria should not be
increased.\67\ The commenter argues that SRO arbitrators are volunteers
rendering a public service, not professional arbitrators, and that
because the proposed increase would not actually compensate arbitrators
for the amount of time they typically devote to cases, the increase
would not attract more qualified arbitrators. He also stated that if
this honorarium increase did attract arbitrators, it would raise a
concern that those arbitrators might not award appropriate damages
against respondent firms for fear of being struck from future panels.
Another commenter argues that an increase in arbitrator honoraria is
reasonable but that it should not apply to pre-hearing conferences.\68\
One commenter states that the expense of the arbitrator honoraria
increase should be paid by the industry, and characterizes the Task
Force Report as supporting this argument.\69\
---------------------------------------------------------------------------
\67\ See Comment Letter No. 28.
\68\ See Comment Letter No. 36. The commenter does not believe
that pre-hearing conferences warrant the same fee for arbitrators as
a hearing session because they are often conducted over the
telephone and are of short duration.
\69\ See Comment Letter No. 3.
---------------------------------------------------------------------------
Miscellaneous
One commenter argues that the proposed fee increase would reduce
the uniformity of the arbitration rules used by the SROs and lead to
forum shopping, as was typical before SICA was established to create a
uniform code.\70\ One commenter who supports the proposed rule change
states that it takes no position on the issue of uniformity but noted
that other SROs are smaller and may have lower expenses, and
accordingly no need to increase fees.\71\ One commenter argues that the
fee increase will cause investors to use other SRO arbitration forums
not prepared to handle the increase in case load.\72\ Another commenter
suggests that NASD Regulation increase the amount it contributes to
funding the arbitration budget rather than trying to make arbitration
self-sustaining.\73\
---------------------------------------------------------------------------
\70\ See Comment Letter No. 28.
\71\ See Comment Letter No. 37.
\72\ See Comment Letter No. 16.
\73\ See Comment Letter No. 4.
---------------------------------------------------------------------------
One commenter states that public customers' interests are not
represented in the administration of the NASD's Arbitration
Department.\74\ NASD Regulation responds that the public is represented
in the administration of the arbitration program because NASD
Regulation's National Arbitration and Mediation Committee (``NAMC'')
includes several public members.\75\ NASD Regulation also responds that
three of the six members of its Subcommittee on Arbitration Fees, which
was formed by the NASD Regulation Board of Directors to develop the
proposed fee increases, are representatives of the public.\76\
---------------------------------------------------------------------------
\74\ See Comment Letter No. 11.
\75\ See NASD Response One.
\76\ NASD Regulation identified James E. Burton, CalPERS, Bonnie
Guitton Hill, Times-Mirror Corp., and William S. Lapp, Laurie,
Libra, Abramson & Thomson and PIABA board member, as representative
of the public.
---------------------------------------------------------------------------
Finally, several commenters argue that there have been changes in
the NASD's fee administration that have not been noticed for comment,
or approved by the Commission, that result in arbitrators increasingly
assessing fees against customer claimants, even when these claimants
recover an award.\77\ One commenter, an individual investor who
recently completed an arbitration at the NASD, states that even though
he prevailed in arbitration, the arbitrators assessed half the
arbitration fees against him.\78\ He also states that if he had been
allowed to file his claim in court, the fees would automatically have
been assessed against the loser. One commenter states that a practice
of assessing fees against investors can have the effect of a sanction
for bringing losing cases. That commenter argues that the fact that an
investor does not prevail does not mean that a ``sanction'' is
appropriate.\79\ Another commenter notes that there is a developing
trend
[[Page 10047]]
among arbitration panels to request additional session deposits. In
that commenter's view, this results from information and training
materials given to the arbitrators at training sessions, or advice
given by employees of NASD Regulation. The commenter views this as
inappropriate because fee assessments are a matter of arbitrator
discretion.\80\
---------------------------------------------------------------------------
\77\ See Comment Letter Nos. 1 (``We are experiencing more and
more cases where customers are directed by the arbitrators to pay
all or 50% of the hearing session fees even when the member firms
are found liable.''); 17 (``Over the last two years, it has become
common that the arbitrator split arbitral fees between the investor
and the firm, even in cases where the investor received a
substantial recovery. * * * PIABA is even more disturbed about the
NASD's recent implementation of a policy requiring investors to pay,
in advance, half the anticipated costs of an arbitration.''); and
39.
\78\ See Comment Letter No. 24.
\79\ See Comment Letter No. 17.
\80\ See Comment Letter No. 8.
---------------------------------------------------------------------------
NASD Regulation responds that, contrary to commenters' assertions,
its figures demonstrate that members are paying approximately 80
percent of the fees assessed, and that public investors are paying 20
percent.\81\ NASD Regulation stated that it is also revising its
arbitrator training to clarify the issues that arbitrators should
consider in assessing forum fees in order to encourage the fair
allocation of forum fees for investors and industry parties. NASD
Regulation states that such factors include whether a party
substantially prevailed, or engaged in dilatory or unreasonable
conduct. Moreover, NASD Regulation stated in conjunction with this rule
proposal that it now advises arbitrators of the dollar amount of the
fees that may be assessed under the fee schedules so that they more
clearly understand the consequences to all parties of fee allocations
based upon a percentage. Previously, some arbitrators may have ordered
percentage-based allocation of fees without checking the total dollar
amounts that had accumulated over multiple hearing sessions. Finally,
NASD Regulation states it is no longer suggesting, in training
materials or otherwise, that arbitrators assess interim hearing session
deposits until after a substantial number of hearing sessions have been
held.\82\
---------------------------------------------------------------------------
\81\ See NASD Responses One and Three. NASD Regulation states
that these percentages cover the time period September 1, 1996 to
August 31, 1997. This figure does not include the initial filing fee
paid by claimants. When filing fees and hearing session fees are
added together, and adjustments are made for deposits and refunds,
the customer share of net revenue during that period was 23%.
According to NASD Regulation, its data for 1995, 1996 and 1997 also
show approximately the same customer to member ratio.
\82\ NASD Regulation states it has experienced increasing
difficulty collecting forum fees from unsuccessful claimants after
an award has been made, and notes its understanding that other, non-
industry forums, such as AAA, will not accept a case for disposition
unless fees are paid in advance.
---------------------------------------------------------------------------
IV. Discussion
Under Section 19(b) of the Act, the Commission must approve a self-
regulatory organization's proposed rule change if it finds it is
consistent with the Act.\83\ The key statutory provision with respect
to an association's fees is section 15A(b)(5) of the Act,\84\ which
requires that the rules of an association provide for the ``equitable
allocation of reasonable'' fees.
---------------------------------------------------------------------------
\83\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\84\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------
In support of this proposal, NASD Regulation conducted an analysis
of its costs in order to determine how to allocate fees and fee
increases reasonably and fairly among members and investor users of the
program. In particular, NASD Regulation analyzed its operating cost
figures in order to compute appropriate fee increases.\85\ NASD
Regulation's analysis permitted the Office of Dispute Resolution to
extrapolate its likely costs for 1998 and compare them to the expected
revenue under the new fee structure. NASD Regulation's analysis of its
average cost of performing these activities \86\ and a hypothetical
cumulative cost for each case,\87\ charted against the fee revenue
received for each case, indicates that the revenue from filing fees has
been expended before a pre-hearing conference is held. NASD
Regulation's analysis also indicates that once an award is rendered
following a hearing, all of the revenue from the additional forum fees
(principally the fees based upon the number of hearing sessions) that
could be collected in a case also has been expended.\88\ In short, the
filing fees and hearing session deposits, even with the increase in
fees proposed in this rule filing, do not cover the cost of
administering the program.\89\
---------------------------------------------------------------------------
\85\ NASD Regulation looked at costs associated with such
activities as: (1) Receiving and processing claims; (2) analyzing
and serving claims; (3) selecting arbitrators; (4) scheduling
hearings; and (5) conducting hearing sessions.
\86\ NASD Regulation stated that it computed the average
activity cost by taking the total cost for each activity and
dividing it by the number of times each activity occurred.
\87\ NASD Regulation stated that it charted the activities and
their costs sequentially as they likely would occur in a case to
produce a hypothetical cumulative cost at each major stage of a
case.
\88\ NASD Regulation stated that its 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, NASD regulation states that in its
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. It believes that the cost
variance may result from the increased contentiousness of the
litigants when there are larger damages in dispute as well as from
the fact that there are sometimes more parties involved in cases
where large amounts are in dispute.
\89\ While its budget figures project that the proposed filing
and hearing session fees may pay for approximately 68% of its direct
costs of administering cases, NASD Regulation's actual experience
with revenue received during the year suggests that the fees may pay
approximately 50% of the direct costs. The proposed filing and
hearing session fees would not pay for NASD Regulation's general
costs for administering the arbitration department, including costs
for arbitrator recruitment and training, computer systems, office
space, senior management, and legal services. See letter from
Elliott Curzon, Assistant General Counsel, NASD Regulation, to
Robert A. Love, Special Counsel, Division of Market Regulation,
Commission, dated June 4, 1998.
---------------------------------------------------------------------------
Based upon the analysis of its costs of administering the
arbitration program, NASD Regulation designed the proposed fee
increases to attempt to cover the projected actual costs incurred by
NASD Regulation in administering particular cases. In particular, NASD
Regulation states that the filing fees were designed to cover much of
the actual projected costs of the arbitration process from filing up to
the prehearing conference. According to NASD Regulation, in the lower
bracket cases the filing fees are lower than its cost of providing the
service, and in larger bracket cases, the filing fees approach but do
not exceed its average cost of providing the service. The hearing
session deposit fee increase was also based upon the analysis of the
projected average cost to provide a single hearing session.\90\
---------------------------------------------------------------------------
\90\ According to the NASD, in 1996 the cost of the dispute
resolution program exceeded fee revenue by $11.3 million. For 1997,
even with the implementation of increases in the member surcharge
and an increase in revenue due to increases in the arbitration
caseload, the cost exceeded revenue by $14.9 million. For 1998, the
cost of the program was expected to exceed revenue by $6.1 million
(this was assuming the proposed changes were approved and
implemented by the beginning of the year; it also excludes, however,
the member process fee, which was implemented to cover this gap).
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 pre-hearing 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).
---------------------------------------------------------------------------
The Commission believes that the proposed fee increases for members
and associated persons are reasonable under the Act because they are
designed to cover the direct costs of administering the arbitration
program. Moreover, the
[[Page 10048]]
fee increase (to cover direct costs) as applied to those claims that
solely involve industry parties is consistent with the SRO rules to
resolve industry disputes outside the court system, through the
arbitration process.\91\
---------------------------------------------------------------------------
\91\ See, e.g., NASD Rule 10201.
---------------------------------------------------------------------------
The proposed new filing fees range from $25 to $600 for public
investors. The average increase is 50% in most categories. The largest
filing fee increases are in cases where the claims are for $1 million
or more.\92\ There is no increase in the $1,000 to $10,000 categories.
The Commission believes that these increases are reasonable because
they are designed to require that public investors pay no more than the
average direct costs incurred by NASD Regulation to provide arbitration
services to the parties. Moreover, the arbitrators in their award may
determine that a respondent must reimburse an investor for any filing
fee it has paid.\93\
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\92\ In the $3 million to $5 million category, the increase is
140%; in the $1 million to $3 million, $5 million to $10 million,
and over $10 million categories, the increase is 100%.
\93\ NASD Rule 10332(c).
---------------------------------------------------------------------------
The amount of the hearing session deposit increases are also
reasonable. The resulting hearing session deposits are graduated from a
relatively low level for cases in lower brackets so as to not
discourage public investors from seeking relief, up to the projected
average cost of conducting hearings in the higher brackets.\94\ Under
the proposal, the hearing session deposit will be the same for claims
filed by public investors and members. The hearing session deposit, and
by extension the hearing session fees, are designed not to exceed the
NASD Regulation's actual costs. According to the proposal, these costs
are, on average, approximately the same regardless of who the parties
are, even if they may vary by the amount in dispute or the number of
parties involved. It is these average direct costs for providing a
hearing (including arbitrator compensation and a hearing room, for
example) that are paid for with these fees. In addition, the fees are
not automatically imposed on either party.
---------------------------------------------------------------------------
\94\ NASD Regulation's projected average cost to provide
hearings in 1998 is approximately $1,200 per hearing session. This
is based upon NASD Regulation's activity-based costing study,
described more fully in the notice of the proposed rule change. See
Securities Exchange Act Release No. 39346 (November 21, 1997), 62 FR
63580 (December 1, 1997). The activities used in computing this cost
include arbitrator expenses and compensation, hearing room expenses,
expenses of keeping a record, and staff work and expenses. NASD
Regulation states that the Office's experience also shows that the
costs of conducting hearings vary as the amount in dispute and the
number of parties involved increase. In many cases, 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.
---------------------------------------------------------------------------
The proposed rule change also provides for the equitable allocation
of these filing and hearing session fees. Under NASD Rule 10332(c)
governing the assessment of fees, which remains unchanged by this rule
filing, ``[t]he arbitrators, in their awards, shall determine the
amount chargeable to the parties as forum fees and shall determine who
shall pay such forum fees.'' Under the rule, arbitrators may apportion
forum fees among the parties, or may assess all of them against one
party or the other. Under the rule, the arbitrators also may determine
not to assess some or all of the fees, in which case NASD Regulation
would have to absorb the costs of the proceeding. Under its rule
structure, the only fee NASD Regulation is assured that it does not
have to return to the parties is the initial filing fee.
Significantly, NASD Regulation has stated it will waive the initial
filing fee and hearing session deposit at the time of filing if a party
can demonstrate financial hardship.\95\ It is the Commission's
understanding and expectation that NASD Regulation will make known to
potential claimants, especially investors, that there can be a
financial hardship waiver of the filing fee and initial hearing session
deposit. The Commission also understands that the procedure for filing
a request for a waiver will be clear to claimants. After the initial
filing fee and hearing session deposit are paid or waived, the
arbitrators in a given case have the discretion to require additional
hearing session fee deposits. In a case where the NASD Regulation has
waived the initial filing fee due to financial hardship, it would seem
improvable that an arbitrator would require the claimant to pay hearing
session fee deposits. (Conversely, an arbitrator could well conclude
not to require additional hearing session fee deposits on financial
hardship grounds even where NASD Regulation staff had refused to waive
the filing fee and initial hearing session deposit.) Because the
financial hardship waiver is important to the Commission's finding that
the proposed fee increases are equitable, the Commission plans to
monitor closely NASD Regulation's administration of the waiver process.
Further, NASD Regulation states that it takes financial hardship into
account when deciding whether to pursue collection action against a
party who has been ordered to pay fees, but has failed to do so.
---------------------------------------------------------------------------
\95\ Arbitrators also may order a respondent to reimburse a
claimant for the amount of the filing fee paid at the beginning of
the case.
---------------------------------------------------------------------------
Arbitrators are charged with making fee assessment decisions after
consideration of whether a party substantially prevailed, or engaged in
dilatory or unreasonable conduct. Arbitrators, who are entrusted with
resolving many other difficult issues involving the parties, also are
capable of resolving the equitable allocation of these increased
fees.\96\ NASD Regulation stated in conjunction with this proposal that
it now advises arbitrators of the dollar amount of fees that may be
assessed under the fee schedules against the parties so that they
clearly understand the consequence to all parties of fee allocations
based upon a percentage. NASD Regulation also has stated that it is
revising its arbitrator training to clarify issues and factors
arbitrators should consider in assessing forum fees, in order to
promote fair fee assessments. Moreover, the overall fee structure
continues to provide that the arbitration program is subsidized by the
NASD and its members.\97\
---------------------------------------------------------------------------
\96\ NASD Regulation has stated that, historically, arbitrators
have assessed approximately 77 percent of the fees against member
parties to arbitrations. NASD Regulation does not expect this
pattern to change, but also has undertaken to monitor fee
assessments.
\97\ NASD Regulation states that a small number of large firms
are involved in more than 50 percent of all arbitration cases, and
it determined to shift member costs to these member users. The
NASD's arbitration program will continue to be subsidized by member
firms, but the subsidy has largely shifted from all members to
member users. This subsidy comes from two separate fees imposed only
on member parties to arbitration cases. In 1994, NASD Regulation
began charging members a non-refundable ``member surcharge'' fee
(and increased the fee in 1997) if the member or an associated
person of the member was named in an arbitration proceeding. In
1998, NASD Regulation began charging a ``member process'' fee
against firms involved in an arbitration as the case progresses to
different phases (accordingly, a firm that is able to settle a case
before a hearing would be able to avoid some of the member process
fee). The fee was intended to address a projected $6.1 million
deficit that would remain even with the approval of this rule
proposal. See supra notes 39 and 90.
---------------------------------------------------------------------------
Some commenters argue that the fee increases in the proposed rule
change are inconsistent with the Act because some investors may be
deterred by the fees from bringing claims to arbitration. The
Commission understands that investors will weigh any increase in the
fees as part of their consideration whether to file an arbitration
claim. As the Commission has stated previously, arbitration fees
``should not be permitted to operate in a manner that weighs too
heavily on individual parties or serves as a disincentive to pursuing
the redress of investors' grievances against broker-dealers or their
[[Page 10049]]
associated persons.'' \98\ Clear procedures for waiving initial fees in
cases of financial hardship and arbitrator discretion should help
prevent fees from becoming too onerous for individual investors.
Set out below are three charts that compare hearing session fees
under the current and proposed new fee structures. The first chart
includes sample hearing session fees for larger cases, which typically
are resolved by three arbitrators. The second chart includes sample
hearing session fees for smaller cases, which typically are resolved by
a single arbitrator. The third chart includes sample fees for smaller
cases decided on the paper record.
Chart I is based largely on the sample cases set out in Exhibit 2
to the proposed rule change. It takes into account both the amount of
the hearing session fees that could be assessed and the number of
hearing sessions typically conducted within the bracket.
Chart I
----------------------------------------------------------------------------------------------------------------
Hearing session
Hearing session fees under current
fees under current rule in 1998 Hearing session
Case dollar amount and number of hearing sessions rule in 1990 dollars (adjusting fees under new
dollars current fees for rule
inflation) \99\
----------------------------------------------------------------------------------------------------------------
$30,000.01-$50,000 (four hearing sessions)\100\..... $1,600 $2,008 $2,400
$50,000.01-$100,000 (four hearing sessions)......... 2,400 3,012 3,000
$100,000.01-$500,000 (six hearing sessions)......... 4,500 5,647 6,750
$500,000.01-$1,000,000 (nine hearing sessions)...... 6,750 8,470 10,800
$1,000,000.01-$3,000,000 (ten hearing sessions)..... 10,000 12,548 12,000
----------------------------------------------------------------------------------------------------------------
Chart II is based upon the fees that can be assessed for cases up
to $30,000 that are decided with an in-person hearing.
Chart II
----------------------------------------------------------------------------------------------------------------
Hearing session
Hearing session fees with one
fees with one arbitrator under Hearing session
Case dollar amount \101\ arbitrator under current rule in fees with one
current rule in 1998 dollars arbitrator under
1990 dollars (adjusting fees new rule
for inflation)
----------------------------------------------------------------------------------------------------------------
$.01-$1,000......................................... $30 $38 $50
$1,000-$2,500....................................... 50 62 100
$2,500.01-$5,000.................................... 200 250 250
$5,000.01-$10,000................................... 400 502 500
$10,000.01-$25,000 \102\............................ 600 752 900
$25,000.01-$30,000 \103\............................ 900 1,128 1,350
----------------------------------------------------------------------------------------------------------------
Chart III is based upon sample cases decided on the paper record
without an oral hearing. This option, which is available for cases up
to $25,000, is the least expensive option for resolving disputes.
Chart III
----------------------------------------------------------------------------------------------------------------
Fees for cases
Fees for cases decided on the
decided on the paper record under Fees for cases
Case dollar amount paper record under current rules in decided on the
current rule in 1998 dollars paper record under
1990 dollars (adjusting fees new rules
for inflation)
----------------------------------------------------------------------------------------------------------------
$.01-$1,000......................................... $15 $19 $25
$1,000.01-$2,500.................................... 25 31 50
$2,500.01-$5,000.................................... 75 94 125
$5,000.01-$10,000................................... 75 94 250
$10,000.01-$25,000.................................. NA NA 300
$25,000.01-$30,000.................................. NA NA NA
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\98\ Securities Exchange Act Release No. 26805 (May 10, 1989), 54 FR 21144 (May 16, 1989).
\99\ Current fees, adjusted for inflation, are added here as a point of reference. They were not included in the
NASD's proposed rule change.
\100\ Under the new fee structure, parties with disputes in this bracket will be able to agree to have one
arbitrator decide their case. If one arbitrator is used, the hearing session fee would be $1,800.
\101\ Two hearing sessions are assumed for all cases up to $25,000, and three hearing sessions are assumed for
cases between $25,000.01 and $30,000. See letters from John M. Ramsey, Vice President and Deputy General
Counsel, NASD Regulation, to Katherine A. England, Assistant Director, Division of Market Regulation,
Commission, dated August 18, 1998 and September 10, 1998.
\102\ If three arbitrators were used, the current fee for two hearing sessions would be $800, the current fee
adjusted for inflation would be $1,004. Three person panels are not typically available under the new fee
structure for cases below $25,000.01.
\103\ If three arbitrators were used, the current fee for three hearing sessions would be $1,200, the current
fee adjusted for inflation would be $1,506, and the fee under the new rule would be $1,800.
[[Page 10050]]
The existing fee schedule was established in 1990.\104\ Inflation
has risen 25% since that time.\105\ Moreover, the NASD's arbitration
facilities have grown in the past eight years since the fees were last
revised.\106\ In dollar amounts, the additional cost to investors with
smaller claims as a result of the fee increased would not be
substantial. For large claims, a significant amount of money already is
at stake in the litigation and the amounts that the arbitrators may
assess against one or both of the parties is not so large that it
should affect the decision to pursue claims, especially when the
arbitrators assess fees only after fully considering each party's
position. Again, the NASD's financial hardship fee waiver process
should help assure that investors do not forego their claims solely on
account of the fee increase.
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\104\ Securities Exchange Act Release No. 28086 (June 1, 1990),
55 FR 23493 (June 8, 1990).
\105\ Consumer Price Index, All Urban Consumers, All Items, U.S.
Department of Labor, Bureau of Labor Statistics.
\106\ For example, 3,617 cases were filed in 1990, and 5,997
cases were filed in 1997. To administer these cases, NASD Regulation
has developed a new computer system to process the selection of
arbitrators under a list selection system for selecting arbitrators
that the Commission recently approved. See supra note 53.
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Comments challenging the efficiency and quality of arbitration
administered by the NASD reinforce the importance of the work
undertaken by the NASD's Arbitration Policy task Force and its NAMC, as
well as the Commission's own oversight of the arbitration process.\107\
These criticisms, however, do not refute NASD Regulation's
demonstration that it expends significant amounts of money
administering its arbitration program that have not in the past been
matched by fee revenue, and that these fee increases are directed at
recovering the direct costs of administering the forum. More
importantly, they also are outweighed by the fact that arbitrators make
fee allocations after a hearing on the record.
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\107\ The NASD has reported that it has implemented steps to
improve efficiency, including the early selection of arbitrators.
The increase in arbitrator honoraria proposed in this filing is part
of NASD Regulation's effort to attract and retain qualified
arbitrators. Moreover, the Commission has recently approved NASD
Regulation's list selection method for choosing arbitrators, which
may be preferred by investors. See Securities Exchange Act Release
No. 40555 (October 14, 1998), 63 FR 56670 (October 22, 1998). NASD
Regulation also has reported to the Commission initiatives to
improve case processing and administration by, among other things,
upgrading its computerized case tracking system and hiring
additional staff.
The comments that arbitration fees are higher than court fees do
not on their own indicate that the proposed fees are not reasonable.
Litigation is likely to involve other significant costs associated
with depositions and attorney fees that would likely be lower in an
arbitration setting.
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Some commenter's other broad attacks against the proposed fee are
equally unpersuasive. As noted above, several commenters, citing
McMahon, questioned whether the fee increases would prevent claimants
from being able to vindicate their rights in arbitration. Because the
fee increases will not affect the substantive rights of claimants, and
because NASD Regulation has a fee waiver process for claimants who have
a financial inability to pay the fees, the Commission sees no conflict
with McMahon.\108\ As to the comments regarding whether arbitrators
require periodic payments of hearing session deposits and how
arbitrators allocate fees in their awards, NASD Regulation states it is
revising its arbitrator training to clarify the issues and factors
arbitrators should consider in assessing forum fees, in order to ensure
that those fees are assessed fairly.\109\ It is clear that
determinations about whether to request additional hearing session
deposits from the parties during a case are at the sole discretion of
the arbitrators.
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\108\ We also do not agree with the commenters' statements that
the fee increases would raise equal protection or due process
concerns. A threshold requirement of any constitutional claim is the
presence of state action. See, e.g., Lugar v. Edmondson, 457 U.S.
922, 936 (1982). A government agency's oversight or approval of a
regulated entity's business and operations does not constitute state
action. See, e.g., Jackson v. Metropolitan Edison Co., 419 U.S. 345,
357 (1974). Courts that have considered the issue have concluded
that the NASD's operation of an arbitration forum does not
constitute state action simply because the Commission reviews and
approves arbitration rules. See, e.g., Cremin v. Merrill Lynch
Pierce Fenner & Smith, Inc., 957 F. Supp. 1460, 1465-1470 (N.D. Ill.
1997).
\109\ See NASD Response One.
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In conclusion, the proposed fee increases are reasonable because
they do not exceed the direct average cost of resolving a dispute.
Moreover, the NASD's financial hardship fee waiver process should help
assure that investors do not forego filing their claims solely on
account of the fee increase. Finally, the proposed fee increases are
equitably allocated because it is the arbitrators who decide who will
pay them in any individual case.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\110\ that the proposed rule change (SR-NASD-97-79) is approved.
\110\ 15 U.S.C. 78s(b)(2).
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By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-4955 Filed 2-26-99; 8:45 am]
BILLING CODE 8010-01-M
