[Federal Register Volume 60, Number 143 (Wednesday, July 26, 1995)]
[Notices]
[Pages 38384-38386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18285]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35990; File No. SR-NASD-95-25]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
Mediation of Disputes
July 19, 1995.
On June 6, 1995,\1\ the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\2\, and Rule 19b-4 thereunder.\3\ The proposed rule change
amends the Code of Arbitration Procedure (``Code'')\4\ by adding a new
Part IV to set forth rules to govern the administration of mediation
proceedings (``Mediation Rules'') and by amending Sections 37, 43 and
44 of the Code\5\ to add fee and other provisions relating to the
administration of mediation proceedings.
\1\ The NASD amended the proposed rule change subsequent to its
original filing on May 19, 1995. Amendment No. 1 was a minor
technical amendment, the text of which may be examined in the
Commission's Public Reference Room. See Letter from Suzanne E.
Rothwell, Associate General Counsel, NASD, to Mark P. Barracca,
Branch Chief, Over-the-Counter Regulation, Division of Market
Regulation, SEC (June 2, 1995).
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ NASD Manual, Code of Arbitration Procedure, (CCH)
Paras. 3701 et seq.
\5\ NASD Manual, Code of Arbitration Procedure, Part III, Secs.
37, 43 and 44, (CCH) Paras. 3737, 3743, 3744.
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Notice of the proposed rule change, together with the substance of
the proposal, was provided by issuance of a Commission release
(Securities Exchange Act Release No. 35830, June 9, 1995) and by
publication in the Federal Register (60 FR 31522, June 15, 1995). No
comment letters were received. This order approves the proposed rule
change.
More than 5,500 arbitration cases were filed with the NASD in
calendar year 1994, which represents 82 percent of all securities
arbitrations filed in all arbitration for a combined (including the
American Arbitration Association) and 86 percent of all arbitrations
filed with self-regulatory organizations. The volume of arbitration
cases has been growing dramatically since the U.S. Supreme Court
recognized the enforceability of predispute arbitration agreements with
respect to claims arising under the Act\6\ and under the Securities Act
of 1933.\7\
\6\ Shearson/American Express, Inc. v. McMahon, 482 U.S. 220
(1987).
\7\ Rodriguez de Quijas v. Shearson/American Express, Inc. 490
U.S. 477 (1989).
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As the volume of arbitrations has increased, cases have grown more
complex and time-consuming such that some of the advantages of
arbitration as a low cost and swift alternative to litigation are
disappearing. This has led to interest in other forms of alternative
dispute resolution that may be less expensive than adversarial
proceedings in arbitration or in court. A goal of mediation is to
explore and come to a settlement of an outstanding dispute without
resort to adversarial adjudication.
Amendments to Existing Rules
Record of Sessions. Section 37 of the Code has been amended by
adding a new paragraph (b) to prohibit keeping a verbatim record of any
mediation session conducted pursuant to the proposed rules. The NASD
believes that a verbatim record is not consistent with the methods of
mediation: a free-flowing and confidential exchange of views, opinions,
proposals and admissions.
Fees. Sections 43 and 44 of the Code have been amended to include
fees for NASD mediation sessions. The administrative fees of the NASD
set forth in new Subsection 43(i) and 44(j) for administering a
mediation will be charged only when there is no Association arbitration
pending. When there is no arbitration pending, the NASD will charge
each party $150 under new Subsection 43(i) to administer the mediation
of a public customer matter and will charge each party $250 under new
Subsection 44(j) to administer the mediation of an industry matter.
The fees will be assessed for each matter submitted to mediation.
Pursuant to new Section 51, discussed below, a matter is deemed
submitted to mediation when the Director of Mediation\8\ has received
an executed mediation Submission Agreement from all parties.\9\
\8\ New Section 50 provides for the appointment of a Director of
Mediation (``Director'') to administer mediations. See infra text
accompanying n. 10.
\9\ The NASD is developing a standard form mediation Submission
Agreement. A copy of the Submission Agreement will be provided to
all parties.
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In addition, new Subsections 43(j) and 44(k) obligate the parties
to pay all of the mediator's charges, including travel and other
expenses. The Submission Agreement will set forth the mediator's
charges and these charges will be apportioned equally among the parties
unless they agree otherwise. The NASD will estimate initially the
mediator's charges based on the anticipated length of the session or
sessions. The parties will be required to deposit their proportional
share of such estimated charges with the NASD prior to the first
mediation session.
The NASD's standard mediator charges will be $150 per hour,
although the parties may agree to pay different charges for a
particular mediator. The NASD intends to make its best efforts to make
mediators available at the specified hourly rate; however, some
qualified mediators may decline to serve unless compensated at a higher
rate.
Finally, the mediator's hourly fee for joint sessions (except for
the first session) and separate sessions will be assessed for each half
hour or portion thereof. In addition, the mediator's hourly rate for
separate meetings will be apportioned equally among all parties without
regard to the actual amount of time each party has spent with the
mediator because all parties should benefit equally from the mediator's
efforts in meeting with each party even if the mediator spends more
time with one than the other.
[[Page 38385]]
Mediation Rules
General Scope and Authority. New Section 50 establishes the scope
and authority of the Mediation Rules. This Section provides that the
Mediation Rules will apply to mediations administered by the
Association and calls for the designation of a Director to administer
mediations. Section 50 also specifies that the Director will consult
the National Arbitration Committee (``Committee'') on administering the
NASD mediation program. The Committee, as necessary, may make
recommendations concerning the administration of the mediation program
to the Director and recommend amendments to the rules to the NASD
Board, Finally, Section 50 states that neither any mediator nor the
NASD shall have any authority to compel a party to submit to mediation
or to settle a matter. This last provision is intended to clarify the
voluntary nature of mediation.\10\
\10\ The NASD has stated that it intends to solicit
participation in mediation by approaching parties to arbitration
cases to advise them about mediation, explain the program and its
merits and explore whether mediation might meet the needs of the
parties. These efforts are intended to increase the number of
matters submitted to mediation and reduce the number of matters
submitted to arbitration.
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Submission of Eligible Matters. New Section 51 provides that any
matter, or part of a matter (such as procedural issues), eligible for
arbitration under the Code may be mediated. The Director has the sole
authority to determine the eligibility of any particular matter for
mediation. New Section 51 also provides that a matter will be deemed
submitted when the Director has received an executed mediation
Submission Agreement from each party. The submission of a matter will
trigger the obligation to pay applicable fees and will trigger the
NASD's activities in finding a mediator and making arrangements for
facilities for the mediation.
As noted above, the NASD has stated that it intends to solicit
participation in mediation by approaching parties to arbitration cases
to advise them about mediation, explain the program and its merits and
explore whether mediation might meet the needs of the parties. Parties
may volunteer to mediate a matter even if the Director has not
solicited indications of interest in mediation. If a party expresses
interest in mediating a matter, the Director will seek commitments to
participate from other parties. If commitments are obtained from all
parties, either orally or in writing, the Director will forward a
mediation Submission Agreement to the parties for execution.
Stay or Delay of Arbitration Pending Mediation. New Section 52
provides that any arbitration pending at the time of a mediation will
not be stayed or delayed unless the parties agree. This provision is
intended to prevent gamesmanship through the use of mediation as a
delaying tactic.
Mediator Selection. New Section 53 provides for the appointment of
mediators and permits parties to select a mediator from a list supplied
by the Director, or to obtain, on their own, a non-NASD mediator. If
the parties do not act to select a mediator, the Director will assign a
mediator. The parties also will be provided with information relating
to the mediator's employment, education, and professional background,
as well as information on the mediator's experience, training, and
credentials as a mediator. Section 53 also requires mediators to comply
with the same background disclosure requirements as arbitrators.\11\
\11\ See NASD Manual, Code of Arbitration Procedure, Part III,
Sec. 23, (CCH) para. 3723.
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Finally, new Subsection 53(c) prohibits a mediator from serving as
an arbitrator or from representing any party to a mediation in any
subsequent arbitration proceeding relating to the subject matter of the
mediation. A mediator functions as a third party neutral who assists
parties in exploring the strengths and weaknesses of their case.
Mediation can function effectively only if parties can fully trust the
mediator to provide impartial guidance and not to divulge confidential
information disclosed. Parties are unlikely to trust a mediator if that
mediator is permitted to serve as an arbitrator or represent a party to
a mediation in a subsequent adversarial proceeding relating to the
subject matter of the mediation. With respect to judicial proceedings,
state law, attorney codes of ethics, and mediator codes of conduct \12\
should provide sufficient protection for parties in judicial forums.
\12\ The American Bar Association (``ABA'') is considering draft
mediator standards of conduct. Draft Standard III states in
pertinent part that ``[w]ithout the consent of all parties, a
mediator shall not subsequently establish a professional
relationship with one of the parties in a related matter, or in an
unrelated matter under circumstances which would raise legitimate
questions about the integrity of the mediation process.''
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Liability Limitation. New Section 54 provides for the limitation of
liability of mediators, the Association, and its employees, for any act
or omission in connection with a mediation administered by the NASD
under the rules.
Ground Rules. New Subsection 55(a) states that Section 55 sets
forth standard Ground Rules governing mediations and permits the
parties to amend any of the Ground Rules at any time. The Subsection
also provides that the Ground Rules are intended to be standards of
conduct for the parties and for the mediation. Parties will be able to
tailor the ground rules governing their mediation to meet their needs.
New Subsection 55(b) states that mediation is voluntary and that
parties may withdraw from a mediation at any time prior to the
execution of a settlement agreement by giving written notice of
withdrawal to the mediator, the other parties, and the Director. This
provision is intended to clarify that, while the goal of mediation is
to explore and settle outstanding disputes, if possible, the proposed
rules are process oriented, not result oriented. Mediation is wholly
voluntary and any party may withdraw from a mediation at any time and
for any reason, or for no reason at all.
New Subsection 55(c) establishes that the mediator's role is to act
as a neutral and impartial facilitator, without authority to impose
decisions or a settlement on the parties.
New Subsection 55(d) requires that the parties and their
representatives meet jointly with the mediator, in person or by
conference call as determined by the mediator or by mutual agreement of
the parties. The mediator will facilitate through joint sessions,
caucuses and/or other means, discussions between the parties on the
subject matter of the mediation.
New Subsection 55(d) also provides that the mediator will determine
the procedure for the mediation. Under this subsection, parties would
agree to cooperate with the mediator in conducting the mediation
expeditiously, to make reasonable efforts to be available for mediation
sessions, and to be represented at all sessions either in person or by
a representative with authority to settle the matter. This subsection
is intended to avoid common obstacles to expeditious, effective
mediation and it sets forth rules that are intended to prevent
gamesmanship and discourage dilatory conduct.
New Subsection 55(e) permits the mediator to meet with and
communicate separately with each party, provided the mediator notifies
the other parties. This is intended to permit the mediator to pursue a
candid discussion with all parties of the issues and priorities in the
dispute and the strengths and weaknesses of their positions. However,
Subsection 55(g), discussed below, bars the mediator from disclosing
one party's
[[Page 38386]]
confidential information to another party without authorization.
New Subsection 55(f) sets forth the goal of mediation--to explore
and come to a good faith settlement of an outstanding dispute without
resort to adversarial adjudication. This Subsection also permits
parties to negotiate directly outside the mediation process.
New Subsection 55(g) provides that mediation is intended to be
private and confidential. This Subsection obligates the parties and the
mediator not to disclose or otherwise communicate anything disclosed
during the mediation in any other proceeding, unless authorized by all
other parties to the mediation. The Subsection permits disclosure if
compelled by law, which provides for situations when a party is
subpoenaed or when there are regulatory requirements, such as the
disclosures required in Form U-4 or under Article IV, Section 5 of the
Rules of Fair Practice.\13\ This Subsection also provides expressly
that the fact that a mediation occurred is not confidential.
\13\ NASD Manual, Rules of Fair Practice, Art. IV, Sec. 5 (CCH)
para. 2205.
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New Subsection 55(g) also makes clear that the confidentiality
provisions will not operate to shield from disclosure documentary or
other information that the Association or any other regulatory
authority would be entitled to obtain or examine in the exercise of its
regulatory responsibilities. Accordingly, the fact that documentary or
other information had been disclosed during the course of a mediation
would not render it confidential or shield it from disclosure to the
NASD or an opposing party in civil litigation where it otherwise would
be available to these parties.
In addition, the Subsection bars the mediator from disclosing one
party's confidential information to another party without
authorization, which memorializes a standard practice of mediators.
The Commission finds that the proposed rule change is consistent
with the provisions of Section 15A(b)(6) of the Act \14\ because the
rule change will protect investors and the public interest by providing
a voluntary alternative to adversarial adjudication of disputes that
may result in lower-cost, quicker resolution of disputes. The proposed
rule change approved today provides a forum for a non-binding
discussion by all interested parties, and a form of dispute resolution
that can be more effective than direct negotiations and that increases
the likelihood of early settlement of a dispute at cost savings.
\14\ 15 U.S.C. 78o-3.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that File No. SR-NASD-95-25 be, and hereby is, approved, effective
August 1, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18285 Filed 7-25-95; 8:45 am]
BILLING CODE 8010-01-M
