Self-Regulatory Organizations; Order Approving Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to Mediation of Disputes

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]

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