63580 Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices

7 15 U.S.C. 78f and 78s(b)(2).

8 15 U.S.C. 78s(b)(2).

9 17 CAR 200.30–3(a)(12).

1The NASD submitted Amendment No. 1 to the

proposed rule filing on November 14, 1997, the

substance of which is incorporated into this notice

and the proposed rule filing. See letter from John

M. Ramsay, Deputy General Counsel, NASD

Regulation, to Katherine A. England, Assistant

Director, Market Regulation, Commission, dated

November 12, 1997 (‘‘Amendment No. 1’’).

and liquidity of the market for such

additionally listed securities.

Finally, the Commission notes that

the proposed change to the pilot

program does not alter the notification

requirement to order entry firms, and

the effective date of a specialist’s

deregistration.

The Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication notice thereof in the

Federal Register. This will permit the

changes to be in effect for as much of

the pilot program as possible thereby

allowing CHX to better assess the effects

of these changes to be assessed prior to

the expiration of the pilot. In addition,

the rule change that implemented the

pilot program was published in the

Federal Register for the full comment

period and no comments were received.

Accordingly, the Commission believes

that it is consistent with Sections 6 and

19(b) of the Act 7 to accelerate approval

of the proposed rule change.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,8 that the

proposed rule change (SR–CHX–97–29)

is hereby approved on an accelerated

basis.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–31394 Filed 11–28–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39346; File No. SR–NASD–

97–79]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc., Relating to Fees and

Hearing Session Deposits for the

Arbitration of Claims by Public

Investors, Members and Associated

Persons

November 21, 1997.

Pursuant to section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on October 29, 1997,1

the National Association of Securities

Dealers, Inc. (‘‘NASD’’ or ‘‘Association’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change as described in

Items I, II, and III below, which Items

have been prepared by the selfregulatory organization. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

NASD Regulation is proposing to

amend Rules IM–10104, 10205 and

10332 of the NASD’s Code of

Arbitration Procedure (‘‘Code’’) to

increase the arbitrator honoraria and the

arbitration filing fees and hearing

session deposits for intra-industry and

public investor arbitrations

administered by NASD Regulation.

Below is the text of the proposed rule

change. Proposed new language is in

italics; proposed deletions are in

brackets.

IM–10104. Arbitrator’s Honorarium

All persons [serving on panels of

arbitrators pursuant to Rule 10104 of]

selected to serve as arbitrators pursuant

to the Association’s Code of Arbitration

Procedure shall be paid an honorarium

for each hearing session (including a

prehearing conference) in which they

participate [while in the performance of

said duties].

The honorarium shall be $[150]200

for [a single] each hearing session [,

$225 for a double session], $50 for travel

to a canceled hearing, and $[50]75 per

day additional honorarium to the

chairperson of the panel. The

honorarium for a case not requiring a

hearing [is $75 per case] shall be $125.

10205. Schedule of Fees for Industry

and Clearing Controversies

(a) At the time of filing a Claim,

Counterclaim, Third Party Claim, or

Cross-Claim in an industry or clearing

controversy which is required to be

submitted to arbitration before the

Association as set forth in Rule 10201,

above, a party who is a member shall

pay a non-refundable filing fee and shall

remit a hearing session deposit to the

Association in the amounts stated in

paragraph (k) unless such fee or deposit

is specifically waived by the Director of

Arbitration. A party who is an

associated person shall pay a nonrefundable filing fee and shall pay a

hearing session deposit in the amounts

specified for customer claimants in Rule

10332. If the associated person is a joint

claimant with a member, the member

shall pay a non-refundable filing fee

and shall pay a hearing session deposit

in the amounts specified in paragraph

(k) of this Rule. Where multiple hearing

sessions are required, the arbitrator(s)

may require any of the parties to make

additional hearing deposits for each

additional hearing session. In no event

shall the amount deposited by all

parties per hearing session exceed the

amount of the largest initial hearing

deposit made by any party under the

paragraph (k) below.

(b) No change.

(c) No change.

(d) No change.

(e) If the dispute, claim, or

controversy does not involve, disclose,

or specify a money claim, the nonrefundable filing fee assessed on a party

who is a member shall be $500. If the

dispute, claim, or controversy does not

involve, disclose, or specify a money

claim, the hearing session deposit to be

remitted by a party shall be $1000

[$600]. These amounts may be adjusted

by the Director of Arbitration or the

panel of arbitrators may require the

maximum amount specified in the

schedule [$1,000].

(f) No change.

(g) No change.

(h) No change.

(i) If an eligible matter is submitted

for arbitration as a large and complex

case, under the procedures set forth in

Rule 10334, or under procedures agreed

upon by the parties, following the

Administrative Conference specified in

Rule 10334(b), the fees and deposits for

such matter shall be those set forth in

the schedule of fees for claims over

$10,000,000 [$5,000,000].

(j) No change.

(k) Schedule of Fees
Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices 63581

SCHEDULE OF FEES

Amount in dispute (exclusive of interest and expenses) Claim filing

fee

Deposit for

cases to be

decided on

the paper

record [simplified1]

Hearing Session Deposit

One arbitrator1[2]Three arbitrators2[3]

$.01–$1,000 ....................................................................................................... $200 [500] $25 [75] $25 [300] NA

$1,000.01–$2,500 .............................................................................................. $300 [500] $50 [75] $50 [300] NA

$2,500.01–$5,000 .............................................................................................. $400 [500] $125 [75] $125 [300] NA

$5,000.01–$10,000 ............................................................................................ $500 $250 [75] $250 [300] NA

$10,000.01–$25,000 .......................................................................................... $750 $300 $450 NA

$25,000.01–$30,000 .......................................................................................... $1,000 [500] NA $450 [300] $–600

$30,000.01–$50,000 .......................................................................................... $1,000 [500] NA $450 [300] $–600

$50,000.01–$100,000 ........................................................................................ $1,000 [500] NA $4503[3004] $750 [600]

$100,000.01–$500,000 ...................................................................................... $1,000 [500] NA $4503[3004] $–1,125 [750]

$500.000.01–$1,000,000 ................................................................................... $1,250 NA $4503 $1,200

$1,000,000.01–$5,000,000 ................................................................................ $2,000 [500] NA $4503[3004] $1,200 [1,000]

[Over]$5,000,000.01–$10,000.000.00 ................................................................ $2,500 [500] NA $4503[3004] $1,200[1,500]

Over $10,000,000 .............................................................................................. $5,000 NA $4503 $1,200

[1Simplified Arbitration (Without Hearing)] 1[2] The dispute is resolved by o[O]ne a[A]rbitrator per hearing session, including pre-hearing conferences. [(Per hearing session)] 2[3] The dispute is resolved by t[T]hree [or more] a[A]rbitrators per hearing session. [(Per hearing session)] 3[4] Fee applies only to p[P]re-hearing c[C]onferences [Only] with a single arbitrator.

10332. Schedule of Fees for Customer

Disputes

(a) No change.

(b) No change.

(c) No change.

(d) No change.

(e) If the dispute, claim, or

controversy does not involve, disclose,

or specify a money claim, the nonrefundable filing fee for a public

customer shall be $250 and the nonrefundable filing fee for an industry

party shall be $500[.00]. The hearing

session deposit to be remitted by a party

shall be $1000 [$600] or such greater or

lesser amount as the Director of

Arbitration or the panel of arbitrators

may require, but shall not exceed the

maximum amount specified in the

schedule [$1,000].

(f) No change.

(g) No change.

(h) If an eligible matter is submitted

for arbitration as a large and complex

case under the procedures set forth in

Rule 10334, or under procedures agreed

upon by the parties, following the

Administrative Conference specified in

Rule 10334(b), the fees and deposits for

such matter shall be those set forth in

the schedule of fees for claims over

$10,000,000 [$5,000,000].

(i) No change

(j) No change

(k) Schedule of Fees

For purposes of the schedule of fees,

the term ‘‘claim’’ includes Claims,

Counterclaims, Third Party Claims, and

Cross-Claims. Any such claim made by

a customer or associated person is

treated as a customer claim for purposes

of the schedule of fees. Any such claim

made by a member [or associated person

of a member] is an industry claim.

CUSTOMER or Associated Person CLAIMANT

Amount in dispute (exclusive of interest and expenses) Claim filing

fee

Deposit for

cases to be

decided on

the paper

record [simplified 1]

Hearing session deposit

One arbitrator 1[2]Three arbitrators 2[3]

$.01–$1,000 ....................................................................................................... $ 25 [ 15] $ 25 [15] $ 25 [ 15] NA

$1,000.01–$2,500 .............................................................................................. $ 25 $ 50 [25] $ 50 [ 25] NA

$2,500.01–$5,000 .............................................................................................. $ 50 $125 [75] $125[100] NA

$5,000.01–$10,000 ............................................................................................ $ 75 $250 [75] $250 [200] NA

$10,000.01–$25,000 .......................................................................................... $125 [100] $300 [NA] $450 NA

$25,000.01–$30,000 .......................................................................................... $150 NA $450[300] $ 400

$30,000.01–$50,000 .......................................................................................... $175 [120] NA $450[300] $ 600[ 400]

$50,000.01–$100,000 ........................................................................................ $225 [150] NA $4503[3004] $ 750[ 500]

$100,000.01–$500,000 ...................................................................................... $300 [200] NA $4503[3004] $1,125[ 750]

$500,000.01–$1,000,000 ................................................................................... $375 [250] NA $4503[3004] $1,200[1,000]

$1,000,000.01–$3,000,000 ................................................................................ $500 NA $4503 $1,200

$3,000,000.01–$5,000,000 ................................................................................ $600 NA $4503 $1,200

[Over]$5,000,000.01–$10,000,000 ..................................................................... $600 [300] NA $4503[3004] $1,200[1,500]

Over $10,000,000 .............................................................................................. $600 NA $4503 $1,200

[1Simplified Arbitration (Without Hearing)]. 1[2] The dispute is resolved by o[O]ne a[A]rbitrator per hearing session, including pre-hearing conferences. [(Per Hearing Session)]. 2[3] The dispute is resolved by t[T]hree [or more] a[A]rbitrators per hearing session. [(Per hearing session)]. 3[4] Fee applies only to p[P]re-hearing c[C]onferences [Only] with a single arbitrator.
63582 Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices

2This rule filing replaces SR–NASD–97–39, in

which NASD Regulation originally proposed the

amendments to the filing fees and hearing session

deposits that are contained in this filing. As

discussed below, in this filing NASD Regulation has

modified some of the fee changes proposed in SR–

NASD–97–39 to align the fees charged more closely

with the Office of Dispute Resolution’s (‘‘Office’’)

average costs of administering arbitration

proceedings. In addition, the budget, revenue and

cost figures used throughout this filing reflect the

most current information about the arbitration

process.

Since SR–NASD–97–39 was filed, the NASD has

completed its 1998 budget process. The Office’s

revised 1998 revenue and expense figures from the

1998 Budget (set forth in Table 1) reflect significant

savings resulting from the NASD’s ‘‘Reinvesting for

Our Future’’ program. This program required NASD

departments to identify areas within their

operations where savings could be achieved. In

addition, the Office’s 1997 revenue and cost

experience through the end of September 1997, and

including the new member surcharges implemented

on July 1, 1997, caused NASD Regulation to revise

the Office’s projected 1998 revenues and costs. The

revised revenue and cost projections are reflected

in this rule filing.

MEMBER [INDUSTRY] CLAIMANT

Amount in dispute (exclusive of interest and expenses) arbitrators 2 [3] Claim filing

fee

Deposit for

cases to be

decided on

the paper

record [simplified 1]

Hearing Session Deposit

One Three arbitrator 1 [2]

$.01–$1,000 ....................................................................................................... $200 [500] $25 [75] $25 [300] NA

$1,000.01–$2,500 .............................................................................................. $300 [500] $50 [75] $50 [300] NA

$2,500.01–$5,000 .............................................................................................. $400 [500] $125 [75] $125 [300] NA

$5,000.01–$10,000 ............................................................................................ $500 $250 [75] $250 [300] NA

$10,000.01–$25,000 .......................................................................................... $750 $300 $450 NA

$25,000.01–$30,000 .......................................................................................... $1,000 [500] NA $450 [300] $600

$30,000.01–$50,000 .......................................................................................... $1,000 [500] NA $450 [300] $600

$50,000.01–$100,000 ........................................................................................ $1,000 [500] NA $4503[300 4] $750 [600]

$100,000.01–$500,000 ...................................................................................... $1,000 [500] NA $4503[300 4] $1,125 [750]

$500,000.01–$1,000,000 ................................................................................... $1,250 NA $4503 $1,200

$1,000,000.01–$5,000,000 ................................................................................ $2,000 [500] NA $4503[300 4] $1,200 [1,000]

[Over] $5,000,000.01–$10,000,000 ................................................................... $2,500 [500] NA $450 [300 4] $1,200 [1,500]

Over $10,000,000 .............................................................................................. $5,000 NA $4503 $1,200

[1Simplified Arbitration (Without Hearing)] 1 [2] The dispute is resolved by o[O]ne a[A]rbitrator per hearing session, including pre-hearing conferences. [(Per Hearing Session)] 2 [3] The dispute is resolved by t[T]hree [or more] a[Arbitrators per hearing session. [(Per hearing session)] 3 [4] Fee applies only to p[P]re-hearing c[C]onferences [Only] with a single arbitrator.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

self-regulatory organization included

statements concerning the purpose of

and basis for the proposed rule change

and discussed any comments it received

on the proposed rule change. The text

of these statements may be examined at

the places specified in Item IV below.

The self-regulatory organization has

prepared summaries, set forth in

Sections A, B, and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

Background and Introduction

NASD Regulation is proposing to

amend the NASD’s Code of Arbitration

Procedure to increase the filing fees and

hearing session deposits charged to

public investors, member firms and

associated persons for arbitrating

disputes under the Code. In addition,

NASD Regulation is proposing to

increase the honoraria paid to

arbitrators.2

In support of the proposed rule

change, below is a discussion of NASD

Regulation’s arbitration program

operating costs and revenue, new

initiatives for improving the arbitration

program, and a general description of

filing fees, hearing session deposits and

forum fees charged in arbitration

proceedings. In addition, the

development of the proposed fee

increases is described. Finally, a

narrative description of the proposed

rule change is provided.

Operating Costs and Revenue. NASD

Regulation’s Office of Dispute

Resolution (‘‘Office’’), and its

predecessors, have been administering

arbitrations for the Association since

1969. Since 1972 NASD Members have

been required to submit disputes to

arbitration upon the request of a

customer, another member or an

associated person. Submission of claims

to arbitration by public investors was

largely voluntary until 1987 and, as a

result, the program handled a relatively

small number of cases each year.

Following the United States Supreme

Court’s 1987 decision in Shearson/

American Express, Inc. v. McMahon,

482 U.S. 220, 96 L.Ed.2d 185, 107 S.Ct.

2332, affirming the enforceability of

customer predispute arbitration

agreements, the arbitration caseload

grew rapidly and the program now

handles more than 6,000 cases annually.

The Office’s operating costs have been

funded from filing fees (charged to any

party filing a claim in arbitration),

forum fees (charged for each hearing

session held in an arbitration and

allocated by the arbitrators in the award

to the parties), and, more recently,

member surcharges (charged to any

member named in a claim and to any

member when an employee of the

member is named in a claim). The

difference between the revenue

collected in fees and the cost of

administering the program has been

made up from the general member

assessment revenue collected by the

Association from all of its members. As

the number of cases has grown, and the

cost and complexity of administering

arbitration proceedings have increased,

NASD Regulation has sought to increase

the fees in order to shift the costs of the

program primarily to its member users.

In 1994, for example, NASD Regulation

began charging members a nonrefundable fee if the member or an

associated person of the member was

named in an arbitration proceeding—the

‘‘member surcharge.’’

In spite of the effort to shift the costs

to service users, the Office is not

collecting sufficient user revenue to

cover its costs. For example, as the table

below illustrates, in 1996 the cost of the

dispute resolution program exceeded fee
Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices 63583

3The number of cases filed with NASD

Regulation’s Office of Dispute Resolution in the first

five months of 1997 is up 16 percent over the same

period in 1996. The number of cases filed annually

has risen from 2,886 in 1987 to an estimated 6,247

in 1997 based on the number of cases filed in the

first nine months of 1997, a 116 percent increase.

NASD Regulation projects that over 6,900 cases will

be filed in 1998, an increase of 139 percent over

1987.

4Member surcharges imposed pursuant to Rule

10333, are intended to shift some of the costs of the

dispute resolution program to the members who are

actually named in cases and, therefore, are the

primary users of the program.

revenue by $11.3 million. For 1997,

even with the implementation of

substantial increases in the member

surcharge and an increase in revenue

due to increases in the arbitration

caseload, the cost will exceed revenue

by $16 million. For 1998, even if the

proposed changes are approved and

implemented, the cost of the program

will exceed revenue by $6.1 million.

TABLE 1.—REVENUES VS. EXPENSES

[In thousands of dollars]

1995 Actual 1996 Actual

1997 Projected (with

member surcharge increase effective 7/1/97)

1998 Projected (includes member surcharge and

arbitrator

honorarium

increase, but

without fee

increase)

1998 Projected (with

member surcharge, arbitrator honorarium increase and

fee increases)

Revenue .......................................................................................... $9,664 $13,275 $16,000 $23,110 $29,100

Expenses ........................................................................................ $17,826 $24,617 $31,988 $35,128 $35,158

Net .................................................................................................. ($8,162) ($11,342) ($15,988) ($12,058) ($6,058)

The revenue shortfall in the program

is currently made up from general

assessment revenue; however, NASD

Regulation is developing further

increases in the member-user fees to

close the budget gap. There will not be

any further increases in fees charged to

public investors in the foreseeable

future.

New Initiatives to Improve the

Arbitration Program. In January 1996,

the NASD’s Arbitration Policy Task

Force (‘‘Task Force’’) released its report

on Securities Arbitration Reform. The

Task Force’s report made numerous

recommendations to improve the

arbitration process. Some of the

recommendations, such as early

appointment of arbitrators, have been

implemented. Other recommendations,

such as selecting arbitrators by a list

selection method, involve significant

technological changes and changes in

the way the Office administers

arbitration cases. And still others, like

increasing arbitrator honoraria to attract

and retain qualified arbitrators, involve

permanent increases in the NASD’s

costs of operating the program.

Since the report was released, NASD

Regulation has been engaged in a major

effort to implement the numerous Task

Force recommendations. The Office also

has other initiatives underway to

improve the arbitrator process. These

include improving case processing and

administration by, among other things,

upgrading the computerized case

tracking system and hiring additional

staff. Some of the changes, such as

increasing arbitrator honoraria and

implementing list selection of

arbitrators, will result in permanent

increases in the cost to the NASD of

administering the dispute resolution

program, while others, such as

improving case tracking, should result

in savings. Implementing these changes

will substantially improve the fairness

and efficiency of the arbitration process.

Finally, the growth rate in NASD

Regulation’s arbitration case load over

the last ten years, and the increasing

length and complexity of arbitration

cases, are generating additional cost

pressures on the Office in its continuing

efforts to meet the needs of users of the

dispute resolution services.3

The amendments to the fee schedules

proposed in this rule change will serve

to close some of the user revenue gap

that currently exists in funding the

Office’s direct costs of providing

arbitration services. However, the

revenue from the proposed fee increases

on public investors will not be used to

fund the development of new systems or

the implementation of the Task Force’s

recommendations. The exception to this

is the early appointment of arbitrators,

a Task Force recommendation that has

already been implemented, and the

proposed increases in arbitrator

honoraria, which will be an increase in

the Office’s direct cost of administering

arbitrations. Both of these initiatives

directly benefit public investors, the

first by improving the efficiency of

arbitration, the second by attracting and

retaining a higher caliber of willing,

committed arbitrators.

General Description of Filing Fees,

Hearing Session Deposits and Forum

Fees. The fees and deposits for

arbitration proceedings fall into three

categories: (1) filing fees (including

member surcharges); 4 (2) hearing

session deposits; and (3) forum fees.

Filing fees are submitted by the party

filing a claim. Filing fees are required

for all claims, including cross-claims,

counterclaims and third party claims.

For example, if a public investor files a

claim against two members, the investor

pays a filing fee specified in Rule 10332

for public investor claimants based on

the aggregate amount claimed. If one

member then files a counterclaim

against the public investor, the member

pays the filing fee specified in Rule

10332 for industry claimants based on

the aggregate amount claimed in the

counterclaim. If the member then files a

cross-claim against the other member

firm respondent or a third party claim

against another member, the member

pays another filing fee as specified in

Rule 10332 for industry claimants based

on the aggregate amount claimed in the

cross-claim and the member who is a

third party respondent pays a member

surcharge based on the aggregate

amount claimed in the third party

claim. The members each pay one

member surcharge when they are

brought into the case, whether through

a claim, counter-claim, cross-claim or

third party claim.

A hearing session deposit is required

for arbitrations where hearings will be

held and is intended as an advance

payment for the Office’s cost of

conducting one hearing session. If the

arbitrators determine that several
63584 Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices

5Arbitrators assess forum fees in the award. The

Office keeps track of the number of hearing sessions

held, the hearing session charge to be applied and

any other fees paid or incurred (such as filing or

postponement fees and hearing session deposits)

and advises the arbitrators. The arbitrators then

determine how much of the fees, if any, each party

will be responsible for paying, sometimes setting

forth liability for the fees in percentages and

specifying individual or joint and several liability

for the fees. Finally, the award will set forth the

specific amounts of fees owed by each party.

6The NASD Regulation Board of Directors formed

a Subcommittee on Arbitration Fees to examine the

current revenue, cost and fee structure, and to

recommend changes. The Subcommittee was

composed of three public members (James E.

Burton, CalPERS; Bonnie Guiton Hill, Times-Mirror

Corp.; and William S. Lapp, Esq., Lapp, Laurie,

Libra, Abramson & Thomson, board member of the

Public Investors Arbitration Bar Association and

member of NASD Regulation’s National Arbitration

and Mediation Committee (NAMC)) and three

securities industry members (Raymond E.

Wooldridge, Southwest Securities Group, Inc.,

NAMC member and Chairman of NAMC’s Finance

Subcommittee, and former Vice-Chairman of NASD

Regulation’s Board of Directors; Philip S. Cottone,

Rutherford, Brown & Catherwood, Inc., Chairman of

NAMC and former member of NASD Regulation’s

Board of Directors; and O. Ray Vass, Merrill, Lynch,

Pierce, Fenner & Smith, Inc., member of NASD

Regulation’s Membership Committee).

7See Table 3, infra, for a summary of the analysis.

8FOCUS Reports (Financial and Operational

Combined Uniform Single Reports) are submitted to

the NASD pursuant to SEC Rule 17a–5 by member

firms to report on the member’s net capital and

general financial position.

hearing sessions may be necessary, Rule

10332(a) permits them to order the

parties to make additional hearing

session deposits. The cost of conducting

a hearing session includes arbitrator

compensation and travel expenses,

hearing conference rooms, and staff

work and expenses. All parties are

required to pay the hearing session

deposits specified in Rules 10205 and

10332. Any member firm filing a crossclaim, counterclaim, or third party

claim against a public investor must pay

the hearing session deposits specified

for industry claimants in Rule 10332. In

addition, if a case is settled or

withdrawn more than eight days before

a hearing is held, the hearing session

deposit is refunded; in the Office’s

experience this occurs two-thirds of the

time.

Forum fees are NASD Regulation’s

charges that are assessed by the

arbitrators to the parties for conducting

hearings where evidence and testimony

is presented. The fees are based on the

number of hearing sessions scheduled

and conducted. Thus, forum fees can be

assessed even if there is no final award.

Forum fees assessed by the arbitrators

are paid to NASD Regulation, not to the

arbitrators, and the arbitrators’

compensation is not affected by the

amount of forum fees assessed or

collected. The arbitrators can assess

forum fees for each hearing session up

to the maximum hearing session deposit

that the party is required to pay under

Rule 10332. For example, under the

proposed rule change, the hearing

session deposit for a public investor

with a $100,000 claim is $750.

Therefore, if an arbitration took four

hearing sessions (two full days), the

arbitrators could assess a maximum of

$3,000 in forum fees.5 The arbitrators

can assess the forum fees evenly

between the parties, or apportion the

fees in any other manner, including

assessing all forum fees against one

party. The arbitrators can also determine

to assess only part of the forum fees

against one party (the respondent, for

example) and not assess any forum fees

against another party (the claimant, for

example). Any forum fee assessed

against any party is reduced by the

amount of hearing session deposits

already paid by the party.

Development of Proposed Fee Increases

As a result of the continuing growth

of the program and the current and

projected operating revenue shortfalls,

NASD Regulation determined that

changes to the funding mechanisms

were necessary. Moreover, as discussed

below, the fees collected under the

current schedule do not come close to

covering the NASD’s costs of providing

the arbitration service. In order to

ensure that the changes were

appropriate to the goals of the program

and fair to its users, NASD Regulations

established guidelines for fee increases

and analyzed the program to identify

the cost of each service.6 In addition,

NASD Regulation identified the member

users of the program.

In 1996, case volume for the entire

program (public investor and intraindustry arbitration) was analyzed to

obtain a profile of the users of

arbitration services and to project the

impact of future fee changes upon

member firms.7 This analysis revealed

that only 753 firms (14 percent) out of

approximately 5,500 NASD member

firms had been parties to arbitration

cases. Of these 753 firms, 88 firms (12

percent) accounted for over 50 percent

of the case volume. Each of these 88

firms reported revenues in excess of

$100 million on their FOCUS filings.8 In

contrast, firms that reported revenues of

less than $500,000 accounted for only 9

percent of NASD member firms and less

than 3 percent of the total projected case

load. Thus, a small number of large

firms are involved in more than 50

percent of all arbitration cases. NASD

Regulation considers these firms to be

the primary and most frequent member

users of the service and, therefore,

believes it is appropriate for any fee

changes to shift member costs to these

member users. The proposed rule

changes, including the changes to the

member surcharge adopted in July 1997,

largely accomplish this goal. In

addition, any future changes to the fee

structure will transfer any additional

costs to these primary users of the

program.

The Office has analyzed the overall

flow of revenue from users of the

arbitration services for the twelve

months ending August 31, 1997. After

calculating filing and other fees with

forum fees actually paid by public

investors and refunds received by

public investors, the data show that

public investors currently are assessed

approximately $3.5 million of $15.3

million in fee revenue collected from

users. This is 23 percent of the total fee

revenue. Although the time periods are

not directly comparable, the revenue

contribution of public investors over the

twelve months ended August 31, 1997

is less than 12 percent of the $29.8

million calendar year 1997 projected

total cost of running the dispute

resolution program. Public investors,

however, file approximately 80 percent

of the new claims filed with the Office

each year. Moreover, even though some

of these revenue contribution figures

will vary because of differences in case

volume, forum fee allocations and other

factors, NASD Regulation believes that

the total relative revenue contributions

of public investors and members will

not change substantially after the

proposed fee changes are approved.

Overall, NASD Regulation expects

that the fee changes proposed in this

rule filing and the member surcharge

changes implemented earlier in 1997

will generate approximately $11.5

million in additional revenue. The

combination of increases in fees (filing

fees, member surcharges and hearing

session deposits) charged to members

will generate $8.4 million in additional

revenues (73 percent of total additional

revenues to be generated by the fee

changes). Even with this additional

revenue, the Office will continue to

incur operating shortfalls of more than

$6.1 million.

Guidelines for Proposed Fee

Increases. In developing the proposed

rule change, NASD Regulation

identified several important principles

to guide its decisions on the appropriate

fees for the arbitration service it

provides:

• The current ratio of public investor

fees to member fees should not change.

Currently public investors pay

approximately 23 percent of the
Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices 63585

9The proposed rule change treats associated

persons of members like public customers for

purposes of fees. See discussion, infra.

10For the twelve month period ending August 31,

1997, the net revenue contribution of public

investors was approximately $3.5 million. (Net

revenue contribution is calculated by identifying

the fees paid, including hearing session deposits

and postponement fees, less the refunds and

reallocations through assessment of costs, such as

forum fees.) The net revenue contribution of

members was $11.8 million. NASD Regulation is

projecting that the combined additional revenue

generated by the proposed fee increases in this rule

filing and the increased member surcharge already

in effect will be approximately $11.6 million. While

it is not possible to predict accurately the 1998 net

revenue contributions of public investors and

members, NASD Regulation intends for the

proposed increases to maintain the same ratio of

public investor/member net revenue contributions.

11See note 1, supra.

12See Table 2, infra.

arbitration service fees and members

pay 77 percent.

• The fees should not create a

financial barrier to prevent a public

investor from seeking arbitration. The

maximum fee charged to public

investors should not exceed the direct

costs of providing the service and public

investors should be permitted to ask the

Office to waive the fees in

circumstances of financial hardship.

• The fees for a public investor to file

a case in arbitration (the filing fee plus

hearing session deposit) must be less or

no more than the initial fee charged to

the member named in the aribration (the

member surcharge).

• The revenue contribution plan

should, to the extent possible, impose

costs on the member firms that use the

program.

• Any fee increases for public

investors should be allocated to reduce

the revenue shortfall for direct

arbitration services alone. Additional

fee increases to cover revenue shortfalls

for other dispute resolution programs

and indirect operating costs would be

assessed to member users of the dispute

resolution programs.

Activity-Based Cost Analysis. In order

to understand better the costs of

administering the dispute resolution

program, NASD Regulation, assisted by

the accounting firm of Coopers &

Lybrand, conducted an activity-based

costing study to identify more

accurately the Office’s current costs and

link specific activity costs to the

services provided. This study identified

fifty-two separate arbitration service

activities and determined the total

direct cost of performing each activity.

In addition to providing the Office

with a better understanding of particular

activities and costs, the study also

provided a program-wide perspective of

the raw average costs and average fees

collected in both simplified and

standard arbitration cases. The study

showed, on a per occurrence basis, the

costs associated with activities such as:

(1) receiving and processing claims; (2)

analyzing and serving claims; (3)

selecting arbitrators; (4) scheduling

hearings; and (5) conducting hearing

sessions. The analysis has permitted the

Office to extrapolate its likely costs for

1998 and compare them to the revenue

expected. This ‘‘Break-Even Analysis’’ is

attached to this filing as Exhibit 2 and

is discussed below.

The raw average costs for particular

activities have been identified by

breaking down the work of the Office

into discrete functions, such as

‘‘Receiving Claims.’’ The cost of

performing these discrete functions is

then identified by totaling the staff

hours and other expenses devoted to the

function. The number of occurrences of

the function are then identified and

counted. The number of times the

receiving claims function occurs

matches the number of claims filed with

the Office each year. The number of

occurrences of the function is then

divided into the total cost to derive the

per occurrence cost of the function, or

the raw average cost. The average cost

of each function can be multiplied by

the number of times it occurs in each

case and added to all of the other

functional costs of a case to produce the

average cost of a hypothetical case.

The costs associated with particular

cases, however, fall along a wide

spectrum depending on the nature of

the case. Cases that are settled shortly

after being filed usually cost little to

administer. Cases that involve

numerous and complex issues,

numerous pre-hearing rulings and

conferences with the arbitrators, lengthy

hearings and, finally, an award are more

costly to administer than other cases.

The Office has also found that the larger

the amount in dispute, the more costly

the case is to administer because there

are usually more parties involved

(which makes communication more

costly and time consuming), there are

more motions and other disputes to

resolve, and prehearing conference and

hearing logistics are more complicated.

This wide spectrum of costs is the

reason that the Office imposes

graduated fees in two stages: filing fees

and forum fees (the latter are partly

prepaid through hearing session

deposits).

Finally, NASD Regulation notes that

the activity-based cost analysis is a

useful analytical tool for budgeting and

planning; however, it should not be

relied upon to produce guaranteed cost

figures. The actual costs of providing

the services can and will vary due to

factors that are unpredictable and

beyond NASD Regulation’s ability to

control.

Proposed Rule Changes

In view of the foregoing, NASD

Regulation is proposing to amend the

schedules of fees (including hearing

session deposits) for both intra-industry

and public investor disputes to support

the improvement of the arbitration

service administered by the Office and

to shift the cost of administering the

service to the users.

The filing fee and hearing session

deposit changes proposed in this rule

filing are discussed in four separate

categories: (1) filing fees for claims by

public investors against members

(‘‘Public Investor-Member Disputes’’);

(2) filing fees for claims by members

against public customers (‘‘MemberPublic Investor Disputes’’) or other

members or associated persons (‘‘Intraindustry Disputes’’); 9 (3) hearing

session deposits in all cases between

public investors and members, and in

intra-industry cases; and, (4)

miscellaneous changes. Also discussed

are NASD Regulation’s proposed

changes to the arbitrator honorarium

schedule. NASD Regulation believes the

changes, taken together, will maintain

the current ratio of funding of the

arbitration service between public

investors and members.10

Filing Fees: Public Investor-Member

Disputes. NASD Regulation is proposing

to amend Rule 10332 to increase the

filing fee for disputes between a public

investor claimant and a member

respondent by an average of 50 percent

in most brackets (fees are based on the

amount in dispute, and a range of

amounts in dispute (e.g., $50,000.01 to

$100,000) to which a particular fee

applies is referred to as a bracket) and

add three new brackets to graduate

further the fee schedule. For example,

the old bracket of fees for claims of

$10,000.01 to $30,000 has been divided

into two brackets; one from $10,000.01

to $25,000 with a new filing fee of $125

(versus $100 for the old bracket), and

another from $25,000.01 to $30,000 with

a new filing fee of $150. The old bracket

was divided to take into account the

new ceiling for simplified arbitration

cases, which was raised from $10,000 to

$25,000.11 The largest filing fee

increases are for the largest cases; the

filing fee for claims of more than

$10,000,000 is being raised 100 percent

from $300 to $600.12

Using the costs identified in the

activity-based costing study, NASD

Regulation believes that in 1998 the

average direct cost associated with

processing a simplified arbitration case
63586 Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices

13Exhibit 2 to the proposed rule filing presents

examples of how the proposed filing fees and forum

fees would apply in particular types of cases and

the Office’s average costs of administering

arbitration proceedings in such cases. The figures

in the line ‘‘Net of revenues—cost’’ show the loss

the Office will incur in the example when the

Office’s costs are subtracted from the revenues

collected. Similarly, the final figure in each

example shows how much the Office would lose in

such cases after the Office’s total costs are

subtracted from the revenues collected, including

forum fees. In addition, for comparison purposes,

Exhibit 2 includes the current forum fees that

would be charged for the type of case in each

example. Because the cost figures set forth in

Exhibit 2 are averages, parties should not regard

them as predictive of the actual cost of

administering their case.

14By contrast, the filing fees of the American

Arbitration Association (‘‘AAA’’) range from $300

to $4,000, depending on the amount in dispute. In

addition, the AAA’s rules require the parties to pay

arbitrator honorariums and other costs of an

arbitration proceeding.

from beginning to end will be

approximately $412. For a standard case

the cost from filing through all activities

up to the prehearing conference will

range from $353 through at least $630.

The activity categories used to calculate

average claim processing costs were: (i)

receipt/assignment of cases; (ii) check

processing; (iii) analyzing claims; (iv)

serving claims; (v) processing answers;

(vi) processing motions; (vii) processing

counterclaims; and (viii) conducting

discovery (except for prehearing

conferences to resolve discovery issues).

Activity costs that were not included,

among others, were; (i) recruiting and

training of arbitrators; (ii) qualifying

arbitrators; (iii) mediation; and (iv)

NASD corporate oversight and transfer

pricing of services from other

departments.

For a simplified arbitration case the

proposed customer filing fee for a

$10,000 claim is $75, plus a proposed

$250 simplified arbitration fee, for a

total of $325, versus average costs for

simplified cases of $412. Because there

are no hearings in such cases, much of

the Office’s cost is associated with

activities from processing the claim up

through presenting it to the arbitrator for

a decision. By contrast, in cases where

hearings are conducted, the hearings

constitute by far the largest portion of

the cost.

NASD Regulation is proposing filing

fees designed to cover as much of the

actual costs of the arbitration process

from filing up to the prehearing

conference as is possible without

erecting barriers to entry into

arbitration. For a standard case in which

more than $100,000 is in dispute and

three arbitrators are appointed, the

proposed customer filing fee is $300,

while the Office’s average expenses for

administering the case from filing up to

the pre-hearing conference will be at

least $477. The margins for large bracket

cases are smaller, but the proposed fees

do not exceed the actual average cost to

provide the service.

NASD Regulation’s ‘‘Break-even

Analysis’’ (attached as Exhibit 2)

illustrates how the Office’s costs of

administering an arbitration correlate to

the revenues obtained through filing

fees and hearing session deposits using

1998 figures and the proposed fee

increases.13 The analysis uses the

activity categories identified in the

activity-based costing study. For each

type of activity the Office’s total cost of

performing the activity (serving claims,

for example) is divided by the number

of times the particular activity occurs to

produce an approximate average cost for

each occurrence of the activity. These

activities and their costs are then

charted sequentially as they would

likely occur in a case to produce a

hypothetical cumulative cost at each

major stage of a case. This average cost

is charted against the fee revenue

received in a case. As noted above,

however, NASD Regulation does not

regard the analysis as a guarantee that

in each case each step in the process

will cost no more than the average

predicted by the analysis.

The analysis shows that well before a

preheating conference is held the claim

filing fee revenue has been used up and,

after an award is rendered following a

hearing, all of the fee filing revenue and

forum fees that could be collected in a

case have been expended. The analysis

takes into account that some activities

(processing motions, for example) will

occur several times in a case. In

addition, the costs of some activities

(notably, holding hearings) vary greatly

so that, although it is possible to

establish an average cost for the activity,

the cost of the activity in a particular

case could be substantially higher or

lower than the average. Finally, in the

Office’s experience, the cost of some

activities tends to vary by the amount in

dispute, with larger cases tending to

cost more to administer at certain stages

than smaller cases. The Office believes

that the cost variance may result from

the increased contentiousness of the

litigants when there are significant

damages in dispute and there are

sometimes larger numbers of parties

involved in cases where large amounts

are in dispute.

While the proposed increases in filing

fees and hearing session deposits are

expected to generate $3.1 million in

additional revenue from public

investors, the increase will be spread

over more than 5,000 cases and should

not discourage claimants from seeking

relief. For example, in cases where more

than $50,000 is in dispute

(approximately 16 percent of the public

investor cases filed with the Office), the

filing fee is increasing $75 from $150 to

$225. The increase of $75 represents

less than 2/10 of 1 percent of the

amount in dispute.14 The filing fee

increases in other brackets are similarly

small relative to the amount in dispute:
Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices 63587

15Rule filing SR–NASD–97–40, filed for

immediate effectiveness on June 12, 1997, and

effective July 1, 1997, steeply graduated and

increased the surcharge on members from a

maximum of $500 under the old schedule to $3,600

under the new schedule.

16Hearing session deposits are required before

NASD Regulation will schedule a hearing unless

waived by the Director due to financial hardship.

The amount deposited is offset against the actual

hearing costs incurred. If a case is settled,

dismissed, or withdrawn more than eight business

days before a hearing was scheduled to occur, the

hearing session deposit is refunded.

TABLE 2.—PERCENTAGE INCREASE IN CUSTOMER FILING FEES

Old filing

fee

Proposed

new filing

fee

Dollar

amount of

increase

Percent increase

Increase as

percent of

amount in

dispute

$.01–1,000.00 ........................................................................................... $15 $25 $10 66.67 1.000

$1,000.01–2,500 ....................................................................................... 25 25 0 0.00 0.000

$2,500.01–5,000 ....................................................................................... 50 50 0.000 0 0.000

$5,000.01–10,000 ..................................................................................... 75 75 0 0.00 0.000

$10,000.01–25,000 ................................................................................... 100 125 25 25.00 0.250

$25,000.01–30,000 ................................................................................... 100 150 50 50.00 0.200

$30,000.01–50,000 ................................................................................... 120 175 55 45.83 0.183

$50,000.01–100,000 ................................................................................. 150 225 75 50.00 0.150

$100,000.01–500,000 ............................................................................... 200 300 100 50.00 0.100

$1,000,000.01–3,000,000 ......................................................................... 250 500 250 100.00 0.025

$500,000.01–3,000,000 ............................................................................ 250 375 125 50.00 0.025

$3,000.01–5,000,000 ................................................................................ 250 600 350 140.00 0.012

$5,000.01–10,000,000 .............................................................................. 300 600 300 100.00 0.005

Over $10,000.000 ..................................................................................... 300 600 300 100.00 0.005

Filing Fees: Member-Public Investor

Disputes and Intra-Industry Disputes.

NASD Regulation also is proposing to

amend Rule 10332 to increase the filing

fees where a member files a claim

against a public investor. The current

filing fee is $500 for all brackets. NASD

Regulation is proposing to substitute a

graduated filing fee beginning at $200

for claims of $1,000 or less up to $5,000

for claims over $10,000,000. By

graduating the fee schedule, the filing

fees are assessed proportionately on the

members based on the size of the claim.

Thus, while the filing fees for large

claims would increase substantially, the

filing fees for small claims would

actually decrease. The fairness of the fee

schedule to members with small claims

is enhanced by decreasing fees for

claims of $5,000 or less.

NASD Regulation also is proposing to

amend Rule 10205 to increase and

graduate the filing fees for intra-industry

disputes. Currently, the filing fees are

$500 regardless of the amount in

dispute. NASD Regulation is proposing

to graduate the filing fee from $200 for

claims of $1,000 or less up to $5,000 for

claims exceeding $10,000,000 in order

to make the filing fee fairer to claimants

with small claims.

As noted above, in addition to the

filing fee and hearing session deposit

increases proposed in this rule filing,

NASD Regulation has increased

substantially the surcharge on members

named as respondents in an arbitration

proceeding.15 Taken together, the

surcharges and proposed fee increases

on members in both public-investor and

intra-industry cases are expected to

generate $8.4 million in additional

revenue, or 73 percent of the total

revenue generated. The specific impact

on members is shown below:

Table 3.—Impact of Fee Increases (Including Surcharges) on Member Firms

Capitalization of firm Number of

firms

Number of

cases (est.

1998)

Percent of

total

Estimated

impact

(1998)

Impact per

firm

$1 Billion + ................................................................................................ 19 2495 36.18 $3,000,000 $157,895

$100 Million–$1 Billion .............................................................................. 69 1062 15.40 1,300,000 18,841

$50 Million–$100 Million ........................................................................... 48 531 7.70 650,000 13,542

$25 Million–$50 Million ............................................................................. 83 751 10.90 900,000 10,843

$10 Million–$25 Million ............................................................................. 117 766 11.11 950,000 8,120

$1 Million–$5 Million ................................................................................. 303 1069 15.50 1,300,000 4,290

$500,000–$1 Million .................................................................................. 49 111 1.61 150,000 3,061

Less Than $500,000 ................................................................................. 65 111 1.61 150,000 2,308

Total ............................................................................................... 753 6896 100.00 8,400,000 11,155

The average increase in cost to

member firms for each case will be

$1,218.

NASD Regulation is proposing

increases in member-user contributions

to the dispute resolution process

because member firms have indicated

that arbitration is their preferred forum

for resolving public investor-member

disputes through the predispute

arbitration agreements that are typical of

broker-customer business relationships.

Accordingly, the proposed fee increases

assess the costs on the actual users of

the program.

Hearing Session Deposits. NASD

Regulation also is proposing to amend

Rules 10205 and 10332 to increase the

hearing session deposits 16 for all cases

by no more than 50 percent in most

brackets (in the lowest brackets

increases from $15 to $25, and $25 to

$50, represent 67 and 100 percent
63588 Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices

17Under the new ceilings for single arbitrator

claims without a hearing, claims up to $25,000 may

be resolved by a single arbitrator on the pleadings

alone. In such cases, a hearing session deposit is not

required. Thus, the new $450 hearing session

deposit for such cases only applies in the event the

claimant requests a hearing.

18 In cases where the claimant is seeking a remedy

other than damages (recision, for example) and does

not specify damages, the staff will attempt to

establish the market value of the securities which

are the subject matter of the claim before resorting

to the default fee specified in paragraph (e) of the

two rules.

19Rule 10334 (the rule for large and complex

cases) has been extended for five years and the use

of the procedures is now entirely voluntary. See

Securities Exchange Act Release No. 39024

(September 5, 1997), 62 FR 47856 (September 11,

1997). 20 15 U.S.C. 78o–3.

increases, respectively) and to add three

new brackets to graduate further the

hearing session deposit schedule. For

example, the old bracket of fees for

claims of $10,000.01 to $30,000 has

been divided into two brackets, one

from $10,000.01 to $25,000 with a new

hearing session deposit of $450 17

(compared to $300 for the old bracket)

for a single arbitrator, and another from

$25,000.01 to $30,000 with a new

hearing session deposit of $450. In the

$25,000.01 to $30,000 bracket the

hearing session deposit for three

arbitrators will be $600 (compared to

$300 for the old bracket). The hearing

session deposit for claims of

$5,000,000.01 or more is being reduced

to $1,200.

The proposed new hearing session

deposits are based on the results of the

activity-based costing study which

showed that, for cases requiring

hearings, NASD Regulation’s projected

average cost to provide hearings in 1998

will be approximately $1,200 per

hearing session. The activities used in

computing this cost include arbitrator

expenses and compensation, hearing

room expenses, taping expenses, and

staff work and expenses. The Office’s

experience also shows, however, that

the costs of conducting hearings varies

significantly with the amount in dispute

and the number of parties involved.

This is because staff attorneys may need

to attend some or all of the hearing

sessions, staff coordination of logistics

may be more difficult and complicated,

and staff communication with the

parties may be more involved and timeconsuming. Moreover, the hearing

session deposits have been graduated

from a relatively low level for cases in

lower brackets up to the actual average

cost of conducting hearings because

NASD Regulation believes that charging

claimants the full cost of conducting

hearings in relatively small cases could

discourage some public investors from

seeking relief.

In addition, the proposed rule change

makes the hearing session deposits for

particular brackets the same among all

types of cases; public investor vs.

member, member vs. public investor

and intra-industry. This is being done

because NASD Regulation believes the

hearing session deposit, and by

extension the forum fees, should not

exceed the Office’s actual costs, and

such costs are, on average,

approximately the same for all types of

cases, even if they may vary by the

amount in dispute or the number of

parties involved. As a result of this

change, the hearing session deposit will

be the same without regard to whether

a public investor or a member filed the

initial claim.

Miscellaneous Changes. NASD

Regulation is proposing to amend Rule

10205(a) to provide that if the claimant

is an associated person, he or she will

pay the filing fee and hearing session

deposit specified for public customers.

However, if the associated person is a

joint claimant with a member, the

member will pay the filing fee and

hearing session deposit specified for

industry claimants. NASD regulation is

also proposing to amend Rules 10205(e)

and 10332(e) to increase the hearing

session deposit from $600 to $1000, or

an amount specified by the Director or

the arbitrators not exceeding the

maximum hearing session deposit

specified in the rules, for claims where

the amount in dispute is not disclosed

by the claimant in the Statement of

Claim.18

Finally, Rules 10205(i) and 10332(h)

are proposed to be amended to provide

that the filing fees and hearing session

deposits for large and complex cases

brought under Rule 10334 19 will be

those specified for cases exceeding

$10,000,000. There are a few significant

and distinct costs associated with such

cases, including the Administrative

Conference, the number of hearing

sessions, pre-hearing issues to be

resolved and customized arbitration

procedures that may be requested by the

parties.

Arbitrator Honoraria. NASD

Regulation is proposing to amend IM–

10104 to increase the honoraria paid to

arbitrators. The honorarium will be

increased from $150 to $200 for each

hearing session, with an additional $75

per day for the chairman of the panel.

Thus, the Office’s honorarium cost for a

panel of three arbitrators for one hearing

session is $675. The honorarium for a

prehearing conference will be $200. The

honorarium for a case not requiring a

hearing will be $125.

2. Statutory Basis

NASD Regulation believes that the

proposed rule change is consistent with

the provisions of Section 15A(b)(5) of

the Act 20 in that the proposed rule

change provides for the equitable

allocation of reasonable charges among

members and other persons using the

Association’s arbitration facility because

it further graduates the fee schedules

and requires users, especially member

firm users, to absorb a reasonable share

of the costs of operating the arbitration

program.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD does not believe that the

proposed rule change will impose any

inappropriate burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

No written comments were either

solicited or received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the publication of

this notice in the Federal Register or

within such longer period (i) as the

Commission may designate up to 90

days of such date if it finds such longer

period to be appropriate and publishes

its reasons for so finding or (ii) as to

which the self-regulatory organization

consents, the Commission will:

(A) by order approve the proposed

rule change, or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying at
Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices 63589

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Letter from John M. Ramsay, Deputy

General Counsel, NASD Regulation, to Katherine A.

England, Assistant Director, Division of Market

Regulation, Commission, dated November 19, 1997

(‘‘Amendment No. 1’’). In Amendment No. 1, the

NASD Regulation amended the proposal to: (1) Add

a sentence to the rule relating to the responsibility

of introducing members to notify clearing members

of the specific reports needed by the introducing

members to supervise its business; (2) clarify that

failure to provide such notification would violate

not only the proposed rule but also, the

Association’s supervisory rules; and (3) delete a

series of questions directed to readers of the

proposal. Commission staff has incorporated the

changes set forth in Amendment No. 1 into the

notice.

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–97–79 and should be

submitted by December 22, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc 97–31392 Filed 11–28–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39349; File No. SR–NASD–

97–96]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment No. 1 by the National

Association of Securities Dealers, Inc.

To Amend Its Rule 3230 Relating to

Clearing Agreements

November 21, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on October

14, 1997, the NASD Regulation, Inc.

(‘‘NASD Regulation’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’) the proposed

rule change as described in Items I, II,

and III below, which Items have been

prepared by NASD Regulation. On

November 20, 1997, the NASD

Regulation filed Amendment No. 1 to

the proposed rule change.3 The

Commission is publishing this notice to

solicit comments on the proposed rule

change, as amended, from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

NASD Regulation proposes to amend

the National Association of Securities

Dealers, Inc.’s (‘‘NASD’’ or

‘‘Association’’) Rule 3230 to: (1)

establish standards for the disposition of

written customer complaints received

by clearing firms about introducing

member firms relating to their functions

and responsibilities under the clearing

agreement; (2) govern how exception

reports are made available to

introducing firms and retained by

clearing firms; and (3) permit

introducing firms to write checks on

their clearing firm’s account. Below is

the text of the proposed rule change.

Proposed new language is in italics;

proposed deletions are in brackets.

3230. Clearing Agreements

(a) All clearing or carrying agreements

entered into by a member, except where

any party to the agreement is also

subject to a comparable rule of a

national securities exchange, shall

specify the respective functions and

responsibilities of each party to the

agreement and shall, at a minimum,

specify the responsibility of each party

with respect to each of the following

matters:

(1) Opening, approving and

monitoring customer accounts;

(2) Extension of credit;

(3) Maintenance of books and records;

(4) Receipt and delivery of funds and

securities;

(5) Safeguarding of funds and

securities;

(6) Confirmations and statements;

(7) Acceptance of orders and

execution of transactions;

(8) Whether, for purposes of the

Commissioner’s financial responsibility

rules adopted under the Act, and the

Securities Investor Protection Act, as

amended, and regulations adopted

thereunder, customers are customers of

the clearing number; and

(9) the requirement to provide

customer notification under paragraph

[(d)](g) of this Rule.

(b)(1) In order for the introducing

member to carry out its functions and

responsibilities under the agreement,

each clearing member must forward

promptly any written customer

complaint received by the clearing

member regarding the introducing

member or its associated persons

relating to functions and responsibilities

allocated to the introducing member

under the agreement directly to: (A) the

introducing member; and (B) the

introducing member’s examining

authority designated under Section 17

of the Act (‘‘DEA’’) (or, if none, to its

appropriate regulatory agency or

authority). The clearing or carrying

agreement must specifically direct and

authorize the clearing member to do so.

(2) The clearing member must also

notify the customer, in writing, that it

has received the complaint, and that the

complaint has been forwarded to the

introducing member and to the

introducing member’s DEA (or, if none,

to its appropriate regulatory agency or

authority). This written notice to the

customer must also contain a statement

that reads substantially as follows:

‘‘Please be aware that you retain the

right, at your discretion, to transfer your

account to another broker/dealer of your

choice.’’

(c)(1) A clearing member, when it

enters into a clearing agreement, must

immediately, and annually thereafter,

provide the introducing member a list or

description of all reports (exception and

other types of reports) which it offers to

the introducing member to assist the

introducing member in supervising its

activities, monitoring its customer

accounts, and carrying out its functions

and responsibilities under the clearing

agreement. The introducing member

must notify promptly the clearing

member, in writing, of those specific

reports by the clearing member that the

introducing member requires to

supervise and monitor its customer

accounts.

(2) The clearing member must retain

as part of its books and records required

to be maintained under the Act and the

Association’s rules, copies of the reports

requested by or provided to the

introducing member. For purposes of

this Rule, the clearing member will be in

compliance with the requirements of

this paragraph it if retains the data from

which the original report was produced,

provided, the clearing member can, at

the request of the DEA, either (A)

recreate the report; or (B) provide the

data and the data formatting that was

used to prepare the report.

(3) Each year, no later than July 31,

the clearing member must notify in

writing the introducing member’s chief

executive and compliance officers of the

reports offered to the introducing

member and the reports requested by or

supplied to the introducing member

during the previous year ending June 30.

The clearing member must also provide

a copy of the notice to the introducing

member’s DEA.

(4) The clearing member must

provide, at the request of the

introducing member’s DEA, any reports

(or, if the reports are not available,

information or data from which the