[Federal Register Volume 62, Number 246 (Tuesday, December 23, 1997)]
[Notices]
[Pages 67104-67106]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33405]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39451; File No. SR-NASD-97-88]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Incorporated Relating to Process Fees on Members 
That Are Parties to Arbitration Proceedings

December 15, 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 December 
11, 1997, the National Association of Securities Dealers, Incorporated 
``NASD'' or ``Association'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend Rule 10333 of the NASD's Code 
of Arbitration Procedure (``Code'') to add a process fee on members 
that are parties to arbitration proceedings. Below is the text of the 
proposed rule change. Proposed new language is in italics; proposed 
deletions are in brackets.
10333. Member Surcharge and Process Fees
    (a) Each member [who is named as] that is a party to an arbitration 
proceeding, whether in a Claim, Counterclaim, Cross-claim or Third-
Party Claim, shall be assessed a non-refundable surcharge pursuant to 
the schedule below when the Director of Arbitration perfects service of 
the claim naming the member on any party to the proceeding. For each 
associated person who is named, the surcharge shall be assessed against 
the member or members that employed the associated person at the time 
of the events which gave rise to the dispute, claim or controversy. No 
member shall be assessed more than a single surcharge in any 
arbitration proceeding. The surcharge shall not be [subject to 
reimbursement] chargeable to any other party under Rules 10332(c) and 
10205(c) of the Code.

[[Page 67105]]



------------------------------------------------------------------------
                      Amount in Dispute                        Surcharge
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$.01-$2,500..................................................       $150
$2,500.01-$5,000.............................................        200
$5,000.01-$10,000............................................        300
$10,000.01-$25,000...........................................        400
$25,000.01-$30,000...........................................        600
$30,000.01-$50,000...........................................        800
$50,000.01-$100,000..........................................      1,000
$100,000.01-$500,000.........................................      1,500
$500,000.01-$1,000,000.......................................      2,000
$1,000,000.01-$5,000,000.....................................      2,500
$5,000,000.01-$10,000,000....................................      3,000
Over $10,000,000.............................................      3,600
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    (b) For purposes of this Rule, service is perfected when the 
Director of Arbitration properly serves the Respondents to such 
proceeding under Rule 10314 of the Code.
    (c) If the dispute, claim, or controversy does not involve, 
disclose, or specify a money claim, the non-refundable surcharge shall 
be $1,200 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.
    (d) Each member that is a party to an arbitration proceeding will 
pay a non-refundable process fee as set forth in the schedule below for 
each stage of a proceeding. The process fee shall not be chargeable to 
any other party under Rules 10332(c) and 10205(c) of the Code. If an 
associated person of a member is a party, the member that employed the 
associated person at the time of the events which gave rise to the 
dispute, claim or controversy will be charged the process fees. The 
prehearing process fee will accrue according to the schedule set forth 
below, but will be due and payable when the prehearing conference is 
held, or, if no prehearing conference is held, when the parties are 
notified of the date and location of the first hearing session. The 
hearing fee will accrue and be due and payable when the parties are 
notified of the date and location of the first hearing session. All 
accrued but unpaid fees will be due and payable at the conclusion of 
the member's or associated person's involvement in the proceeding. No 
member will pay more than one prehearing and hearing process fee for 
any case. The process fees will stop accruing when either the member 
enters into a settlement of the dispute or the member is dismissed from 
the proceeding or, if the member is paying a process fee as a result of 
an associated person being named as a party, when the associated person 
enters into a settlement or is dismissed from the proceeding, whichever 
is later.

 Prehearing Process Fee Schedule (proceedings where more than $25,000 is
                               in dispute)                              
Service of Claim (accrues when the claim has been submitted             
 and is ready to be served on the respondents)...............        $50
Case Preparation (accrues when the first answer to the claim            
 is received or due and discovery and motions proceedings               
 commence....................................................        150
Prehearing Activities (accrues when the parties are first               
 notified of the names of any of the arbitrators selected to            
 hear the matter or are given the names of arbitrators to               
 select).....................................................        400
    Total....................................................       $600
                                                                        


 Hearing Process Fee Schedule (accrues and becomes due and payable when 
 the parties are notified of the date and location of the first hearing 
                                session)                                
                                                                        
                                                                Hearing 
                      Damages requested                         process 
                                                                  fee   
                                                                        
$1-$30,000...................................................         $0
$30,000.01-$50,000...........................................      1,000
$50,000.01-$100,000..........................................      1,500
$100,000.01-$500,000.........................................      2,500
$500,000.01-$1,000,000.......................................      3,500
$1,000,000.01-$5,000,000.....................................      4,500
More than $5,000,000.........................................      5,000
Unspecified..................................................      2,000
                                                                        

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
    NASD Regulation is proposing to amend Rule 10333 of the Code to add 
a process fee to be charged to members at several stages of arbitration 
proceedings. The proposed rule change is the last stage of a three 
stage effort to make the NASD's dispute resolution program self-funding 
by charging fees to participants in arbitration proceedings.\1\
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    \1\ The first two stages involved increasing the surcharge on 
members named in arbitration proceedings and increasing filing fees 
and hearing session deposits. The increase in the member surcharge 
was submitted to the SEC for approval in rule filing SR-NASD-97-40 
and was approved by the SEC. It was implemented on July 1, 1997. The 
proposed increases in filing fees and hearing session deposits were 
originally submitted to the SEC for approval in rule filing SR-NASD-
97-39, resubmitted in rule filing SR-NASD-97-79, and are currently 
pending SEC approval.
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    The previously approved surcharge and the other pending fee 
increases will add approximately $12 million to the revenue stream of 
the Office of Dispute Resolution (``Office''). In addition, they will 
shift much of the direct cost of operating the dispute resolution forum 
to the users of the forum. The final 1998 Budget for the Office, 
however, which includes transfer pricing of services provided by other 
NASD departments to the Office, projects total expenses of 
approximately $35.2 million versus projected revenue of approximately 
$29.1 million, leaving a revenue shortfall of approximately $6.1 
million. The proposed fees are designed to recover all of the Office's 
costs that are not recovered through filing fees, hearing session 
deposits, forum fees,\2\ and member surcharges and to make the Office's 
activities self-funding in a manner that generally reflects the extent 
of the use of resources in a given case.
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    \2\ Forum fees are the charges for hearing sessions assessed at 
the end of a proceeding. Forum fees are calculated by multiplying 
the number of hearing sessions by the applicable hearing session 
deposit.
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    The process fees will be assessed in two parts: (1) The Prehearing 
Process Fee for the activities in the case from the filing of the claim 
up to and including the Prehearing Conference; and (2) the Hearing 
Process Fee for the activities relating to the evidentiary hearing, 
award and case closing. If the member concludes its involvement in a 
case through dismissal or settlement, the process fees accrued to that 
point will be assessed. In addition, if an associated person of a 
member is named in a proceeding, but the member is not named, the 
member employing the associated person at the time of the events that 
gave rise to the dispute will be assessed the process fees when the 
associated person's involvement in the case is concluded.
    The Prehearing Process Fee will accrue in three cumulative stages. 
When a claim is filed, a $50 fee will accrue against each member named 
in the claim.\3\ When the first answer to the

[[Page 67106]]

claim is received or due, an additional $150 fee will accrue. Finally, 
when the arbitrators are selected, a fee of $400 will accrue against 
each member in the case, for a maximum assessment against each member 
of $600. The Prehearing Process fee will be due and payable when the 
prehearing conference is held, or, if no prehearing conference is held, 
when the parties are notified of the date and location of the first 
hearing. These fees will not be dependent on the amount of the claim.
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    \3\ As discussed above, if an associated person of a member is 
named, but the member employing the associated person is not named, 
the process fee will accrue against the member employing the 
associated person at the time of the events which gave rise to the 
dispute. References in this rule filing to fees assessed against 
members named in the proceeding will also refer to the circumstance 
where the member is not named in the proceeding, but is assessed the 
fee because a present or, where applicable, former associated person 
of the member is named in the proceeding.
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    The Hearing Process Fee will accrue and become due and payable when 
the parties are notified of the date and location of the first hearing 
session. The Hearing Process Fee will be a graduated fee ranging from 
$1000 to $5000, based on the amount in dispute.
    If an associated person is named, the member firm that employed the 
associated person at the time the claim arose will be assessed fees; 
however, a member will only be assessed once for each case even if both 
the member and an associated person (or more than one associated 
person) of the member are named as respondents. \4\
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    \4\ As with the member surcharge, the proposed process fees will 
be assessed only against members. They will not be assessed against 
associated persons. In addition, because the process fee will be 
assessed against a member if an associated person of the member is 
named in a proceeding, members would be required to pay the process 
fee, for example: (1) Where a member brings an arbitration case 
against an associated person to recover on an promissory note; (2) 
where an associated person brings an arbitration case against a 
member for defamation or wrongful discharge; or (3) where a customer 
brings an arbitration case against an associated person but does not 
name the member that employed the associated person at the time of 
the events that are the subject of the claim.
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    NASD Regulation believes that, by structuring the process fees in 
the manner proposed, the Office's costs will be recovered even if there 
are significant variations in the number of cases that proceed all the 
way through a hearing. Moreover, NASD Regulation believes that the 
proposed process fees may encourage settlements because significantly 
greater fees will be incurred by members once the matter proceeds to 
hearing.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(5) of the Act \5\ 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 and requires member firm users to 
absorb a reasonable share of the costs of operating the arbitration 
program.
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    \5\ 15 U.S.C. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe the proposed rule change will impose any 
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 solicited on received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The proposed rule change has become effective upon filing pursuant 
to Section 19(b)(3)(A) of the Act \6\ and subparagraph (e) of Rule 19b-
4 thereunder, \7\ in that the proposal constitutes a fee which the NASD 
imposes on its members. At any time within 60 days of the filing of 
such proposed rule change, the Commission may summarily abrogate such 
rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(e).
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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, N.W., Washington, D.C. 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 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-97-88 and should 
be submitted by January 13, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-33405 Filed 12-22-97; 8:45 am]
BILLING CODE 8010-01-M