[Federal Register Volume 64, Number 4 (Thursday, January 7, 1999)]
[Notices]
[Pages 1051-1054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-299]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40858; File No. SR-NYSE-98-28]
Self Regulatory Organizations; Order Approving Proposed Rule
Change by the New York Stock Exchange, Inc. Relating to Arbitration
Rules
December 29, 1998.
I. Introduction
On September 15, 1998, the New York Stock Exchange, Inc. (``NYSE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') a proposed rule change pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\
and Rule 19b-4 thereunder.\2\ The proposed rule change would amend NYSE
Rules 347 and 600 to exclude claims of employment discrimination,
including sexual harassment, in violation of a statute from arbitration
unless the parties have agreed to arbitrate the claim after it has
arisen. Notice of the proposed rule change, together with the substance
of the proposal, was provided in a Commission release and in the
Federal Register.\3\ The Commission received three comment letters and
a response to those letters from the Exchange. The Commission is
approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 40479 (September 24,
1998) 63 FR 52782 (October 1, 1998).
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II. Description
The proposed rule change will modify the current requirement in
NYSE Rule 347 that any employment-related disputes between a registered
representative and a member or member organization be settled by
arbitration. The proposal provides that statutory employment
discrimination claims are eligible for arbitration at the Exchange only
if the parties agree to arbitrate the claims after they arise.
Background
NYSE Rule 347 has been in effect since the late 1950's and requires
that any employment-related disputes between a registered
representative and a member or member organization be settled by
arbitration.\4\ In order to become ``registered'' an individual is
required to sign and file with the Exchange a Form U-4 (Uniform
Application for Securities Registration or Transfer). Form U-4 requires
registered persons to submit to arbitration any claim that must be
arbitrated under the rules of the self-regulatory organizations
(``SROs'') with which they register.
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\4\ NYSE Rule 347 provides ``Any controversy between a
registered representative and any member or member organization
arising out of the employment or termination of employment of such
registered representative by and with such member or member
organization shall be settled by arbitration, at the instance of any
such party, in accordance with the arbitration procedure prescribed
elsewhere in these rules.''
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Until the 1990's, the rule was generally invoked to arbitrate
business and contract disputes, such as wrongful discharge, breach of
contract or claims regarding compensation. In 1991, the Supreme Court
held in Gilmer v. Interstate/Johnson Lane,\5\ that a registered
representative could be compelled to arbitrate his claim under the Age
Discrimantion in Employment Act (``ADEA'') pursuant to Form U-4 and
NYSE Rule 347. Subsequent courts have held that claims alleging
employment discrimation, including sexual harassment claims, may be
compelled to arbitration.\6\
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\5\ 500 U.S. 20 (1991).
\6\ Indeed, they have extended the reasoning of Gilmer to cover
disputes arising under: Title VII of the Civil Rights Act of 1964,
see, e.g., Alford v. Dean Witter Reynolds, Inc., 939 F. 2d 229 (5th
Cir. 1991), Cremin v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
957 F. Supp. 1460 (N.D. III. 1997), but see Rosenberg v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 1998 U.S. Dist. Lexis 877 (D.
Mass. 1998)); the Americans with Disabilities Act, (see, e.g.,
Austin v. Owens-Brockway Glass Container, Inc., 78 F. 3d 875, 881
(4th Cir.) cert. denied, 117 S. Ct. 432 (1996); and state statutes
of a similar nature (see, e.g., Kalider v. Shearson Lehman Hutton,
Inc., 789 F. Supp. 179, 180 (W.D. Pa. 1991)).
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In 1994, the General Accounting Office (``GAO'') conducted a study
on the arbitration of employment discrimination disputes in the
securities industry.\7\ The GAO Report did not critize the fairness of
arbitration as a means of resolving employment discrimination disputes,
but did make recommendations for improving the arbitration process.
Despite steps to improve the process, registered representatives and
others continue to oppose arbitration of discrimination claims pursuant
to the Form U-4 and other pre-dispute agreements. In July 1997, the
U.S. Equal Employment Opportunity Commission (``EEOC'') issued a policy
statement that mandatory pre-dispute agreements to arbitrate statutory
employment discrimination claims are consistent with the purpose of the
federal civil rights laws.\8\
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\7\ Employment Discrimination: How Registered Representatives in
Discrimination Disputes (GAO/HEHS-94-17, March 30, 1994).
\8\ EEOC Notice No. 915.002, July 10, 1997.
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In support of the EEOC's position, the Ninth Circuit Court of
Appeals held in May 1998, in Duffield v. Robertson Stephens &
Company,\9\ that employers could not compel employees to waive their
right to a judicial forum under Title VII, and therefore plaintiff
could not be compelled to arbitrate her statutory employment
discrimination claims pursuant to Form U-4.\10\ Other federal courts
consistently upheld the arbitration of employment discrimination claims
pursuant to the Form U-4.
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\9\ 1998 WL 227469 (9th Cir.).
\10\ In January 1998, a U.S. District Court in Massachusetts, in
Rosenberg v. Merrill Lynch, 76 FEP 681 (D.Mass 1998), declined to
compel arbitration of plaintiff's Title VII and the ADEA claims
pursuant to the agreement to arbitrate contained in the Form U-4
plaintiff was required to sign as a condition of her employment.
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On June 22, 1998, the Commission approved a proposed rule change by
the National Association of Securities Dealers, Inc. (``NASD'') to
remove the requirement from its rules that registered representatives
must arbitrate statutory employment discrimination claims.\11\ Under
the NASD's rule, an employee could file such a claim in court unless he
or she was obligated to arbitrate pursuant to a separate agreement
entered into either before or after the dispute arose.
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\11\ Exchange Act Release No. 40109 (June 22, 1998) 63 FR 35299
(June 29, 1998).
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The Commission's order approving the NASD rule change noted that
the NASD intends to make changes to its arbitration program to make
arbitration more attractive to parties for the resolution of
discrimination claims.\12\ An NASD ``Working Group'' that includes
attorneys who represent employees, member firms and neutrals
[[Page 1052]]
is developing improvements to the NASD's arbitration procedures for
discrimination cases. A representative of the Exchange is participating
as an observer in the Working Group's discussions.
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\12\ Id.
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The Exchange's proposed rule change will create a narrow exception
to the NYSE rule that requires arbitration of all employment-related
claims of a registered representatives. Paragraph (a) of the proposed
amendment to NYSE Rule 347 adds language indicating that paragraph (b)
contains an exception to the requirement to arbitrate employment
disputes. Paragraph (b) provides that ``a claim alleging employment
discrimination,including any sexual harassment claim, in violation of a
statute shall be eligible for arbitration only where the parties have
agreed to arbitrate the claim after it has arisen.'' \13\
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\13\ Claims ``in violation of a statute'' are not limited to the
federal civil rights laws and include all federal, state and local
anti-discrimination statutes.
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In addition, under the proposal, statutory employment
discrimination claims will not be eligible for arbitration pursuant to
any pre-dispute agreement to arbitrate. The Exchange has stated that
its action brings its arbitration policy into conformity with the
EEOC's ``Policy Statement on Mandatory Binding Arbitration of
Employment Discrimination Disputes as a Condition of Employment.'' \14\
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\14\ EEOC Notice No. 915.002, July 10, 1997.
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In its December 1997 comment letter to the SEC regarding the NASD
proposal, the EEOC stated its position ``that pre-dispute arbitration
agreements, particularly those that mandate binding arbitration of
discrimination claims as a condition of employment, are contrary to the
fundamental principles reflected in this nation's employment
discrimination laws. We recommend therefore, that the proposed rule be
revised to permit arbitration of statutory employment discrimination
claims only under post-dispute arbitration agreements.'' \15\
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\15\ Letter from Gilbert F. Casellas, Chairman, EEOC, to
Jonathan G. Katz, Secretary, SEC, Re: NASD Proposed Rule Change on
Arbitration of Employment Discrimination Claims, December 1997.
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The Exchange has had a general arbitration provision in its
Constitution since 1817. NYSE Rule 600 requires the arbitration of
disputes between customers or non-members and members or member
organizations, pursuant to any written agreement to arbitrate or upon
the demand of the customer or non-member.\16\ The vast majority of
disputes resolved by Exchange arbitration are business disputes arising
out of securities transactions with investors, and contractual disputes
between members and their employees. Since 1992, the year following the
Gilmer decision, the Exchange has received an average of 18
discrimination claims a year.\17\ The Exchange's proposed amendments
will limit the availability of the Exchange's forum for the resolution
of employment discrimination claims to those cases where the parties
have agreed to arbitrate the claim after it has arisen, as recommended
by the EEOC.
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\16\ NYSE Rule 600(a) provides: ``Any dispute, claim or
controversy between a customer or non-member and a member, allied
member, member organization and/or associated person arising in
connection with the business of such member, allied member, member
organization and/or associated person in connection with his
activities as an associated person shall be arbitrated under the
Constitution and Rules of the New York Stock Exchange, Inc. as
provided by any duly executed and enforceable written agreement or
upon the demand of the customer or non-member.''
\17\ Historically, discrimination claims accounted for less than
two percent of the total claims filed at the Exchange, except for
1996 (when discrimination claims accounted for two point six
percent) and the first six months of 1998 where, due to a steady
decline in case filings generally, discrimination claims accounted
for three percent of the cases filed.
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The Exchange is also proposing to amend NYSE Rule 600, adding
paragraph (f) that provides that claims alleging employment
discrimination, including any sexual harassment claim, shall be
eligible for submission to arbitration only where the parties have
agreed to arbitrate the claim after it has arisen. This amendment
excludes from Exchange arbitration statutory employment discrimination
claims of non-registered employees pursuant to pre-dispute arbitration
agreements. NYSE Rule 347 only applies to ``registered'' employees.
The EEOC and several members of Congress have endorsed arbitration
as an effective means of resolving discrimination claims, provided the
parties agree to arbitrate after the claim has arisen. The Exchange's
proposed amendment provides a forum for those employees who choose,
after a claim has arisen, to resolve their statutory employment
discrimination claims through arbitration.
Some employment disputes may contain contract or tort claims as
well as statutory employment discrimination claims. Under amended NYSE
Rule 347 (and NYSE Rule 600 for non-registered employees who have
executed pre-dispute arbitration agreements) these cases may be
bifurcated. The employment discrimination claims may be heard in a
forum other than the Exchange, such as court, while any claims subject
to arbitration may continue to be heard at the Exchange.\18\ However,
NYSE Rule 347 requires arbitration of claims ``at the instance'' of
either party, and therefore may be waived, allowing the entire case to
be heard in court. The parties may also avoid bifurcation by agreeing
to proceed with all claims in a single forum. Given a choice, after a
dispute has arisen, employees in many instances believe that
arbitration is preferable to protracted and expensive litigation and
will willingly make that choice.\19\
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\18\ The bifurcation of securities industry claims is not
unprecedented. Before the Supreme Court's decision in Shearson v.
McMahon, 482 U.S. 220 (1987) (holding that claims under the Exchange
Act could be compelled to arbitration), the Supreme Court decided
Dean Witter Reynolds, Inc. v. Byrd, 105 S. Ct. 1238 (1985). In Byrd,
the dispute involved allegations of federal securities laws
violations and pendent state law claims. The Court compelled the
state law claims to arbitration and held that the federal securities
laws claims could be heard in court.
\19\ See Duffield v. Robertson Stephens & Company, 1998 WL
227469 (9th Cir.).
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III. Summary of Comments
The Commission received three comment letters on the proposed rule
change.\20\ Two of the letters supported the proposal \21\ and the
other oppose it.\22\ The comment letter primarily focused on section
3(f) of the Exchange Act and the Federal Arbitration Act (``FAA''). The
Exchange responded to the comment letters.\23\
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\20\ October 16, 1998 National Employment Lawyers Association
Letter (NELA Letter); October 21, 1998 Securities Industry
Association Letter (SIA Letter); and October 21, 1998 New York State
Attorney General Dennis Vacco (NY Attorney General Letter).
\21\ NELA Letter; and NY Attorney General Letter.
\22\ SIA Letter.
\23\ Letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated December
2, 1998.
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Overview of the Proposed Rule Change
One commenter that supported the proposal did so because it
believes that it complies with EEOC policy and the letter and spirit of
Tile VII.\24\ A second commenter that supported the proposal did so
because it believes that arbitration may not be well-adapted for
employment discrimination claims, since employees and others have
challenged its fairness in employment-related disputes.\25\ While
supporting the proposal, this commenter suggested that the proposal be
modified to include common law employment-related claims (e.g.,
wrongful termination, defamation) and preserve punitive damages.
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\24\ NELA letter.
\25\ NY Attorney General Letter.
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The one commenter that opposed the proposal said that it is
inconsistent with
[[Page 1053]]
section 3(f) of the Exchange Act and the FAA, and that it will lead to
unnecessary bifurcation of claims, since it differs from the NASD's
recent rule change.\26\ This commenter disagreed with the Exchange's
interpretation of the relevant case law. It also asserted that
arbitration is faster and cheaper than litigation and that plaintiffs
are more likely to win in arbitration than in litigation.
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\26\ SIA Letter.
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Comments Concerning Section 3(f) of the Exchange Act
The SIA said that the proposal, which provides the Exchange as an
arbitration forum only for post-dispute arbitration agreements, is
inconsistent with section 3(f) of the Exchange Act \27\ because it
differs from the recent NASD rule change, which does not affect pre-
dispute arbitration agreements. The SIA claimed that this would create
a system of inconsistent regulations that would eliminate the efficacy
of arbitration agreements and create disparate treatment for similarly
situated cases at different SROs. It also argued that this would result
in bifurcation of claims and an unwarranted increase in litigation.
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\27\ Section 3(f) of the Exchange Act provides that when the
Commission reviews a proposed rule change from an SRO, it must
``consider or determine whether an action is necessary or
appropriate in the public interest * * * (and) consider, in addition
to the protection of investors, whether the action will promote
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).''
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The Exchange stated in its response letter that section 3(f) does
not require that SROs have precisely the same rules. It noted that its
proposal is substantially similar to the NASD's recent rule change,
since both leave parties' substantive rights and remedies largely
unchanged.\28\ Further, the Exchange said that bifurcation would only
occur if a prospective plaintiff chose to bifurcate his or her claims.
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\28\ In its response to the comment letters, the Exchange noted
that its rule change is ``similar to the recently approved NASD
rules in that they exclude claims of statutory employment
discrimination from the Exchange's requirement that all employment
disputes between a registered representative and a member or member
organization be arbitrated.''
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In its letter, the SIA offers a hypothetical case in which a
registered representative signs a Form U-4 and an agreement to
arbitrate all disputes, including statutory employment discrimination
claims. The SIA concludes that under the Exchange's proposal, only the
economic claims can be arbitrated. The Exchange interpreted its
proposal differently. The Exchange stated that under the NASD's rules,
the entire dispute in the SIA's hypothetical would be eligible for
arbitration at the NASD or another forum provided for in the Form U-4
or arbitration agreement.
The Exchange also noted that after a dispute has arisen, the
parties can agree to proceed with all claims in arbitration or in
court. The Exchange recognized that there is some potential for
bifurcation, but believes that in most instances parties will, in their
own best interests, agree to proceed in a single forum. The Exchange
also disagreed with the SIA's argument that the proposal will lead to
motion practice or forum shopping.
The Exchange also noted that it has received relatively few claims
alleging employment discrimination and only 126 since 1992 (or about
two each month). The NASD, in contrast, received 139 such claims in
1997 alone. Nevertheless, the Exchange stated that it will monitor its
actual experience under the porposal, including bifurcation, and
consider appropriate action in the future if warranted.
The Exchange further stated that its proposal represents a policy
decision not to adopt identical procedures because it receives
relatively few employment-discrimination claims. The Exchange stated
that its decision would not significantly harm securities industry
arbitration. The Exchange also noted that even though most Exchange
members and member organizations are also NASD members, the few
Exchange members that are not may still proceed with arbitration of
employment discrimination claims in another forum, such as the American
Arbitration Association.
Comments Concerning the FAA
The SIA disagreed with the Exchange's analysis of the case law
interpreting the FAA, stating that the Exchange's proposal violates the
FAA. The SIA argued that for member firms that have pre-dispute
arbitration agreements, the proposal would vitiate an otherwise valid
arbitration agreement. The Exchange disagreed. The Exchange stated that
the FAA does not mandate arbitration of all claims, but merely the
enforcement, upon motion of a party, of privately megotiated
arbitration agreements. The Exchange also noted that the FAA does not
require an arbitration provider such as the Exchange to make its forum
available to hear particular types of cases.
The Exchange also noted that the proposal would not prevent parties
with pre-dispute arbitration agreements from agreeing to arbitrate
after the dispute arises. Further, as discussed above, the Exchange
noted that the proposal neither invalidates pre-disputes arbitration
agreements nor forces parties to litigate statutory employment
discrimination claims--it merely removes the Exchange as an arbitration
forum for such claims.
Comments Concerning Other Issues
The SIA also argued that arbitration is better for plaintiffs in
employment dispute cases than litigation in Fedral court, cliting its
own study in support.\29\ The SIA said that, among other things, in
arbitration: plaintiffs prevail more frequently; claims are resolved
more quickly; and arbitration is less expensive. In its response, the
Exchange neither agreed with nor disputed these SIA statements, stating
that its proposal allows plaintiffs to choose the forum they believe is
better for them. The Exchange stated that under its proposal, statutory
employment discrimination claims are eligible for arbitration at the
Exchange if the parties agree to arbitrate after the dispute arises.
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\29\ Atached to the SIA Letter was its General Counsel's
Congressional testimony, which described the SIA study.
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Finally, one commenter suggested that voluntary post-dispute
arbitration agreements should only be encouraged if they preserve the
substantive protections and remedies afforded by statutes. The Exchange
responded that the commenter's concern was unwarranted in the post-
dispute context. It argued that any disparity in bargaining power
between the parties that exists before a dispute arises is missing
after the dispute arises, and the employee may freely agree that he or
she is better off arbitrating statutory employment discrimination
claims. The Exchange also noted that the EEOC supports post-dispute
agreements.
IV. Discussion
Under the Act, SROs like the Exchange are assigned rulemaking and
enforcement responsibilities to perform their role in regulating the
securities industry for the protection of investors and other related
purposes. Pursuant to section 19(b)(2) of the Act, the Commission is
required to approve an SRO rule change like the Exchange's if it
determines that the proposal is consistent with applicable statutory
standards.\30\ These standards include section 6(b)(5) of the Act,
which
[[Page 1054]]
provides that the Exchange's rules must be designed to, among other
things, ``promote just and equitable principles of trade'' and
``protect investors and the public interest.'' Section 6(b)(5) also
provides that the Exchange's rules may not be designed to ``regulate .
. . matters not related to the purposes of the (Exchange Act) or the
administration of the (Exchange).''
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\30\ The Commission oversees the arbitration programs of the
SROs, including the Exchange's, through inspections of the SRO
facilities and the review of SRO arbitration rules. Inspections are
conducted to identify areas where procedures should be strengthened,
and to encourage remedial steps either through changes in
administration or through the development of rule changes.
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By changing its rules, the NYSE proposal provides that statutory
employment discrimination claims are eligible for submission to
arbitration at the Exchange only if the parties agree to arbitrate the
claims after they arise. This narrow amendment to the NYSE's rules
affects only the arbitration of employment discrimination claims
between NYSE members and their employees.\31\ This proposal is
consistent with the applicable statutory standards.\32\ The statutory
employment anti-discrimination provisions reflect an express intention
that employees receive special protection from discriminatory conduct
by employers. Such statutory rights are an important part of this
country's efforts to prevent discrimination. It is reasonable for the
NYSE to make a policy determination that in this unique area it will
not, as an SRO, require or permit arbitration unless there is a post-
dispute agreement. It is also proper under the Exchange Act for one
SRO's policy determination to differ from that of another.
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\31\ The amendment in no way affects the obligation, under NYSE
rules, of Exchange members or their employees to arbitrate claims
brought by customers against them.
\32\ U.S.C. 78o-3(b)(6).
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Section 3(f), raised by one commenter, addresses issues concerning
efficiency, competition, and capital formation. The Exchange's proposal
fosters competition by providing different approaches for dispute
resolution among markets and among brokers and dealers.
The benefits of the Exchange's proposal to employees with
employment discrimination claims and to the employer/employee
relationship are clear. The Exchange's provision of an arbitration
forum for employment discrimination disputes where the parties choose
arbitration after the dispute arises is consistent with section 3(f).
With respect to the bifurcation issue raised by the commenters, the
Supreme Court, in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 217
(1985), acknowledged the appropriateness of bifurcation between federal
statutory and pendant state law claims. The Exchange noted in its
response that there is a potential for bifurcation in some cases.
However, in many instances it is likely that parties will agree to
proceed in a single forum. The Commission notes that the Exchange
stated that it will monitor its actual experience under the proposal,
including bifurcation, and consider appropriate action in the future if
warranted.
The proposal is not, as one commenter suggested, inconsistent with
the FAA. The FAA does not mandate that all claims be arbitrated. The
FAA provides that privately negotiated arbitration agreements should be
enforced, upon motion of a party. Further, the FAA does not require an
arbitration provider such as the Exchange to make its forum available
to hear particular types of cases.
With respect to other comments that suggested that the NYSE should
enact other rules concerning employer/employee arbitration agreements
or extend this rule to other causes of action, these issues are left to
the NYSE to consider in the first instance.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Exchange Act,\33\ that the proposal, SR-NYSE-98-28 be and hereby is
approved.
\33\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-299 Filed 1-6-99; 8:45 am]
BILLING CODE 8010-01-M
