[Federal Register Volume 63, Number 190 (Thursday, October 1, 1998)]
[Notices]
[Pages 52782-52784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26235]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40479; File No. SR-NYSE-98-28]
Self Regulatory Organizations; Notice of Filing of Proposed Rule
Changes by the New York Stock Exchange, Inc. Relating to Arbitration
Rules
September 24, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on September 15, 1998 the New York Stock Exchange, Inc.
(``NYSE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') the proposed rule changes as
described in Item I, II and III below, which Items have been prepared
by the Exchange. The Commission is publishing this notice to solicit
comments on the proposed rule changes from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Changes
The proposed amendments to NYSE Rules 347 and 600 will 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. The text of the proposed
rule changes are as follows (additions are italicized, deletions are
bracketed.)
* * * * *
NYSE Rule 347. Controversies As to Employment or Termination of
Employment
(a) Except as provided in paragraph (b), [A]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.
(b) 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.
NYSE Rule 600. Arbitration
(f) Any claim alleging employment discrimination, including any
sexual harassment claim, in violation of a statute shall be eligible
for submission to arbitration under these Rules only where the parties
have agreed to arbitrate the claim after it has arisen.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule changes. The
text of these statements may be examined at the places specified in
Item IV below and is set forth in Sections A, B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
1. Purpose
The purpose of the proposed rule changes is to:
Exclude any claim alleging employment discrimination,
including any sexual harassment claim, in violation of a statute from
the requirement that all employment disputes between a registered
representative and a member or member organization be arbitrated,
except where the parties agree to arbitrate the claim after it has
arisen. (NYSE Rule 347)
Provide that any claim alleging employing discrimination,
including any sexual harassment claim, in violation of a statute shall
be eligible for submission to arbitration only where the parties have
agreed to arbitrate the claim after it has arisen. (NYSE Rule 600)
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.\3\ 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 is required
to be arbitrated under the rules of the self-regulatory organizations
with which they register.
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\3\ 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. Beginning with the Supreme
Court's decision in Gilmer v. Interstate/Johnson Lane,\4\ claims
alleging employment discrimination, including sexual harassment claims,
were compelled to arbitration.
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\4\ 500 U.S. 20 (1991). In Gilmer, the Court held that a
registered representative could be compelled to arbitrate his claim
under the Age Discrimination in Employment Act (``ADEA'') pursuant
to Form U-4 and NYSE Rule 347.
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In 1994, the General Accounting Officer (``GAO'') conducted a study
on the arbitration of employment discrimination disputes in the
securities industry.\5\ While the GAO Report did not address the
adequacy of arbitration as a means of resolving employment
discrimination disputes, it made several recommendations for improving
the arbitration process. The recommendation included specialized
training of arbitrators in discrimination law and the appointment of
more women and minorities as arbitrators.
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\5\ Employment Discrimination: How Registered Representatives
Fare in Discrimination Disputes (GAO/HEHS-94-17, March 30, 1994).
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Despite steps to improve the process, registered representatives
and others continue to oppose mandatory 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
[[Page 52783]]
discrimination claims are inconsistent with the purpose of the federal
civil rights laws.\6\
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\6\ EEOC Notice No. 915.002, July 10, 1997.
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Two federal court cases decided in 1998 support the EEOC's
position. In January 1998, a Massachusetts district court in Rosenberg
v. Merrill Lynch \7\ 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. In May 1998, the Court of Appeals for the Ninth
Circuit held, in Duffield v. Robertson Stephens & Company,\8\ 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 discrimination claims pursuant to Form U-4.
Prior to these decisions, federal courts had consistently upheld the
arbitration of employment discrimination claims pursuant to the Form U-
4.
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\7\ 76 FEP 681 (D. Mass. 1998).
\8\ 1998 WL 227469 (9th Cir.).
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On October 17, 1997, the National Association of Securities
Dealers, Inc. (``NASD'') submitted to the Commission a proposed rule
changes to remove the requirement from its rules that registered
representatives must arbitrate statutory employment discrimination
claims.\9\ Under the NASD's proposal, an employee could file such a
claim in court unless he was obligated to arbitrate pursuant to a
separate agreement entered into either before or after the dispute
arose.
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\9\ Exchange Act Release No. 39421 (December 10, 1997), 62 FR
66164 (December 17, 1997).
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In announcing the approval of the NASD rule amendment, SEC Chairman
Arthur Levitt ``encourage[d] the other SROs to promptly change their
rules to conform to those of the NASD.'' \10\ The Commission's order
stated that the NASD intends to make changes to its arbitration program
to make arbitration more attractive to parties for the resolution of
discrimination claims.\11\ The NASD previously created a ``Working
Group'' that includes attorneys who represent employees, member firms
and neutrals. The group is developing proposals and will be
recommending changes to the NASD's arbitration procedures for
discrimination cases. A representative of the Exchange is participating
as an observer in the Working Group's discussion.
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\10\ SEC News Release 98-61, June 23, 1998.
\11\ Exchange Act Release No. 40109 (June 22, 1998), 63 FR 35299
(June 29, 1998).
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The Exchange is following Chairman Levitt's suggestion by proposing
an amendment to NYSE Rule 347. The amendment will create an exception
to the NYSE rule that requires arbitration of all employment-related
claims of 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 claims, in violation of
a statute shall be eligible for arbitration only where the parties have
agreed to arbitrate the claim after it has arisen.'' \12\
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\12\ 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, the Exchange is going further by proposing rule
amendments under which statutory discrimination claims will not be
eligible for arbitration pursuant to any pre-dispute agreement to
arbitrate. This action brings the Exchange's arbitration policy into
conformity with the EEOC's ``Policy Statement on Mandatory Binding
Arbitration of Employment Discrimination Disputes as a Condition of
Employment.'' \13\
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\13\ 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 reiterated 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.''
\14\
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\14\ 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
organization, pursuant to any written agreement to arbitrate or upon
the demand of the customer or non-member.\15\ 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
Gillmer decision, the Exchange has received an average of 18
discrimination claims a year.\16\
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\15\ 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.''
\16\ 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'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.
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,
post-dispute, to resolve their statutory employment discrimination
claims through arbitration.
Some employment disputes may contain both 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 will be heard in a
forum other than the Exchange, such as court, while any claims subject
to arbitration may continue to be heard at
[[Page 52784]]
the Exchange.\17\ 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.\18\
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\17\ 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.
\18\ See Duffield v. Robertson Stephens & Company, 1998 WL
227469 (9th Cir.).
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2. Statutory Basis
The proposed changes are consistent with Section 6(b)(5) of the
Exchange Act in that they promote just and equitable principles of
trade by insuring that members and member organizations and the public
have a fair and impartial forum for the resolution of their disputes.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule changes will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Changes Received from Members Participants or Others.
The Exchange has neither solicited nor received written comments on
the proposed rule changes.
III. Date of Effectiveness of the Proposed Rule Changes and Timing
for Commission Action
Within 35 days of the date of 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 Exchange consents, the Commission will:
(A) By order approve the proposed rule changes, or
(B) Institute proceedings to determine whether the proposed rule
changes should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
changes is consistent with the Exchange Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 5th Street, NW, Washington, DC
20549. Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule changes that are filed
with the Commission, and all written communications relating to the
proposed rule changes 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 in the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the NYSE. All submissions should refer to File No.
SR-NYSE-98-28 and should be submitted by October 22,1 998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-26235 Filed 9-30-98; 8:45 am]
BILLING CODE 8010-01-M
