[Federal Register Volume 63, Number 124 (Monday, June 29, 1998)]
[Notices]
[Pages 35299-35303]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17150]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40109; File No. SR-NASD-97-77]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Approval to Proposed Rule Change Relating
to the Arbitration of Employment Discrimination Claims
June 22, 1998.
I. Introduction
On October 17, 1997, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association''), by and through its wholly
owned subsidiary NASD Regulation, submitted to the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Rule 10201 of the NASD's
Code of Arbitration Procedure (``Code'') to remove the requirement to
arbitrate statutory claims of employment discrimination.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Notice of the proposed rule change, together with the substance of
the proposal, was published for comment in Securities Exchange Act
Release No 39421 (December 10, 1997), 62 FR 66164 (December 17, 1997).
Nine comment letters were received on the proposal.\3\ NASD Regulation
subsequently filed Amendment No. 2 to the proposed rule filing on April
15, 1998.\4\
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\3\ Letter from Dennis C. Vacco, Attorney General of the State
of New York (``Attorney General''), to Jonathan G. Katz, Secretary,
Commission, dated December 17, 1997 (``Attorney General Letter'');
Gilbert F. Casellas, Chairman, U.S. Equal Employment Opportunity
Commission (``EEOC''), to Secretary, Commission, (``EEOC Letter'');
Jeffrey L. Liddle, Liddle & Robinson, L.L.P., to Secretary,
Commission, dated January 2, 1998 (``Liddle Letter''); W. Hardy
Callcott, Vice President and Deputy General Counsel, Charles Schwab
(``Schwab''), to Jonathan G. Katz, Secretary, Commission, dated
January 6, 1997 [sic] (``Schwab Letter''); William J. Fitzpatrick,
Attorney, to Secretary, Commission, dated January 8, 1997 [sic]
(``Fitzpatrick Letter''); Stuart J. Kaswell, Senior Vice President
and General Counsel, Securities Industry Association (``SIA''), to
Jonathan G. Katz, Secretary, Commission, dated January 13, 1998
(``SIA Letter''); Helen Norton, Director, Equal Opportunity
Programs, Women's Legal Defense Fund (``WLDF''), to Jonathan G.
Katz, Secretary, Commission, dated January 7, 1998 (``WLDF
Letter''); Cliff Palefsky, Chair, Securities Industry Arbitration
Committee, National Employment Lawyers Association (``NELA''), to
Secretary, Commission, dated January 6, 1998 (``NELA Letter''); and
George A. Schieren, Senior Vice President and General Counsel,
Merrill Lynch, to Jonathan G. Katz, Secretary, Commission, dated
January 16, 1998 (``Merrill Letter'').
\4\ Letter from Jean I. Feeney, Attorney, NASD Regulation, to
Katherine A. England, Assistant Director, Market Regulation,
Commission, dated April 14, 1998. Amendment No 2 amends the language
of the proposed rule change in Section 10201(b) of the code to state
``A claim alleging employment discrimination, including a sexual
harassment claim, [or sexual harassment] in violation of a statute
is not required to be arbitrated.'' Amendment No. 2 also amends the
effective date of the proposed rule change to January 1, 1999. In
addition, Amendment No. 2 responds to the comment letters.
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II. Description
The proposed rule change will modify the current requirement that
associated persons arbitrate all disputes arising out of their
employment or termination of employment with a member broker/dealer.
The proposed rule provides that associated persons are no longer
required, solely by virtue of their association or their registration
with the NASD, to arbitrate claims of statutory employment
discrimination. Associated persons still will be required to arbitrate
other employment-related claims, as well as any business-related claims
involving investors or other persons.
Background
The requirement for associated persons to register with the NASD
arises from Section 15A(g)(3)(B) of the Act, which provides that the
NASD may ``require a natural person associated with a member, or any
class of such natural persons, to be registered with the association in
accordance with procedures so established [by the rules of the
association].'' The registration requirement for associated persons who
effect securities transactions was made mandatory by Rule 15b7-1 under
the Act in 1993.\5\ The NASD, other self-regulatory organizations
(``SROs''), and
[[Page 35300]]
state regulatory authorities require all applicants for registration as
persons associated with a broker/dealer (registered representatives,
assistant representatives or principals) to complete and sign the Form
U-4, the ``Uniform Application for Securities Industry Registration or
Transfer.'' \6\ Form U-4 requires registered persons to submit to
arbitration any claim that is eligible under the rules of the
organizations with which they register (as indicated in Item 10 of the
Form U-4).\7\ thus, the Form U-4 incorporates by reference the rule of
the SRO with which the individual is to be registered. NASD Rule 10101
provides as follows:
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\5\ 17 CFR 240.15b7-1. The rule provides as follows:
No registered broker or dealer shall effect any transaction in,
or induce the purchase or sale of, any security unless any natural
person associated with such broker or dealer who effects or is
involved in effecting such transaction is registered or approved in
accordance with the standards of training, experience, competence,
and other qualification standards (including but not limited to
submitting and maintaining all required forms, paying all required
fees, and passing any required examinations) established by the
rules of any national securities exchange or national securities
association of which such broker or dealer is a member or under the
rules of the Municipal Securities Rulemaking Board (if it is subject
to the rules of that organization).
\6\ The Form U-4 was adopted effective October 1, 1975.
\7\ The relevant language on the Form U-4 states:
I agree to arbitrate any dispute, claim or controversy that may
arise between me and my firm, or a customer, or any other person,
that is required to be arbitrated under the rules, constitutions, or
by-laws of the organizations indicated in Item 10 as may be amended
from time to time and that any arbitration award rendered against me
may be entered as a judgment in any court of competent jurisdiction.
From page 4 of the Form U-4 as revised in November 1991. A new
version of the Form U-4 was approved by the Commission on July 5,
1996. Securities Exchange Act Release No. 37407 (July 5, 1996), 61
FR 36595 (July 11, 1996). Use of the revised form has been deferred
pending related changes to the Central Registration Depository
(``CRD''). Securities Exchange Act Release No. 37994 (November 27,
1996), 61 FR 64549 (December 5, 1996). The substance of the quoted
language was not changed in the revision.
The Code of Arbitration Procedure is prescribed * * * for the
arbitration of any dispute, claim, or controversy arising out of or
in connection with the business of any member of the Association, or
arising out of the employment or termination of employment of
associated person(s) with any member, with the exception of disputes
involving the insurance business of any member which is also an
insurance company * * * between or among members and associated
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persons * * *.
For industry and clearing controversies, Rule 10201 requires that all
matters eligible under Rule 10101 be submitted to arbitration at the
request of any member or associated person.\8\ Rules 10101 and 10201
were amended in 1993 to include the language relating to disputes
``arising out of the employment or termination of employment'' of an
associated person.\9\ This language was added in order to clarify that
employment disputes were required to be arbitrated, since a California
court had held that the Code of Arbitration Procedure did not cover
such disputes, but only covered disputes arising out of or in
connection with business transactions.\10\
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\8\ As one court explained, ``Section 1 [now Rule 10101] defines
the general universe of issues that may be arbitrated, and Section 8
[now Rule 10201] describes a subset of that universe that must be
arbitrated under the Code.'' Armijo v. Prudential Ins. Co. of Am.,
72 F.3d 793, 798 (10th Cir. 1995).
\9\ Securities Exchange Act Release No. 32802 (August 25, 1993),
58 FR 45932 (August 31, 1993). In its order approving this change
and a related change in the composition of arbitration panels to
hear employment disputes, the Commission recognized that claims
based on allegations of age, sex, or race discrimination, or
relating to sexual harassment, were subject to the arbitration
requirement.
\10\ Higgins v. Superior Court of Los Angeles County, No.
B057028 (Cal. App. Oct. 8, 1991), review denied and decision ordered
not officially published, 1 Cal. Rptr. 2d 57 (1992). The state court
noted the difference between the NYSE rule (at issue in the Supreme
Court's Gilmer decision, discussed below), which refers to disputes
arising out of the employment or termination of employment of an
associated person, and the NASD rule, which at the time did not
contain the phrase relating to employment. A federal court reached
the same conclusion while the rule change was pending approval.
Farrand v. Lutheran Bhd., 993 F.2d 1253 (7th Cir. 1993). The
Association stated in its rule filing that the amendment was a
clarification of existing intent rather than a new policy; some
courts accepted this view, while other courts interpreted the rule
amendment as a change in policy. See Kuehner v. Dickinson & Company,
84 F.3d 316, 320 n.1 (9th Cir. 1996) (describing splits in the
Seventh, Tenth and Eleventh Circuits on this issue).
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Over the past several years, employees have raised several
challenges to the mandatory arbitration of employment discrimination
disputes. In 1991, the Supreme Court established the framework for
considering the issues raised by such challenges in Gilmer v.
Interstate/Johnson Lane Corp.\11\ In Gilmer, which involved a person
registered with the New York Stock Exchange, the Court examined
numerous challenges to the adequacy of arbitration procedures raised by
the registered representative and found that none was sufficient to
prevent the Court from enforcing the representative's agreement,
pursuant to his signing of the Form U-4, to arbitrate his federal age
discrimination claim. The Court held that Mr. Gilmer had not met his
burden of showing that Congress intended to preclude arbitration of
claims under the Age Discrimination in Employment Act (``ADEA'') of
1967.\12\
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\11\ 500 U.S. 20 (1991). Those challenges included contentions
that anti-discrimination laws are designed to further important
social policies that should be addressed in a public forum, that
arbitration panels may be biased, that discovery is more limited in
arbitration than in court, that arbitrators often do not issue
written opinions, that arbitration procedures do not provide for
broad equitable relief and class actions, and that there is unequal
bargaining power between employers and employees. The Court noted
the most of these contentions were generalized attacks on
arbitration that had been rejected in prior Supreme Court decisions.
Id. at 30.
\12\ Id. at 35. The Court cited its earlier holding that, ``So
long as the prospective litigant effectively may vindicate [his or
her] statutory cause of action in the arbitral forum, the statute
will continue to serve both its remedial and deterrent function.''
500 U.S. at 28, quoting Mitsubishi Motors Corp. v. Soler Chrysler-
Plymouth, Inc., 473 U.S. 614, 637 (1985).
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Subsequent to the Glimer decision, several courts have declined to
find a Constitutional or statutory bar to enforcement of the agreement
to arbitrate contained in the Form U-4. Indeed, they have extended the
reasoning of Glimer to cover disputes arising under Title VII of the
Civil Rights Act of 1964,\13\ the Americans with Disabilities Act,\14\
and state statutes of a similar nature.\15\ Courts also have extended
the application of Glimer to the NASD, since its rules are similar to
the NYSE rule at issue Glimer,\16\ The Commission notes, however, that
the U.S. Court of Appeals for the Ninth Circuit, in Duffield v.
Robertson Stephens & Co., 1998 U.S. App. Lexis 9284 (9th cir. 1998),
recently held that Item 10 of Form U-4, incorporating the current
mandatory provision of Rule 10101 and 10201, is unenforceable as
applied to Title VII claims.
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\13\ 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.Ill. 1997). But see Rosenberg v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 1998 U.S. Dist. Lexis
877 (D.Mass. 1998).
\14\ See, e.g., Austin v. Owens-Brockway Glass Container, Inc.,
78 F.3d 875, 881 (4th Cir.), cert. denied, 117 S. Ct. 432 (1996).
\15\ See, e.g., Kaliden v. Shearson Lehman Hutton, Inc., 789 F.
Supp. 179, 180 (W.D. Pa. 1991).
\16\ See, e.g., Metz v. Merril Lynch Pierce, Fenner & Smith,
Inc., 39 F.3d 1482, 1488 (10th Cir. 1994).
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Registered persons and others have continued to question the policy
of requiring the arbitration of statutory discrimination claims.\17\ In
February of 1997, three members of Congress wrote to the SEC and
questioned the authority of the NASD and other SROs to require
arbitration of statutory discrimination claims in employment disputes
through an associated person's signing of the Form U-4.\18\ Legislation
was introduced that year in both the House and Senate \19\ that would
prohibit employers and employees from entering into predispute
arbitration agreements concerning claims of unlawful employment
discrimination.\20\
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\17\ See, e.g., Commission on Future of Worker-Management
Relations (``Dunlop Commission''), Report and Recommendations 33
n.15 (1994); Equal Employment Opportunity Commission, Policy
Statement on Mandatory Binding Arbitration of Employment
Discrimination Disputes as a Condition of Employment n.2 (1997).
\18\ Letter from Representatives Edward J. Markey, Anna G.
Eshoo, and Jesse L. Jackson, Jr., to Arthur Levit, Chairman, SEC
(February 3, 1997). The Commission's Division of Market Regulation
determined that there was no clear answer and suggested that the
SROs should address the issue in the first instance.
\19\ H.R. 983 and S. 63, 105th Cong. (1997).
\20\ Under the proposed legislation, the parties could agree,
after a dispute arose, whether to resolve it by arbitration or by
court proceedings.
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[[Page 35301]]
Details of the Proposed Rule Change
Paragraph (a) of the proposed rule adds a prefatory phrase
indicating that the requirement to arbitrate employment disputes
contains an exception, set forth in paragraph (b).
New paragraph (b) provides that claims alleging employment
discrimination, including sexual harassment, in violation of a statute
are not required to be arbitrated by NASD rules.\21\ This means that
such claims may be filed in the appropriate court, if the employee
chooses to do so and is not under an enforceable predispute obligation
to arbitrate the dispute. An employee also may agree to arbitrate after
a dispute arises.\22\
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\21\ See Amendment No. 2, supra note 4.
\22\ A report by the NASD's Arbitration Policy Task Force
(``Task Force Report'') observed that arbitration of employment-
related disputes offers advantages in terms of speed and cost, and
that arbitration's essentially equitable approach to dispute
resolution is fully capable of vindicating the important public
rights expressed in anti-discrimination statutes. Task Force Report
at 119. Therefore, the NASD expects that many employees will
continue to file their discrimination claims in arbitration if the
proposed rule becomes effective, and the NASD states that it intends
to make further enhancements to its arbitration forum to make it
even more attractive to parties. Firms and their employees who agree
to arbitrate discrimination claims may agree to use any arbitration
forum.
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Paragraph (b) applies only to claims alleging employment
discrimination, including sexual harassment,\23\ in violation of a
statute.\24\ Paragraph (b) does not apply to causes of action created
solely by judicial precedents or to other causes of action under state
or federal law, which remain subject to mandatory arbitration under
paragraph (a).\25\
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\23\ Sexual harassment has been held to be a form of sex
discrimination, and thus a violation of Title VII. Meritor Savings
Bank v. Vinson, 477 U.S. 57, 64 (1986).
\24\ The NASD intends the term ``statute'' to be interpreted
broadly, as defined in Black's Law Dictionary 1410 (6th Ed. 1990):
``A formal written enactment of a legislative body, whether federal,
state, city, or county.''
\25\ Such judicially created causes of action might include, for
example, claims alleging ``wrongful discharge'' without any
accompanying claim of discrimination on account of age, sex, race,
or other status protected by a specific law.
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Paragraph (c) of the proposed rule is former paragraph (b), which
is unchanged except for the renumbering.
Effective Date
The NASD originally requested that the proposed rule become
effective one year from the date of Commission approval. However, the
NASD is now asking that the proposed rule change become effective on
January 1, 1999.\26\ NASD Regulation states that the rule change will
apply to claims filed on or after the effective date of the rule
change.\27\ NASD Regulation states that this method is the one most
commonly used with regard to changes to the Code and is the most
efficient to administer.
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\26\ See Amendment No. 2, supra note 4.
\27\ Accordingly, under the proposal, on January 1, 1999, claims
may be filed in court for past conduct if they are within the
applicable statutes of limitation and other statutory requirements
and no other predispute arbitration agreements apply.
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III. Summary of Comments
The Commission received nine comment letters on the proposed rule
change. Six commenters supported the proposed rule change, with
recommended modifications. Three commenters opposed the proposed rule
change.\28\ The comment letters focused on three main issues: (1)
whether the rule will lead to the bifurcation of claims in arbitration
and in court; (2) whether the one-year delayed effective date was
appropriate; and (3) whether the rule should be amended to permit only
post-dispute agreements to arbitrate. NASD Regulation responded to the
comment letters.\29\
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\28\ Liddle Letter; Fitzpatrick Letter; Schwab Letter.
\29\ See Amendment No. 2, supra note 4.
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Overview of the Proposed Rule Change
Many of those who support the proposed rule change do so because
they believe employment discrimination claims do not belong in
arbitration. The EEOC, for example, applauded the proposal as a ``first
step'' toward bringing the securities industry into harmony with the
intent of federal anti-discrimination statutes. The WLDF asserted that
it will help protect important civil rights. NELA argued that the NASD
does not have the jurisdiction to compel the waiver of fundamental
statutory rights and remedies as a condition of employment, and that
statutory claims of this sort do not belong in the present arbitration
system. The New York Attorney General supported the proposed rule
change, maintaining that industry arbitrators lack training and
experience relating to interpreting and applying employment
discrimination law.
One commenter opposed the proposed rule change, contending that it
is against public policy, is contrary to case law and federal
legislation encouraging the use of arbitration, ignores the concerns of
courts,\30\ and undermines a long history of a system of SRO
arbitration of employment matters without any empirical evidence of a
problem.\31\ Similarly, Schwab stated that although it is willing to
resolve statutory discrimination claims in court, because arbitration
is the preferable forum, it does not support the proposed rule change
in its current form. In Schwab's view, arbitration is fundamentally
fair as a dispute resolution process and the NASD should address any
concerns by working to improve the process, not by removing some
classes of cases from the process.\32\ On the other hand, one commenter
opposed the proposed rule change as not going far enough. He maintained
that the Commission should prohibit arbitration of all employment
claims in any instance.\33\
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\30\ Fitzpatrick Letter.
\31\ Id. the SIA also noted that critics of the arbitration
process have not offered any empirical data to support a claim that
SRO arbitration is not a fair forum for employees to resolve
statutory employment discrimination claims and employees actually do
better in arbitration than in overcrowded court systems.
\32\ Schwab noted that the NASD did state its intent to provide
increased training in employment related issues to arbitrators and
to assign arbitrators based on their subject-matter expertise.
\33\ Liddle Letter. He stated that the decision to exclude
statutory employment claims from mandatory arbitration reflects the
NASD's view that its arbitration process is not suited to handle
resolution of these claims because it is fundamentally unfair and
does not afford a claimant with an employment claim a full and fair
opportunity to vindicate his or her rights.
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NASD Regulation responded that its arbitration forum is fair and
that it provides many benefits to employees as well as to members, and
that the proposed rule change does not in any way indicate a lack of
confidence in the current arbitration system.
Comments Concerning Bifurcation of Claims
Several letters voiced concerns that, as presently drafted, the
rule presents the possibility that claimants will be required to pursue
different claims in different forums. A number of commenters asserted
that the proposal should be expanded to cover all common law claims
concerning employment-related matters,\34\ such as wrongful
termination, defamation, negligent supervision, invasion of privacy,
tortious interference with economic opportunity, and intentional
infliction of emotional distress.\35\ Those commenters argued that
since the proposed rule change allows the statutory discrimination
claims to be brought in court, while requiring employees to bring the
common law and all other statutory claims in arbitration, it will
result in the separation of claims that are often joined together and
based
[[Page 35302]]
on the same alleged facts.\36\ In their view, such bifurcation of the
statutory and common law claims could create a financial burden on
employees \37\ and members or member firms,\38\ delay the resolution of
claims,\39\ and cause scheduling and discovery disputes.\40\ Several
commenters also voiced concerns about the possible res judicata or
collateral estoppel effects of the arbitration on the court
proceeding.\41\
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\34\ Attorney General Letter; Liddle Letter. Another commenter
stated that the proposed rule change should be expanded to cover all
statutory employment rights, including those under ERISA, the Family
and Medical Leave Act, and other laws. WLDF Letter.
\35\ Attorney General Letter.
\36\ Attorney General Letter; Liddle Letter; Schwab Letter;
Fitzpatrick Letter.
\37\ Liddle Letter.
\38\ Schwab Letter. Schwab noted that the court case and
arbitration case might occur in different states, requiring
different lawyers and further increasing the costs of final
resolution.
\39\ Attorney General Letter; Liddle Letter; Schwab Letter.
\40\ Schwab Letter. In addition, Schwab observed that parties
may file pretextual claims in court to gain the advantage of more
liberal discovery in court than in arbitration, or that multiple
proceedings may result in orders that conflict with one another.
Schwab argued that, because it is more likely that arbitrations and
investigations will now occur at the same time because the
arbitration necessarily will not resolve the discrimination claims,
the proposal creates the potential for conflict between
investigations by the EEOC or comparable state or local agencies,
and arbitrations. Schwab also maintained that parties to arbitration
would then subpoena the investigatory files and submit the
information to the arbitration panel, who are likely to
misunderstand the information in those files, which may be gathered
without due process or significant input from the parties involved.
Schwab suggested that EEOC and comparable state investigative files
should not be subject to discovery or admissible as evidence in
arbitration.
\41\ Liddle Letter; Schwab Letter.
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NASD Regulation responded that the proposed rule change is an
exception to a long-standing rule requiring the arbitration of disputes
between members and associated persons and that the interest groups who
expressed their concerns focused on federal anti-discrimination
legislation, not on common law claims or other federal laws. In
addition, NASD Regulation stated it will continue to observe
developments in this area (as will the Commission).
Comments Concerning the Effective Date
Several commenters recommended that the proposal become effective
earlier than one year after Commission approval.\42\ Several commenters
suggested immediate effectiveness,\43\ while one suggested
effectiveness three months after Commission approval.\44\ The EEOC was
of the view that the rule should be effective immediately upon
Commission approval because securities industry employees should not be
locked into an agreement that conflicts with the principles underlying
the anti-discrimination laws. The EEOC was not persuaded otherwise by
the NASD's justification that a one-year delay will allow it to improve
its arbitral forum \45\ and stated that the NASD can still pursue those
steps notwithstanding an immediate effective date. The EEOC stated that
existing deficiencies in the arbitral process militate against delaying
the effective date. The EEOC was concerned that the year delay will
allow firms time to implement their own mandatory arbitration
agreements to replace the requirement eliminated by the NASD.
Similarly, NELA's view is that the real purpose of the waiting period
is to allow member firms time to implement their own mandatory
arbitration requirements in employee contracts in order to circumvent
the positive benefits of the rule change. The WLDF objected to the one-
year waiting period because it argued that victims of sexual harassment
and other forms of illegal discrimination will continue to be denied
important safeguards, while NELA opposed the one year waiting period as
being inconsistent with the purpose and spirit of the proposal and
stated it would be unconscionable to keep in place for a year a system
that is ``admittedly inadequate'' for the resolution of statutory
discrimination claims.
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\42\ Attorney General Letter; EEOC Letter; WLDF Letter; NELA
Letter.
\43\ EEOC Letter; WLDF Letter; NELA Letter.
\44\ Attorney General Letter.
\45\ The NASD stated that it intended to improve the arbitration
process to ensure procedural adequacy and to safeguard employee
rights, including providing for greater disclosure to employees of
the effect of signing the Form U-4, the features of arbitration, and
their rights under the proposed rule.
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On the other hand, the SIA and Merrill Lynch supported the one-year
phase in period.\46\ The SIA stated that employees and firms need time
to consider what agreements they may wish to enter into with each other
and that firms need time to consider and implement the changes. The SIA
also noted that the NASD intends to use the year to enhance the quality
of its arbitration programs, to increase the level of confidence that
employees have in the fairness of the NASD arbitration forum, and to
work with other regulators to consider whether other change sin the
industry registration process are warranted. The SIA argued that the
proposal does not need to be implemented immediately to protect
employee rights because (1) the Supreme Court has stated that parties
who agree to arbitrate their claims do not forgo any substantive
statutory rights, and (2) it is not true that arbitration is improper
and unfair to employees. Similarly, Merrill Lynch supported a one-year
waiting period because, in its view, arbitration is not unfair, as
found by the Supreme Court in Gilmer, and employees fare better in SRO
arbitration than in court. Merrill Lynch stated that because the
proposed rule change represents a significant change in industry
practice, other SROs (who have not followed the NASD's lead in this
area) and the industry need time to resolve the issues created by the
new rule.\47\
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\46\ Fitzpatrick, who oppose the proposed rule change,
nevertheless supported the one-year period in the event the
Commission approves the proposed rule change.
\47\ Schwab requested that the NASD and the Commission clarify
precisely how the one-year effective date is intended to operate.
Schwab questioned whether the proposed rule change will apply to any
court case filed more than a year form the approval of the proposal
(which could encourage people to wait to file a case), or whether it
will apply only to employees who sign the Form U-4 after one year
has passed (which would result in different employees having
different rights in incidents occurring at the same time).
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NASD Regulation responded that the publicity that has surrounded
the proposed rule has always included the fact that the rule would take
effect one year after Commission approval, so firms and employees have
not been on notice that they should act more quickly. NASD Regulation
also stated that making the rule change effective shortly after
Commission approval would be problematic because other SROs that
require arbitration of employee/employer disputes may wish to amend
their rules to be consistent with the NASD and this process could take
several months. Nonetheless, the NASD stated that it understands the
desirability of a definitive effective date and moved the effective
date to January 1, 1999. In the view of NASD Regulation, this date
gives other SROs, members and employees sufficient time to take action
to respond to the rule.
With regard to the significance of the effective date, NASD
Regulation stated that the rule change will apply to claims filed on or
after the effective date of the rule change. NASD Regulation asserted
that this method is the one most commonly used with regard to changes
to the Code and is the most efficient to administer, as it does not
involve subsidiary determinations as to the dates of other
transactions.
Comments Concerning Voluntary Post-Dispute Agreements
Several commenters argue that pre-dispute agreements to arbitrate
should not be allowed because they are never truly voluntary,\48\
because of the
[[Page 35303]]
unequal bargaining power of employers and employees,\49\ and because
they are contrary to the fundamental principles reflected in this
nation's anti-discrimination laws.\50\ These commenters argued that the
Commission should only allow agreements that are truly voluntary and
that are entered into after a dispute has arisen.\51\ In addition, one
commenter supported voluntary post-dispute agreements to arbitrate
employment disputes only to the extent that such agreements preserve
the substantive protections and remedies afforded by statute, and
argued that the NASD should amend its proposal to include such
protections.\52\
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\48\ Attorney General Letter; EEOC Letter. The Attorney General
further stated that opposition to pre-dispute arbitration agreements
is widespread, including some members of Congress, the EEOC, and the
Commission on the Future of Worker-Management Relations (``Dunlop
Commission''). Legislation was introduced in the House and the
Senate that would prohibit parties from entering into agreements to
resolve employment discrimination claims unless they voluntarily
enter into them after such claims arise.
\49\ Attorney General Letter.
\50\ EEOC Letter.
\51\ Attorney General Letter; EEOC Letter; Liddle Letter.
\52\ Attorney General Letter. NASD Regulation responded that the
content of private arbitration agreements is not germane to the
proposed rule change, which simply removes the arbitration
requirement imposed through the signing of the Form U-4 from the
NASD's rules.
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The NASD Regulation stated it considered the above issues and does
not take a position on the desirability of private arbitration
agreements between members and their employees, but instead simply
determined to remove from its rules the mandatory requirement as to
claims of statutory employment discrimination.
IV. Discussion
Under the Act, SROs, like the NASD, 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 a rule change of an SRO like the NASD if it
determines that the proposal is consistent with applicable statutory
standards.\53\ These standards include Section 15A(b)(6) of the Act,
which provides that the NASD's rules must be designed to, among other
things, ``promote just and equitable principles of trade;'' and
``protect investors and the public interest.'' Section 15A(b)(6) also
provides that the NASD's rules may not be designed to ``regulate * * *
matters not related to the purposes of the [Exchange Act] or the
administration of the [NASD].''
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\53\ the Commission oversees the arbitration programs of the
SROs, like the NASD, 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 rule, the NASD will no longer require associated
persons, solely by virtue of their association or registration with the
NASD, to arbitrate claims of statutory employment discrimination.
NASD's proposal is consistent with the applicable statutory
standards.\54\ The statutory employment anti-discrimination provisions
reflect an express intention by legislators 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 NASD to determine that
in this unique area, it will not, as a self-regulatory organization,
require arbitration.
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\54\ 15 U.S.C. 78o-3(b)(6).
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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), acknowledge the appropriateness of bifurcation between federal
statutory and pendant state law claims.
With respect to the issue raised by commenters of whether the rule
should be effective immediately or have a delayed effective date,
notwithstanding this rule change by the NASD, other SROs continue to
have rules that will require employees of their members to arbitrate
statutory discrimination claims. The NASD's decision to move the
effective date from one year after approval of the proposed rule change
to January 1, 1999 is a reasonable compromise. The January 1, 1999 date
will permit other SROs to change their rules as the NASD has done, so
that employees of member firms of other SROs will not be required to
arbitrate these claims.
With respect to other comments that suggested that the NASD should
enact other rules concerning employer/employee arbitration agreements
or extend this rule to other causes of action, these issues are left to
the NASD to consider in the first instance.
In approving this rule, the Commission notes that it has considered
the proposed rule's effects upon efficiency, competition, and capital
formation.\55\
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\55\ 15 U.S.C. 78c(f).
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Amendment No. 2 is a technical amendment; it changes the rule
language to clarify that sexual harassment is a form of sex
discrimination prohibited under Title VII (as well as certain state
statutes). This change will make it clear to the securities industry
that sexual harassment claims are encompassed within the term
``employment discrimination'' claims. In addition, as discussed more
fully above, Amendment No. 2 also amends the effective date of the
proposal to an earlier date, while at the same time still allowing
enough time for members and member firms to consider and implement the
changes.\56\
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\56\ Because Amendment No. 2 is technical in nature, it is not
subject to a notice and comment requirement.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\57\ that the proposed rule change, as amended, (SR-NASD-97-77) is
approved.
\57\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\58\
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\58\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-17150 Filed 6-26-98; 8:45 am]
BILLING CODE 8010-01-M
