Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Granting Approval to Proposed Rule Change Relating to the Arbitration of Employment Discrimination Claims

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

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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

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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