Self Regulatory Organizations; Notice of Filing of Proposed Rule Changes by the New York Stock Exchange, Inc. Relating to Arbitration Rules

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]

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