[Federal Register Volume 63, Number 190 (Thursday, October 1, 1998)]
[Notices]
[Pages 52782-52784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26235]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40479; File No. SR-NYSE-98-28]


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

September 24, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on September 15, 1998 the New York Stock Exchange, Inc. 
(``NYSE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule changes as 
described in Item I, II and III below, which Items have been prepared 
by the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule changes from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Changes

    The proposed amendments to NYSE Rules 347 and 600 will exclude 
claims of employment discrimination, including sexual harassment, in 
violation of a statute from arbitration unless the parties have agreed 
to arbitrate the claim after it has arisen. The text of the proposed 
rule changes are as follows (additions are italicized, deletions are 
bracketed.)
* * * * *
NYSE Rule 347. Controversies As to Employment or Termination of 
Employment
    (a) Except as provided in paragraph (b), [A]any controversy between 
a registered representative and any member or member organization 
arising out of the employment or termination of employment of such 
registered representative by and with such member or member 
organization shall be settled by arbitration, at the instance of any 
such party, in accordance with the arbitration procedure prescribed 
elsewhere in these rules.
    (b) A claim alleging employment discrimination, including any 
sexual harassment claim, in violation of a statute shall be eligible 
for arbitration only where the parties have agreed to arbitrate the 
claim after it has arisen.
NYSE Rule 600. Arbitration
    (f) Any claim alleging employment discrimination, including any 
sexual harassment claim, in violation of a statute shall be eligible 
for submission to arbitration under these Rules only where the parties 
have agreed to arbitrate the claim after it has arisen.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule changes. The 
text of these statements may be examined at the places specified in 
Item IV below and is set forth in Sections A, B, and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

1. Purpose
    The purpose of the proposed rule changes is to:
     Exclude any claim alleging employment discrimination, 
including any sexual harassment claim, in violation of a statute from 
the requirement that all employment disputes between a registered 
representative and a member or member organization be arbitrated, 
except where the parties agree to arbitrate the claim after it has 
arisen. (NYSE Rule 347)
     Provide that any claim alleging employing discrimination, 
including any sexual harassment claim, in violation of a statute shall 
be eligible for submission to arbitration only where the parties have 
agreed to arbitrate the claim after it has arisen. (NYSE Rule 600)

Background

    NYSE Rule 347 has been in effect since the late 1950's, and 
requires that any employment-related disputes between a registered 
representative and a member or member organization be settled by 
arbitration.\3\ In order to become ``registered'' an individual is 
required to sign and file with the Exchange a Form U-4 (Uniform 
Application for Securities Registration or Transfer). Form U-4 requires 
registered persons to submit to arbitration any claim that is required 
to be arbitrated under the rules of the self-regulatory organizations 
with which they register.
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    \3\ NYSE Rule 347 provides: ``Any controversy between a 
registered representative and any member or member organization 
arising out of the employment or termination of employment of such 
registered representative by and with such member or member 
organization shall be settled by arbitration, at the instance of any 
such party, in accordance with the arbitration procedure prescribed 
elsewhere in these rules.''
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    Until the 1990's, the rule was generally invoked to arbitrate 
business and contract disputes, such as wrongful discharge, breach of 
contract or claims regarding compensation. Beginning with the Supreme 
Court's decision in Gilmer v. Interstate/Johnson Lane,\4\ claims 
alleging employment discrimination, including sexual harassment claims, 
were compelled to arbitration.
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    \4\ 500 U.S. 20 (1991). In Gilmer, the Court held that a 
registered representative could be compelled to arbitrate his claim 
under the Age Discrimination in Employment Act (``ADEA'') pursuant 
to Form U-4 and NYSE Rule 347.
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    In 1994, the General Accounting Officer (``GAO'') conducted a study 
on the arbitration of employment discrimination disputes in the 
securities industry.\5\ While the GAO Report did not address the 
adequacy of arbitration as a means of resolving employment 
discrimination disputes, it made several recommendations for improving 
the arbitration process. The recommendation included specialized 
training of arbitrators in discrimination law and the appointment of 
more women and minorities as arbitrators.
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    \5\ Employment Discrimination: How Registered Representatives 
Fare in Discrimination Disputes (GAO/HEHS-94-17, March 30, 1994).
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    Despite steps to improve the process, registered representatives 
and others continue to oppose mandatory arbitration of discrimination 
claims pursuant to the Form U-4 and other pre-dispute agreements. In 
July 1997, the U.S. Equal Employment Opportunity Commission (``EEOC'') 
issued a policy statement that mandatory pre-dispute agreements to 
arbitrate statutory

[[Page 52783]]

discrimination claims are inconsistent with the purpose of the federal 
civil rights laws.\6\
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    \6\ EEOC Notice No. 915.002, July 10, 1997.
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    Two federal court cases decided in 1998 support the EEOC's 
position. In January 1998, a Massachusetts district court in Rosenberg 
v. Merrill Lynch \7\ declined to compel arbitration of plaintiff's 
Title VII and the ADEA claims pursuant to the agreement to arbitrate 
contained in the Form U-4 plaintiff was required to sign as a condition 
of her employment. In May 1998, the Court of Appeals for the Ninth 
Circuit held, in Duffield v. Robertson Stephens & Company,\8\ that 
employers could not compel employees to waive their right to a judicial 
forum under Title VII, and therefore plaintiff could not be compelled 
to arbitrate her statutory discrimination claims pursuant to Form U-4. 
Prior to these decisions, federal courts had consistently upheld the 
arbitration of employment discrimination claims pursuant to the Form U-
4.
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    \7\ 76 FEP 681 (D. Mass. 1998).
    \8\ 1998 WL 227469 (9th Cir.).
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    On October 17, 1997, the National Association of Securities 
Dealers, Inc. (``NASD'') submitted to the Commission a proposed rule 
changes to remove the requirement from its rules that registered 
representatives must arbitrate statutory employment discrimination 
claims.\9\ Under the NASD's proposal, an employee could file such a 
claim in court unless he was obligated to arbitrate pursuant to a 
separate agreement entered into either before or after the dispute 
arose.
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    \9\ Exchange Act Release No. 39421 (December 10, 1997), 62 FR 
66164 (December 17, 1997).
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    In announcing the approval of the NASD rule amendment, SEC Chairman 
Arthur Levitt ``encourage[d] the other SROs to promptly change their 
rules to conform to those of the NASD.'' \10\ The Commission's order 
stated that the NASD intends to make changes to its arbitration program 
to make arbitration more attractive to parties for the resolution of 
discrimination claims.\11\ The NASD previously created a ``Working 
Group'' that includes attorneys who represent employees, member firms 
and neutrals. The group is developing proposals and will be 
recommending changes to the NASD's arbitration procedures for 
discrimination cases. A representative of the Exchange is participating 
as an observer in the Working Group's discussion.
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    \10\ SEC News Release 98-61, June 23, 1998.
    \11\ Exchange Act Release No. 40109 (June 22, 1998), 63 FR 35299 
(June 29, 1998).
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    The Exchange is following Chairman Levitt's suggestion by proposing 
an amendment to NYSE Rule 347. The amendment will create an exception 
to the NYSE rule that requires arbitration of all employment-related 
claims of registered representatives. Paragraph (a) of the proposed 
amendment to NYSE Rule 347 adds language indicating that paragraph (b) 
contains an exception to the requirement to arbitrate employment 
disputes. Paragraph (b) provides that ``a claim alleging employment 
discrimination, including any sexual harassment claims, in violation of 
a statute shall be eligible for arbitration only where the parties have 
agreed to arbitrate the claim after it has arisen.'' \12\
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    \12\ Claims ``in violation of a statute'' are not limited to the 
federal civil rights laws and include all federal, state and local 
anti-discrimination statutes.
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    In addition, the Exchange is going further by proposing rule 
amendments under which statutory discrimination claims will not be 
eligible for arbitration pursuant to any pre-dispute agreement to 
arbitrate. This action brings the Exchange's arbitration policy into 
conformity with the EEOC's ``Policy Statement on Mandatory Binding 
Arbitration of Employment Discrimination Disputes as a Condition of 
Employment.'' \13\
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    \13\ EEOC Notice No. 915.002, July 10, 1997.
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    In its December 1997 comment letter to the SEC regarding the NASD 
proposal, the EEOC reiterated its position ``that pre-dispute 
arbitration agreements, particularly those that mandate binding 
arbitration of discrimination claims as a condition of employment, are 
contrary to the fundamental principles reflected in this nation's 
employment discrimination laws. We recommend therefore, that the 
proposed rule be revised to permit arbitration of statutory employment 
discrimination claims only under post-dispute arbitration agreements.'' 
\14\
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    \14\ Letter from Gilbert F. Casellas, Chairman, EEOC, to 
Jonathan G. Katz, Secretary, SEC, Re: NASD Proposed Rule Change on 
Arbitration of Employment Discrimination Claims, December 1997.
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    The Exchange has had a general arbitration provision in its 
Constitution since 1817. NYSE Rule 600 requires the arbitration of 
disputes between customers or non-members and members or member 
organization, pursuant to any written agreement to arbitrate or upon 
the demand of the customer or non-member.\15\ The vast majority of 
disputes resolved by Exchange arbitration are business disputes arising 
out of securities transactions with investors, and contractual disputes 
between members and their employees. Since 1992, the year following the 
Gillmer decision, the Exchange has received an average of 18 
discrimination claims a year.\16\
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    \15\ NYSE Rule 600(a) provides: ``Any dispute, claim or 
controversy between a customer or non-member and a member, allied 
member, member organization and/or associated person arising in 
connection with the business of such member, allied member, member 
organization and/or associated person in connection with his 
activities as an associated person shall be arbitrated under the 
Constitution and Rules of the New York Stock Exchange, Inc. as 
provided by any duly executed and enforceable written agreement or 
upon the demand of the customer or non-member.''
    \16\ Historically, discrimination claims accounted for less than 
two percent of the total claims filed at the Exchange, except for 
1996 (when discrimination claims accounted for two point six 
percent) and the first six months of 1998 where, due to a steady 
decline in case filings generally, discrimination claims accounted 
for three percent of the cases filed.
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    The Exchange's proposed amendments will limit the availability of 
the Exchange's forum for the resolution of employment discrimination 
claims to those cases where the parties have agreed to arbitrate the 
claim after it has arisen, as recommended by the EEOC.
    The Exchange is also proposing to amend NYSE Rule 600, adding 
paragraph (f) that provides that claims alleging employment 
discrimination, including any sexual harassment claim, shall be 
eligible for submission to arbitration only where the parties have 
agreed to arbitrate the claim after it has arisen. This amendment 
excludes from Exchange arbitration statutory employment discrimination 
claims of non-registered employees pursuant to pre-dispute arbitration 
agreements. (NYSE Rule 347 only applies to ``registered'' employees).
    The EEOC and several members of Congress have endorsed arbitration 
as an effective means of resolving discrimination claims, provided the 
parties agree to arbitrate after the claim has arisen. The Exchange's 
proposed amendment provides a forum for those employees who choose, 
post-dispute, to resolve their statutory employment discrimination 
claims through arbitration.
    Some employment disputes may contain both contract or tort claims 
as well as statutory employment discrimination claims. Under amended 
NYSE Rule 347 (and NYSE Rule 600 for non-registered employees who have 
executed pre-dispute arbitration agreements) these cases may be 
bifurcated. The employment discrimination claims will be heard in a 
forum other than the Exchange, such as court, while any claims subject 
to arbitration may continue to be heard at

[[Page 52784]]

the Exchange.\17\ However, NYSE Rule 347 requires arbitration of claims 
``at the instance'' of either party, and therefore may be waived, 
allowing the entire case to be heard in court. The parties may also 
avoid bifurcation by agreeing to proceed with all claims in a single 
forum. Given a choice, after a dispute has arisen, employees in many 
instances believe that arbitration is preferable to protracted and 
expensive litigation and will willingly make that choice.\18\
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    \17\ The bifurcation of securities industry claims is not 
unprecedented. Before the Supreme Court's decision in Shearson v. 
McMahon, 482 U.S. 220 (1987) (holding that claims under the Exchange 
Act could be compelled to arbitration), the Supreme Court decided 
Dean Witter Reynolds, Inc. v. Byrd, 105 S. Ct. 1238 (1985). In Byrd, 
the dispute involved allegations of federal securities laws 
violations and pendent state law claims. The Court compelled the 
state law claims to arbitration and held that the federal securities 
laws claims could be heard in court.
    \18\ See Duffield v. Robertson Stephens & Company, 1998 WL 
227469 (9th Cir.).
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2. Statutory Basis
    The proposed changes are consistent with Section 6(b)(5) of the 
Exchange Act in that they promote just and equitable principles of 
trade by insuring that members and member organizations and the public 
have a fair and impartial forum for the resolution of their disputes.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Changes Received from Members Participants or Others.

    The Exchange has neither solicited nor received written comments on 
the proposed rule changes.

III. Date of Effectiveness of the Proposed Rule Changes and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve the proposed rule changes, or
    (B) Institute proceedings to determine whether the proposed rule 
changes should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
changes is consistent with the Exchange Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 5th Street, NW, Washington, DC 
20549. Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes between the Commission and any person, other than 
those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NYSE. All submissions should refer to File No. 
SR-NYSE-98-28 and should be submitted by October 22,1 998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-26235 Filed 9-30-98; 8:45 am]
BILLING CODE 8010-01-M