[Federal Register Volume 64, Number 4 (Thursday, January 7, 1999)]
[Notices]
[Pages 1051-1054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-299]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40858; File No. SR-NYSE-98-28]


Self Regulatory Organizations; Order Approving Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to Arbitration 
Rules

December 29, 1998.

I. Introduction

    On September 15, 1998, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The proposed rule change would amend NYSE 
Rules 347 and 600 to 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. Notice of the proposed rule change, together with the substance 
of the proposal, was provided in a Commission release and in the 
Federal Register.\3\ The Commission received three comment letters and 
a response to those letters from the Exchange. The Commission is 
approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 40479 (September 24, 
1998) 63 FR 52782 (October 1, 1998).
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II. Description

    The proposed rule change will modify the current requirement in 
NYSE Rule 347 that any employment-related disputes between a registered 
representative and a member or member organization be settled by 
arbitration. The proposal provides that statutory employment 
discrimination claims are eligible for arbitration at the Exchange only 
if the parties agree to arbitrate the claims after they arise.

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.\4\ 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 must be 
arbitrated under the rules of the self-regulatory organizations 
(``SROs'') with which they register.
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    \4\ 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. In 1991, the Supreme Court 
held in Gilmer v. Interstate/Johnson Lane,\5\ that a registered 
representative could be compelled to arbitrate his claim under the Age 
Discrimantion in Employment Act (``ADEA'') pursuant to Form U-4 and 
NYSE Rule 347. Subsequent courts have held that claims alleging 
employment discrimation, including sexual harassment claims, may be 
compelled to arbitration.\6\
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    \5\ 500 U.S. 20 (1991).
    \6\ Indeed, they have extended the reasoning of Gilmer to cover 
disputes arising under: Title VII of the Civil Rights Act of 1964, 
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. III. 1997), but see Rosenberg v. Merrill 
Lynch, Pierce, Fenner & Smith, Inc., 1998 U.S. Dist. Lexis 877 (D. 
Mass. 1998)); the Americans with Disabilities Act, (see, e.g., 
Austin v. Owens-Brockway Glass Container, Inc., 78 F. 3d 875, 881 
(4th Cir.) cert. denied, 117 S. Ct. 432 (1996); and state statutes 
of a similar nature (see, e.g., Kalider v. Shearson Lehman Hutton, 
Inc., 789 F. Supp. 179, 180 (W.D. Pa. 1991)).
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    In 1994, the General Accounting Office (``GAO'') conducted a study 
on the arbitration of employment discrimination disputes in the 
securities industry.\7\ The GAO Report did not critize the fairness of 
arbitration as a means of resolving employment discrimination disputes, 
but did make recommendations for improving the arbitration process. 
Despite steps to improve the process, registered representatives and 
others continue to oppose 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 
employment discrimination claims are consistent with the purpose of the 
federal civil rights laws.\8\
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    \7\ Employment Discrimination: How Registered Representatives in 
Discrimination Disputes (GAO/HEHS-94-17, March 30, 1994).
    \8\ EEOC Notice No. 915.002, July 10, 1997.
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    In support of the EEOC's position, the Ninth Circuit Court of 
Appeals held in May 1998, in Duffield v. Robertson Stephens & 
Company,\9\ 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 employment 
discrimination claims pursuant to Form U-4.\10\ Other federal courts 
consistently upheld the arbitration of employment discrimination claims 
pursuant to the Form U-4.
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    \9\ 1998 WL 227469 (9th Cir.).
    \10\ In January 1998, a U.S. District Court in Massachusetts, in 
Rosenberg v. Merrill Lynch, 76 FEP 681 (D.Mass 1998), 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.
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    On June 22, 1998, the Commission approved a proposed rule change by 
the National Association of Securities Dealers, Inc. (``NASD'') to 
remove the requirement from its rules that registered representatives 
must arbitrate statutory employment discrimination claims.\11\ Under 
the NASD's rule, an employee could file such a claim in court unless he 
or she was obligated to arbitrate pursuant to a separate agreement 
entered into either before or after the dispute arose.
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    \11\ Exchange Act Release No. 40109 (June 22, 1998) 63 FR 35299 
(June 29, 1998).
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    The Commission's order approving the NASD rule change noted that 
the NASD intends to make changes to its arbitration program to make 
arbitration more attractive to parties for the resolution of 
discrimination claims.\12\ An NASD ``Working Group'' that includes 
attorneys who represent employees, member firms and neutrals

[[Page 1052]]

is developing improvements to the NASD's arbitration procedures for 
discrimination cases. A representative of the Exchange is participating 
as an observer in the Working Group's discussions.
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    \12\ Id.
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    The Exchange's proposed rule change will create a narrow exception 
to the NYSE rule that requires arbitration of all employment-related 
claims of a 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 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.'' \13\
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    \13\ 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, under the proposal, statutory employment 
discrimination claims will not be eligible for arbitration pursuant to 
any pre-dispute agreement to arbitrate. The Exchange has stated that 
its action brings its arbitration policy into conformity with the 
EEOC's ``Policy Statement on Mandatory Binding Arbitration of 
Employment Discrimination Disputes as a Condition of Employment.'' \14\
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    \14\ 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 stated 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.'' \15\
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    \15\ 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 
organizations, pursuant to any written agreement to arbitrate or upon 
the demand of the customer or non-member.\16\ 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 
Gilmer decision, the Exchange has received an average of 18 
discrimination claims a year.\17\ 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.
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    \16\ 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.''
    \17\ 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 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, 
after a claim has arisen, to resolve their statutory employment 
discrimination claims through arbitration.
    Some employment disputes may contain 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 may be heard in a 
forum other than the Exchange, such as court, while any claims subject 
to arbitration may continue to be heard at the Exchange.\18\ 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.\19\
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    \18\ 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.
    \19\ See Duffield v. Robertson Stephens & Company, 1998 WL 
227469 (9th Cir.).
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III. Summary of Comments

    The Commission received three comment letters on the proposed rule 
change.\20\ Two of the letters supported the proposal \21\ and the 
other oppose it.\22\ The comment letter primarily focused on section 
3(f) of the Exchange Act and the Federal Arbitration Act (``FAA''). The 
Exchange responded to the comment letters.\23\
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    \20\ October 16, 1998 National Employment Lawyers Association 
Letter (NELA Letter); October 21, 1998 Securities Industry 
Association Letter (SIA Letter); and October 21, 1998 New York State 
Attorney General Dennis Vacco (NY Attorney General Letter).
    \21\ NELA Letter; and NY Attorney General Letter.
    \22\ SIA Letter.
    \23\ Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated December 
2, 1998.
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Overview of the Proposed Rule Change

    One commenter that supported the proposal did so because it 
believes that it complies with EEOC policy and the letter and spirit of 
Tile VII.\24\ A second commenter that supported the proposal did so 
because it believes that arbitration may not be well-adapted for 
employment discrimination claims, since employees and others have 
challenged its fairness in employment-related disputes.\25\ While 
supporting the proposal, this commenter suggested that the proposal be 
modified to include common law employment-related claims (e.g., 
wrongful termination, defamation) and preserve punitive damages.
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    \24\ NELA letter.
    \25\ NY Attorney General Letter.
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    The one commenter that opposed the proposal said that it is 
inconsistent with

[[Page 1053]]

section 3(f) of the Exchange Act and the FAA, and that it will lead to 
unnecessary bifurcation of claims, since it differs from the NASD's 
recent rule change.\26\ This commenter disagreed with the Exchange's 
interpretation of the relevant case law. It also asserted that 
arbitration is faster and cheaper than litigation and that plaintiffs 
are more likely to win in arbitration than in litigation.
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    \26\ SIA Letter.
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Comments Concerning Section 3(f) of the Exchange Act

    The SIA said that the proposal, which provides the Exchange as an 
arbitration forum only for post-dispute arbitration agreements, is 
inconsistent with section 3(f) of the Exchange Act \27\ because it 
differs from the recent NASD rule change, which does not affect pre-
dispute arbitration agreements. The SIA claimed that this would create 
a system of inconsistent regulations that would eliminate the efficacy 
of arbitration agreements and create disparate treatment for similarly 
situated cases at different SROs. It also argued that this would result 
in bifurcation of claims and an unwarranted increase in litigation.
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    \27\ Section 3(f) of the Exchange Act provides that when the 
Commission reviews a proposed rule change from an SRO, it must 
``consider or determine whether an action is necessary or 
appropriate in the public interest * * * (and) consider, in addition 
to the protection of investors, whether the action will promote 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).''
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    The Exchange stated in its response letter that section 3(f) does 
not require that SROs have precisely the same rules. It noted that its 
proposal is substantially similar to the NASD's recent rule change, 
since both leave parties' substantive rights and remedies largely 
unchanged.\28\ Further, the Exchange said that bifurcation would only 
occur if a prospective plaintiff chose to bifurcate his or her claims.
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    \28\ In its response to the comment letters, the Exchange noted 
that its rule change is ``similar to the recently approved NASD 
rules in that they exclude claims of statutory employment 
discrimination from the Exchange's requirement that all employment 
disputes between a registered representative and a member or member 
organization be arbitrated.''
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    In its letter, the SIA offers a hypothetical case in which a 
registered representative signs a Form U-4 and an agreement to 
arbitrate all disputes, including statutory employment discrimination 
claims. The SIA concludes that under the Exchange's proposal, only the 
economic claims can be arbitrated. The Exchange interpreted its 
proposal differently. The Exchange stated that under the NASD's rules, 
the entire dispute in the SIA's hypothetical would be eligible for 
arbitration at the NASD or another forum provided for in the Form U-4 
or arbitration agreement.
    The Exchange also noted that after a dispute has arisen, the 
parties can agree to proceed with all claims in arbitration or in 
court. The Exchange recognized that there is some potential for 
bifurcation, but believes that in most instances parties will, in their 
own best interests, agree to proceed in a single forum. The Exchange 
also disagreed with the SIA's argument that the proposal will lead to 
motion practice or forum shopping.
    The Exchange also noted that it has received relatively few claims 
alleging employment discrimination and only 126 since 1992 (or about 
two each month). The NASD, in contrast, received 139 such claims in 
1997 alone. Nevertheless, the Exchange stated that it will monitor its 
actual experience under the porposal, including bifurcation, and 
consider appropriate action in the future if warranted.
    The Exchange further stated that its proposal represents a policy 
decision not to adopt identical procedures because it receives 
relatively few employment-discrimination claims. The Exchange stated 
that its decision would not significantly harm securities industry 
arbitration. The Exchange also noted that even though most Exchange 
members and member organizations are also NASD members, the few 
Exchange members that are not may still proceed with arbitration of 
employment discrimination claims in another forum, such as the American 
Arbitration Association.

Comments Concerning the FAA

    The SIA disagreed with the Exchange's analysis of the case law 
interpreting the FAA, stating that the Exchange's proposal violates the 
FAA. The SIA argued that for member firms that have pre-dispute 
arbitration agreements, the proposal would vitiate an otherwise valid 
arbitration agreement. The Exchange disagreed. The Exchange stated that 
the FAA does not mandate arbitration of all claims, but merely the 
enforcement, upon motion of a party, of privately megotiated 
arbitration agreements. The Exchange also noted that the FAA does not 
require an arbitration provider such as the Exchange to make its forum 
available to hear particular types of cases.
    The Exchange also noted that the proposal would not prevent parties 
with pre-dispute arbitration agreements from agreeing to arbitrate 
after the dispute arises. Further, as discussed above, the Exchange 
noted that the proposal neither invalidates pre-disputes arbitration 
agreements nor forces parties to litigate statutory employment 
discrimination claims--it merely removes the Exchange as an arbitration 
forum for such claims.

Comments Concerning Other Issues

    The SIA also argued that arbitration is better for plaintiffs in 
employment dispute cases than litigation in Fedral court, cliting its 
own study in support.\29\ The SIA said that, among other things, in 
arbitration: plaintiffs prevail more frequently; claims are resolved 
more quickly; and arbitration is less expensive. In its response, the 
Exchange neither agreed with nor disputed these SIA statements, stating 
that its proposal allows plaintiffs to choose the forum they believe is 
better for them. The Exchange stated that under its proposal, statutory 
employment discrimination claims are eligible for arbitration at the 
Exchange if the parties agree to arbitrate after the dispute arises.
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    \29\ Atached to the SIA Letter was its General Counsel's 
Congressional testimony, which described the SIA study.
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    Finally, one commenter suggested that voluntary post-dispute 
arbitration agreements should only be encouraged if they preserve the 
substantive protections and remedies afforded by statutes. The Exchange 
responded that the commenter's concern was unwarranted in the post-
dispute context. It argued that any disparity in bargaining power 
between the parties that exists before a dispute arises is missing 
after the dispute arises, and the employee may freely agree that he or 
she is better off arbitrating statutory employment discrimination 
claims. The Exchange also noted that the EEOC supports post-dispute 
agreements.

IV. Discussion

    Under the Act, SROs like the Exchange 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 an SRO rule change like the Exchange's if it 
determines that the proposal is consistent with applicable statutory 
standards.\30\ These standards include section 6(b)(5) of the Act, 
which

[[Page 1054]]

provides that the Exchange's rules must be designed to, among other 
things, ``promote just and equitable principles of trade'' and 
``protect investors and the public interest.'' Section 6(b)(5) also 
provides that the Exchange's rules may not be designed to ``regulate . 
. . matters not related to the purposes of the (Exchange Act) or the 
administration of the (Exchange).''
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    \30\ The Commission oversees the arbitration programs of the 
SROs, including the Exchange's, 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 rules, the NYSE proposal provides that statutory 
employment discrimination claims are eligible for submission to 
arbitration at the Exchange only if the parties agree to arbitrate the 
claims after they arise. This narrow amendment to the NYSE's rules 
affects only the arbitration of employment discrimination claims 
between NYSE members and their employees.\31\ This proposal is 
consistent with the applicable statutory standards.\32\ The statutory 
employment anti-discrimination provisions reflect an express intention 
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 
NYSE to make a policy determination that in this unique area it will 
not, as an SRO, require or permit arbitration unless there is a post-
dispute agreement. It is also proper under the Exchange Act for one 
SRO's policy determination to differ from that of another.
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    \31\ The amendment in no way affects the obligation, under NYSE 
rules, of Exchange members or their employees to arbitrate claims 
brought by customers against them.
    \32\ U.S.C. 78o-3(b)(6).
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    Section 3(f), raised by one commenter, addresses issues concerning 
efficiency, competition, and capital formation. The Exchange's proposal 
fosters competition by providing different approaches for dispute 
resolution among markets and among brokers and dealers.
    The benefits of the Exchange's proposal to employees with 
employment discrimination claims and to the employer/employee 
relationship are clear. The Exchange's provision of an arbitration 
forum for employment discrimination disputes where the parties choose 
arbitration after the dispute arises is consistent with section 3(f).
    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), acknowledged the appropriateness of bifurcation between federal 
statutory and pendant state law claims. The Exchange noted in its 
response that there is a potential for bifurcation in some cases. 
However, in many instances it is likely that parties will agree to 
proceed in a single forum. The Commission notes that the Exchange 
stated that it will monitor its actual experience under the proposal, 
including bifurcation, and consider appropriate action in the future if 
warranted.
    The proposal is not, as one commenter suggested, inconsistent with 
the FAA. The FAA does not mandate that all claims be arbitrated. The 
FAA provides that privately negotiated arbitration agreements should be 
enforced, upon motion of a party. Further, the FAA does not require an 
arbitration provider such as the Exchange to make its forum available 
to hear particular types of cases.
    With respect to other comments that suggested that the NYSE should 
enact other rules concerning employer/employee arbitration agreements 
or extend this rule to other causes of action, these issues are left to 
the NYSE to consider in the first instance.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Exchange Act,\33\ that the proposal, SR-NYSE-98-28 be and hereby is 
approved.

    \33\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-299 Filed 1-6-99; 8:45 am]
BILLING CODE 8010-01-M