[Federal Register Volume 64, Number 61 (Wednesday, March 31, 1999)]
[Notices]
[Pages 15388-15391]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7806]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41206; File No. SR-PCX-99-02]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Matters Subject to 
Arbitration

March 23, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 3, 1999, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items 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 change 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 Change

    The Exchange is proposing to change PCX Rule 12.1 to allow for 
claims related to employment, including sexual harassment, or any 
discrimination claim in violation of a statute, to be eligible for 
submission to arbitration only where all parties have agreed to 
arbitration after the claim has arisen. The text in brackets will be 
deleted, and the text in italics will be added. The text of the 
proposed rule change is as follows:
* * * * *
Matters Subject to Arbitration
    Rule 12.1(a) No change.

    (b) Any claim which is related to employment, including any 
sexual harassment or any discrimination claim in violation of a 
statute, will be eligible for submission to arbitration under this 
Rule only where all parties have agreed to arbitrate the claim after 
it has arisen.
    [(b)](c) Any dispute, claim or controversy between a customer or 
non-member and a member, member organization and/or associated 
person arising in connection with the securities business of such 
member, member organization and/or associated person shall be 
arbitrated under this Rule as provided by any duly executed and 
enforceable written document, or upon the request of the customer or 
non-member.
    [(c) Any dispute, claim or controversy between a member and an 
employee of such member which is related to such employment shall, 
at the request of any such party, be submitted for arbitration in 
accordance with this Rule.]
    (d)-(g) No change.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change, and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the

[[Page 15389]]

places specified in Item IV below. The Exchange has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

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

Purpose
    Background. The Exchange's Constitution, Article XII, states that 
``[a] dispute, claim or controversy arising in connection with the 
securities business of a member, member organization and/or associated 
person may be submitted to arbitration pursuant to the Rules of the 
Exchange.'' PCX Rule 12.1(a) restates the language of the Constitution, 
and further provides for arbitration of employment related claims in 
PCX Rule 12.1(c), by stating ``[a]ny dispute, claim or controversy 
between a member and an employee of such member which is related to 
such employment shall, at the request of any such party, be submitted 
for arbitration in accordance with this Rule.'' The Exchange has long 
construed the term ``employee' for purposes of PCX Rule 12.1(c) to mean 
registered representatives or other persons who are required to file a 
Form U-4 (Uniform Application for Securities Registration or Transfer) 
as a condition of employment with a member firm of the Exchange. The 
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 organization with which they are registered.
    Until the 1990's, PCX Rule 12.1(c) was generally used for the 
resolution of claims alleging breach of contract, compensation issues 
or wrongful discharge. However, in 1991 the United States Supreme Court 
held in Gilmer v. Interstate/Johnson Lane Corp.,\3\ that pursuant to 
the language of the Form U-4 and New York Stock Exchange (``NYSE'') 
Rule 347, a registered representative's Age Discrimination in 
Employment Act (``ADEA'') claim was subject to compulsory 
arbitration.\4\ NYSE Rule 347 specifically provides for the arbitration 
of ``employment or termination of employment'' matters. PCX Rule 
12.1(c) likewise provides for the arbitration of matters ``related to 
such employment.'' The ruling of the Court in Gilmer, which referred to 
the rules of the NYSE, can thus be applied to arbitration cases as 
administered by the Exchange, since both NYSE Rule 347 and PCX Rule 
12.1(c) specifically require the arbitration of ``employment'' 
matters.\5\
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    \3\ 500 U.S.C. 20 (1991).
    \4\ Id.
    \5\ Distinguish Farrand v. Lutheran Bhd., 993 F.2d 1253 (7th 
Cir. 1993), where the court concluded that the then existing 
National Association of Securities Dealers, Inc. (``NASD'') 
arbitration rules did not require ``employment'' disputes to be 
arbitrated, since the language of the rule only referred to 
``disputes arising out of or in connection with business 
transactions.''
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    In 1994, several years after the decision in Gilmer, the General 
Accounting Office (``GAO'') released the findings of a two-year study 
on the results of employment discrimination disputes in the securities 
industry as administered by the various self-regulation 
organizations.\6\ While the GAO did not address the adequacy of 
arbitration as a means of resolving employment discrimination disputes, 
it made several recommendations for improving the self-regulatory 
organization arbitration process as it related to employment 
discrimination claims. For example, the GAO recommended implementing a 
method of tracking employment discrimination claims, establishing 
formal standards for selecting arbitrator panels, or criteria for 
excluding arbitrators from the pool.\7\
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    \6\ Employment Discrimination: How Registered Representatives 
Fare in Discrimination Disputes, (GAO/HEHS-94-17, March 30, 1994).
    \7\ Id. at 11.
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    In July 1997, the Equal Employment Opportunity Commission 
(``EEOC'') issued a policy statement that mandatory pre-dispute 
agreements to arbitrate statutory discrimination claims are 
inconsistent with the purpose of federal civil rights laws.\8\ The EEOC 
stated in its policy statement that ``[t]he use of unilaterally imposed 
agreements mandating binding arbitration of employment discrimination 
disputes as a condition of employment harms both the individual civil 
rights claimant and the public interest in eradicating 
discrimination.''\9\ The EEOC further stated that ``the use of these 
agreements is not limited to particular industries, but can be found in 
various sectors of the workforce, including, for example, the 
securities industry, retail, restaurant and hotel chains, health care, 
broadcasting, and security services.\10\
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    \8\ Equal Employment Opportunity Commission Notice No. 915.002, 
July 10, 1997, (``Policy Statement on Mandatory Biding Arbitration 
of Employment Discrimination Disputes as a Condition of 
Employment'').
    \9\ Id. at 22.
    \10\ Id. at 1.
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    In October 1997, the NASD submitted a proposal to the Commission 
regarding the arbitration of statutory employment discrimination 
claims.\11\ The NASD proposed to remove the requirement that registered 
representatives arbitrate statutory employment discrimination claims 
and to allow an employee to file such a claim in court unless he was 
obligated to arbitrate pursuant to a separate agreement between the 
parties, entered into before or after the dispute arose.\12\ The 
proposal was approved June 22, 1998.
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    \11\ See Exchange Act Release No. 39421 (December 10, 1997), 62 
FR 66164 (December 17, 1997) and Exchange Act Release No. 40109 
(June 22, 1998), 63 FR 35299 (June 29, 1998).
    \12\ Id.
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    In September 1998, the NYSE filed a rule proposal regarding 
employment discrimination claims.\13\ The NYSE filing was approved by 
the Commission on December 29, 1998.\14\ In its rule filing, the NYSE 
proposed to create an exception to the rule requiring the arbitration 
of all employment-related claims of registered representatives. The 
NYSE proposed that ``any 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'' (emphasis added).\15\ 
Further, in conformity with the EEOC policy statement, the NYSE limited 
its forum to claims where the parties had agreed to arbitrate only 
after the dispute arose, thus providing additional safeguards to the 
employee that the self-regulatory organization arbitration process is 
entered into knowing by and voluntarily by the employee.\16\
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    \13\ See Exchange Act Release No. 40858 (December 29, 1998), 64 
FR 1051 (January 7, 1999).
    \14\ Id.
    \15\ Id. at 1052, footnote 13. The NYSE qualified the ``in 
violation of statute'' language (as did the NASD) to include all 
federal, state and local anti-discrimination statutes.
    \16\ In December 1997, Gilbert F. Casellas, Chairman of the 
EEOC, wrote a comment letter to Jonathan G. Katz, Secretary of the 
SEC, regarding the pending NASD rule 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.'' The 
EEOC therefore recommended ``that the proposed rule be revised to 
permit arbitration of statutory employment discrimination claims 
only under post-dispute arbitration agreements.
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    Relevant Caselaw. In 1998, two federal courts supported the EEOC's 
position that mandatory pre-dispute agreements to arbitrate statutory 
discrimination claims are inconsistent with the purpose of federal 
civil rights laws. Prior to these decisions, federal courts had 
consistently upheld the arbitration of employment discrimination claims 
pursuant to the Form U-4.
    First, in January 1998, in Rosenberg v. Merrill Lynch, 995 F. Supp. 
190 (D.

[[Page 15390]]

Mass. 1998), a Massachusetts district court, declined to compel 
arbitration of the Plaintiff's Title VII and ADEA claims pursuant to an 
agreement to arbitrate contained in a Form U-4 the plaintiff was 
required to sign as a condition of employment.\17\
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    \17\ Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 
995 F. Supp. 190 (D. Mass. 1998); Rosenberg v. Merrill Lynch, 
Pierce, Fenner & Smith, Inc., 976 F. Supp. 84 (D. Mass. 1997); 
Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 965 F. 
Supp. 190 (D. Mass. 1997).
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    On appeal, the United States Court of Appeals for the First Circuit 
found that the motion to compel arbitration was properly denied, but 
for reasons other than those stipulated to by the district court.\18\ 
On a de novo review of the legal issues, the court found that what was 
at issue was whether the parties' arbitration agreement met the 
standard set forth in the 1991 CRA amendment to Title VII for enforcing 
arbitration clauses ``where appropriate and to the extent authorized by 
law.''\19\ The court held that the standard was not met because ``[a]t 
a minimum the words `to the extent authorized by law' must mean that 
arbitration agreements that are unenforceable under the Federal 
Arbitration Act (``FAA'') are also unenforceable when applied to claims 
under Title VII and the ADEA.''\20\ The court states that ``[u]sing the 
`to the extent authorized by law' standard of the 1991 CRA, we are 
doubtful that there was an enforceable contract.''\21\ Under common law 
contract principles and referring to general state common-law 
principles, the court further stated that it was ``doubtful that there 
was an agreement to arbitrate Title VII and ADEA claims.''\22\ Finally, 
with regard to this issue, the court stated that the arbitration 
agreement was incomplete in that it failed to define the range of 
claims subject to arbitration.\23\ Specifically, the court found that 
the agreement only referred to arbitration of claims that were required 
by NYSE rules, but that these rules were neither provided to the 
plaintiff nor explained to her.\24\
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    \18\ Upon review, the court stated that application of pre-
dispute arbitration agreements to federal claims arising under Title 
VII and the ADEA are not precluded by the 1991 Civil Rights Act 
(``1991 CRA'') amendments to Title VII or by the Older Workers 
Benefit Protection Act (``OWBPA'') amendments to the ADEA, and that 
there is no ``structural bias in the NYSE arbitration arbitral 
forum. Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 
1998 LEXIS 32522, 4-5 (1st Cir.).
    \19\ Id. at 54.
    \20\ Id. at 55.
    \21\ Id. at 56.
    \22\ Id.
    \23\ Id.
    \24\ Id.
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    In the recent California case of Craft v. Campbell Soup Co.,\25\ 
the U.S. Circuit Court of Appeals for the 9th Circuit considered the 
issue of whether the FAA broadly excludes arbitration agreements within 
contracts of employment. The Court held that prior cases and 
legislative history indicate that the FAA's arbitration clause was 
solely intended to bind merchants who were involved in commercial 
dealings and contracts involving interstate commerce and is thus 
inapplicable to labor and employment contract.\26\
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    \25\ 161 F.3d 1199 (9th Cir. 1998).
    \26\ 161 F.3d 1199; 1202-1203 (9th Cir. 1998).
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    In May 1998, the United States Court of Appeals for the 9th Circuit 
held, contrary to Rosenberg, that the 1991 CRA amendments to Title VII 
provide for the right to a jury trial in discrimination claims and 
that, in adopting them, ``Congress intended to preclude compulsory 
arbitration of Title VII claims.''\27\ The Court also noted that 
following the 1991 CRA, the courts have held that claimants who do not 
``knowingly'' agree to arbitrate Title VII claims cannot be required to 
submit to arbitration.\28\ The Court held that employers could not 
compel employees to waive their right to a judicial forum under Title 
VII and, therefore, the plaintiff could not be compelled to arbitrate 
here statutory discrimination claims pursuant to a Form U-4 that she 
signed as a condition of employment.\29\ Specifically, the Court held 
that under the Civil Rights Act of 1991, employers may not compel 
individuals to waive their right to bring future Title VII claims to 
court.\30\
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    \27\ Duffield v. Robertson, Stephens & Co., 144 F.3d 1182, 1199 
(9th Cir. 1998), cert. denied, 67 U.S.L.W. 3113, 67 U.S.L.W. 3177 
(U.S., Nov. 9, 1998)(Nos. 98-237-98-409).
    \28\ Id. at 1189.
    \29\ Id. at 1202-03.
    \30\ Id. at 1189.
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    Proposal. The Exchange is proposing an amendment to PCX Rule 12 to 
provide that ``any claim which is related to employment, including any 
sexual harassment or discrimination claim in violation of a statute, 
will be eligible for submission to arbitration * * * only where all 
parties have agreed to arbitrate the claim after it has arisen.'' The 
new language excepts all employment related claims from arbitration at 
the Exchange, and specifically addresses claims alleging discrimination 
in violation of a statute, unless the parties have agreed to proceed 
with arbitration at the Exchange after the dispute has arisen.
    By proposing these rule amendments, the Exchange is in conformity 
with the EEOC's ``Policy Statement on Mandatory Binding Arbitration of 
Employment Discrimination Disputes as a Condition of Employment,''\31\ 
and also goes further by proposing to except all employment claims from 
arbitration, unless the parties agree to arbitrate after the dispute 
has arisen.
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    \31\ EEOC Notice No. 915.002, July 10, 1997.
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    The extension of the exception to all employment related claims 
will avoid the bifurcation of a single employment dispute. By requiring 
post-dispute agreement regarding whether any employment claim will be 
arbitrated, the parties can determine together whether the entire case 
should proceed through arbitration or the courts. Avoiding bifurcation 
will ultimately provide efficiency in the dispute resolution process, 
and save the parties significant time and money.
    The majority of the Exchange's caseload arises from claims between 
customers or nonmembers and members or member organizations, pursuant 
to any written agreement to arbitrate or upon the demand of the 
customer or non-member.\32\ Employment-related cases make up a very 
small percentage of the total caseload of the Exchange.\33\ For 
example, from 1996 through 1998, of the total 174 cases filed, only 10 
were employment-related cases alleging wrongful termination, breach of 
contract or other compensation issues. Only one of the 10 employment-
related cases filed during those years alleged statutory 
discrimination.
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    \32\ PCX Rule 12.1(b) provides: ``Any dispute, claim or 
controversy between a customer or non-member and a member, member 
organization and/or associated person arising in connection with the 
securities business of such member, member organization and/or 
associated person shall be arbitrated under this Rule as provided by 
any duly executed and enforceable written document, or upon the 
request of the customer or non-member.''
    \33\ Employment-related claims historically account for 2% or 
less of claims filed annually with the Exchange. Discrimination 
claims account for less than 1% of claims field annually.
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    The Exchange also proposes to delete Rule 12.1(c) so that the new 
proposed language and the existing language are not in conflict.
Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \34\ in general, because it furthers the 
objectives of Section 6(b)(5) of the Act \35\ in particular, in that it 
promotes just and equitable principles of trade by ensuring that 
members, member organizations and the public have a fair and impartial 
forum for the resolution of their disputes.
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    \34\ 15 U.S.C. 78f(b).
    \35\  15 U.S.C. 78f(b)(5).

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[[Page 15391]]

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

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

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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change 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 self-regulatory organization consents, the Commission will
    A. by order approve such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change 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 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change 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 
PCX. All submissions should refer to File No. SR-PCX-99-02 and should 
be submitted by April 21, 1999.

    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12.
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-7806 filed 3-30-99; 8:45 am]
BILLING CODE 8010-01-M