[Federal Register Volume 64, Number 107 (Friday, June 4, 1999)]
[Notices]
[Pages 30081-30088]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14210]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41461; File No. SR-NASD-99-08]
Self-Regulatory Organizations; filing of Proposed Rule Change and
Amendment No. 1 by the National Association of Securities dealers, Inc.
Relating to the Arbitration Process for Claims of Employment
Discrimination
May 27, 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 1, 1999, the National Association of Securities Dealers,
Inc., (``NASD'') or ``Association''), through its wholly-owned
subsidiary, NASD Regulation, Inc. (``NASD Regulation'') filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items, I, II, and III below, which
Items have been prepared by NASD Regulation. On May 10, 1999, NASD
Regulation amended its proposal.\3\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as amended,
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Alden S. Adkins, Senior Vice President and
General Counsel, NASD Regulation, to Katherine A. England, Assistant
Director, Division of Market Regulation, Commission, dated May 10,
1999 (``Amendment No. 1''). Amendment No. 1 made substantive changes
to the proposed rule language, including the provisions for
arbitrator qualifications and coordination of claims filed in court
and arbitration.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation is proposing to amend Rules 10201 and 10202, and to
add new Rule 3080 and new Rule Series 10210 of the NASD. The proposed
rule change is intended to enhance the dispute resolution process for
the handling of employment discrimination disputes, and to expand
disclosure to employees concerning the arbitration of all disputes. The
text of the proposed rule change follows. Proposed new rule language is
in italics; proposed deletions are in brackets.
* * * * *
RULES OF THE ASSOCIATION
* * * * *
3000. RESPONSIBILITIES RELATING TO ASSOCIATED PERSONS, EMPLOYEES,
AND OTHERS' EMPLOYEES
* * * * *
3080. Disclosure to Associated Persons When Signing Form U-4
A member shall provide an associated person with the following
written statement whenever the associated person is asked to sign a new
or amended Form U-4.
The Form U-4 contains a predispute arbitration clause. It is in
item 5 on page 4 of the Form U-4. You should read that clause now.
Before signing the Form U-4, you should understand the following:
(1) You are agreeing to arbitrate any dispute, claim or controversy
that may arise between you and your firm, or a customer, or any other
person, that is required to be arbitrated under the rules of the self-
regulatory organizations with which you are registering. This means you
are giving up the right to sue a member, customer, or another
associated person in court, including the right to a trial by jury,
except as provided by the rules of the arbitration forum in which a
claim is filed.
(2) A claim alleging employment discrimination, including a sexual
harassment claim, in violation of a statute is not required to be
arbitrated under NASD rules. Such a claim may be arbitrated at the NASD
only if the parties have agreed to arbitrate it, either before or after
the dispute arose. The rules of other arbitration forums may be
different.
(3) Arbitration awards are generally final and binding; a party's
ability to have a court reverse or modify an arbitration award is very
limited.
(4) The ability of the parties to obtain documents, witness
statements and other discovery is generally more limited in arbitration
than in court proceedings.
(5) The arbitrators do not have to explain the reason(s) for their
award.
(6) The panel of arbitrators may include arbitrators who were or
are affiliated with the securities industry, or public arbitrators, as
provided by the rules of the arbitration forum in which a claim is
filed.
(7) The rules of some arbitration forums may impose time limits for
bringing a claim in arbitration. In some cases, a claim that is
ineligible for arbitration may be brought in court.
* * * * *
1000. CODE OF ARBITRATION PROCEDURE
* * * * *
10200. INDUSTRY AND CLEARING CONTROVERSIES
10210. Required Submission
(a) Except as provided in paragraph (b) or Rule 10216, a dispute,
claim, or
[[Page 30082]]
controversy eligible for submission under the Rule 10100 Series between
or among members and/or associated persons, and/or certain others,
arising in connection with the business of such member(s) or in
connection with the activities of such associated person(s), or arising
out of the employment or termination of employment of such associated
person(s) with such member, shall be arbitrated under this Code, at the
instance of:
(1) a member against another member;
(2) a member against a person associated with a member or a person
associated with a member against a member; and
(3) a person associated with a member against a person associated
with a member.
* * * * *
10202. Composition of Panels
(a) In disputes subject to arbitration that arise out of the
employment or termination of employment of an associated person, and
that relate exclusively to disputes involving employment contracts,
promissory notes or receipt of commission, the panel of arbitrators
shall be appointed as provided by paragraph (b)(1) or (2) or Rule
10203, whichever is applicable. In all other disputes arising out of
the employment or termination of employment of an associated person,
the panel of arbitrators shall be appointed as provided by rule 10212,
10302 or [Rule] 10308, whichever is applicable.
10210. Statutory Employment Discrimination Claims
The Rule 10210 Series shall apply only to disputes that include a
claim alleging employment discrimination, including a sexual harassment
claim, in violation of a statute. The Rule 10210 Series shall supersede
any inconsistent Rules contained in this Code.
10211. Special Arbitrator Qualifications for Employment Discrimination
Disputes (a) Minimum Qualifications for All Arbitrators
Only arbitrators classified as public arbitrators as provided in
Rule 10308 shall be selected to consider disputes involving a claim of
employment discrimination, including a sexual harassment claim, in
violation of a statute.
(b) Single Arbitrators or Chairs of Three-Person Panels
(1) Arbitrators who are selected to serve as single arbitrators or
as chairs of three-person panels should have the following additional
qualifications:
(A) law degree (Juris Doctor or equivalent);
(B) membership in the Bar of any jurisdiction;
(C) substantial familiarity with employment law; and
(D) ten or more years of legal experience, of which at least five
years must be in either:
(i) law practice;
(ii) law school teaching;
(iii) government enforcement of equal employment opportunity
statutes;
(iv) experience as a judge, arbitrator, or mediator, or
(v) experience as an equal employment opportunity officer or in-
house counsel of a corporation.
(2) In addition, a chair or single arbitrator with the above
experience may not have represented primarily the views of employers or
of employees within the last five years. For purposes of this Rule, the
term ``primarily'' shall be interpreted to mean 50% or more of the
arbitrator's business or professional activities within the last five
years.
(c) Waiver of Special Qualifications
If all parties agree, after a dispute arises, they may waive any of
the qualifications set forth in paragraph (a) or (b) above.
10212. Composition of panels
For disputes involving a claim alleging employment discrimination,
including a sexual harassment claim, in violation of a statute:
(a) Each panel shall consist of either a single public arbitrator
or three public arbitrators qualified under Rule 10211, unless the
parties agree to a different panel composition.
(b) A single arbitrator shall be appointed to hear claims for
$100,00 or less.
(c) A panel of three arbitrators shall be appointed to hear claims
for more than $100,000, unless the parties agree to have their case
determined by a single arbitrator.
10213. Discovery
(a) Necessary pre-hearing depositions consistent with the expedited
nature of arbitration shall be available.
(b) The provisions of Rule 10321 shall apply to proceedings under
this Rule 10210 Series.
10214. Awards
The arbitrator(s) shall be empowered to award any relief that would
be available in court under the law. The arbitrator(s) shall issue an
award setting forth a summary of the issues, including the type(s) of
dispute(s), the damages or other relief requested and awarded, a
statement of any other issues resolved, and a statement regarding the
disposition of any statutory claim(s).
10215. Attorneys' Fees
The arbitrator(s) shall have the authority to provide for
reasonable attorneys' fee reimbursement, in whole or in part, as part
of the remedy in accordance with applicable law.
10216. Coordination of Claims Filed in Court and in Arbitration
(a) Option To Combine Related Claims in Court
(1)(A) If a current or former associated person of a member files a
statutory discrimination claim in court against a member or its
associated persons, and asserts related claims in arbitration at the
Association against some or all of the same parties, a respondent who
is named in both proceedings shall have the option to move to compel
the claimant to bring the related arbitration claims in the same court
proceeding In which the statutory discrimination claim is pending, to
the full extent to which the court will accept jurisdiction over the
related claims.
(B) The respondent shall notify the claimant in writing, before the
time to answer Rule 10314 has expired, that it is exercising this
option and shall file a copy of such notification with the Director. If
the respondent files an answer without having exercised this option, it
shall have waived its right to move to compel the claimant to assert
related claims in court, except as provided in paragraph (b).
(2)(A) If a member or current or former associated person of a
member (``party'') has a pending claim in arbitration against a current
or former associated person of a member and the current or former
associated person thereafter asserts a related statutory employment
discrimination claim in court against the party, the party shall have
the option to assert its pending arbitration claims and any
counterclaims in court.
(B) The party shall notify the current or former associated person
in writing, before filing an answer to the complaint in court, that it
is exercising this option and shall file a copy of such notification
with the Director. If the party files an answer in court without having
exercised this option, it shall have waived its right to assert the
pending arbitration claim in court.
(C) The party may not exercise this option after the first hearing
has begun on the arbitration claim.
[[Page 30083]]
(b) Option Extended When Claim Is Amended
(1) If the claimant files an amended Statement of Claim adding new
claims not asserted in the original Statement of Claim, a respondent
named in the amended Statement of Claim shall have the right to move to
compel the claimant to assert all related claims in the same court
proceeding in which the statutory discrimination claim is pending, to
the full extent that the court will accept jurisdiction over the
related claims, even if those related claims were asserted in the
original Statement of Claim.
(2) The respondent shall notify the claimant in writing, before the
time to answer the amended Statement of Claim under Rule 10314 has
expired, that it is exercising this option and shall file a copy of
such notification with the Director. If the respondent files an answer
to the amended Statement of Claim without having exercised this option,
it shall have waived its right to move to compel the claimant to assert
related claims in court.
(c) Requirement to Combine All Related Claims
If a party elects to require a current or former associated person
to assert all related claims in court, the party shall assert in the
same court proceeding all related claims that it has against the
associated person to the full extent to which the court will accept
jurisdiction over the related claims.
(d) Right of Respondent to Remain in Arbitration
(1) If there are multiple respondents and a respondent has
exercised an option under paragraph (a) or (b), but another respondent
wishes to have the claims against it remain in arbitration, then any
remaining party may apply for a stay of the arbitration proceeding.
(2) The arbitration shall be stayed unless the arbitration panel
determines that the stay will result in substantial prejudice to one or
more of the parties. If a panel has not been appointed, the Director
shall appoint a single arbitrator to consider the application for a
stay. Such single arbitrator shall be selected using the Neutral List
Selection System (as defined in Rule 10308) and is not required to have
the special employment arbitrator qualifications described in Rule
10211.
(e) Pre-Filing Certification
(1) Prior to or concurrently with filing a Statement of Claim, a
claimant may file with the Director a certification that it had
communicated unsuccessfully with the respondent concerning the
consolidation of all claims in court prior to filing a Statement of
Claim, in an effort to save the expense of arbitration fees. A copy of
such certification shall be sent to the respondent at the same time and
in the same manner as the filing with the Director.
(2) If, after a certification has been filed, all the respondents
later exercise the option to consolidate all claims in court, the
Director will return the claimant's filing fee and any hearing session
deposits for hearings that have not been held, but will retain the
member surcharge and any accrued member process fees. If there are any
remaining respondents, the filing fee and any hearing deposits will be
adjusted to correspond to the claims against the remaining respondents.
(f) Motions to Compel Arbitration
If a member or a current or former associated person of a member
files in court a claim against a member or a current or former
associated person of a member that includes matters that are subject to
mandatory arbitration, either by the rules of the Association or by
private agreement, the defending party may move to compel arbitration
of the claims that are subject to mandatory arbitration.
(g) Definitions
For purposes of this Rule:
(1) The term ``related claim'' shall mean any claim that arises out
of the employment or termination of employment of an associated person.
(2) The term ``statutory discrimination claim'' means a claim
alleging employment discrimination, including a sexual harassment
claim, in violation of a statutes.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD Regulation 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 places
specified in Item IV below. NASD Regulation 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
1. Purpose
The proposed rule change is intended to enhance the dispute
resolution process for the handling of employment discrimination
disputes, and to expand disclosure to employees concerning the
arbitration of all disputes.
Background. In August 1997, NASD Regulation and the NASD Boards
decided to remove from the NASD Code of Arbitration Procedure the
requirement for registered persons to arbitrate claims of statutory
employment discrimination. That rule change was approved by the
Commission and became effective January 1, 1999.\4\ In conjunction with
this rule change, the Boards recommended certain enhancements to the
arbitration process for discrimination claims. To carry out the Boards'
mandate, NASD Regulation staff assembled a working group, including
attorneys representing employees, general counsels of member firms, and
arbitrators with expertise in employment matters to advise on issues
relating to the arbitration of employment discrimination claims. This
working group met numerous times during 1997 and 1998 to assist the
staff in preparing recommendations to the Board.
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\4\ See Securities Exchange Act Release No. 40109 (June 22,
1998), 63 FR 35299 (June 29, 1998). The NASD Code of Arbitration
Procedure applies not only to NASD members and their associated
persons, but also to members and associated persons of the Municipal
Securities rulemaking Board (``MSRB'') (for claims filed after Jan.
1, 1998), the Philadelphia Stock Exchange (``Phlx'') (for claims
filed after Oct. 1, 1998), and the American Stock Exchange
(``Amex'') (for claims filed following the closing of the merger),
pursuant to agreements under which members of those self-regulatory
organizations for whom the NASD administers the arbitration process
will be treated as ``members'' of the NASD for purposes of the NASD
Code of Arbitration Procedure. See Securities Exchange Act Release
Nos. 39378 (December 1, 1997), 62 FR 64417 (December 5, 1997)
(MSRB); 40517 (October 1, 1998), 63 FR 54177 (October 8, 1998)
(Phlx); and 40622 (October 30, 1998), 63 FR 59819 (November 5, 1998)
(Amex).
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In addition to several issues that were presented to them by NASD
Regulation staff, the working group considered recommendations
contained in a document known as ``A Due Process Protocol for Mediation
and Arbitration of Statutory Disputes arising out of the Employment
Relationship'' (``the Protocol''). The Protocol was created in 1995 by
a task force made up of individuals from diverse organizations involved
in labor and employment law to examine questions of due process arising
out of the use of mediation and
[[Page 30084]]
arbitration for resolving employment disputes. The Protocol has been
adopted by several dispute resolution forums, and the Boards
recommended that due process procedures similar to those in the
Protocol be considered for use in the dispute resolution process at the
NASD for claims of employment discrimination. The working group and the
staff considered the provisions of the Protocol, and made
recommendations to the Board as to how they could be applied to the
arbitration process in the NASD forum. Those recommendations were
considered and adopted by the Boards in October 1998. In this rule
filing, NASD Regulation proposes adoption of a new Rule 10210 Series
which will contain special rules applicable to the arbitration of
statutory employment discrimination claims, and proposes related
changes to other NASD rules. These rule changes deal with the
qualifications of arbitrators hearing claims of employment
discrimination; the number of arbitrators to hear such claims; special
rules for discovery, awards, and attorneys' fees; coordination of
claims filed in court and arbitration; and disclosure to associated
persons of the effects of the arbitration clause found in the Forum U-
4. These proposed changes are described in detail below.
Description of Proposed Amendments. The proposed Rule 10210 Series
contains certain special rules applicable to statutory employment
discrimination claims. These rules supplement and, in some instances,
supersede the provisions of the Code that currently apply to the
arbitration of employment disputes. The proposed special rules do not
attempt to set forth all procedures applicable to the arbitration of
statutory employment discrimination claims, but only those procedures
that relate specifically to such claims and may be different from
procedures that apply to other intra-industry claims.
Qualifications for Neutrals Who Hear Employment Discrimination
Cases. With regard to membership on the roster of arbitrators qualified
to hear claims of employment discrimination, the Protocol provides as
follows:
Mediators and arbitrators selected for such cases should have
skill in the conduct of hearings, knowledge of the statutory issues
at stake in the dispute, and familiarity with the workplace and
employment environment. The roster of available mediators and
arbitrators should be established on a non-discriminatory basis,
diverse by gender, ethnicity, background, experience, etc. to
satisfy the parties that their interest and objectives will be
respected and fully considered.
Our recommendation is for selection of impartial arbitrators and
mediators. We recognize the right of employers and employees to
jointly select as mediator and/or arbitrators one in whom both
parties have requisite trust, even though not possessing the
qualifications here recommended, as most promising to bring finality
and to withstand judicial scrutiny. The existing cadre of labor and
employment mediators and arbitrators, some lawyers, some not,
although skilled in conducting hearings and familiar with the
employment milieu is unlikely, without special training, to
consistently possess knowledge of the statutory environment in which
these disputes arise and of the characteristics of the non-union
workplace.
NASD Regulation currently has on its arbitration roster many
arbitrators who have indicated that they have experience or training in
employment law. In addition, NASD Regulation currently offers
employment law training to arbitrators; such training is conducted by
attorneys experienced in the field of employment law. In accordance
with the Protocol provisions, however, NASD Regulation proposes the use
of a more specialized roster of available arbitrators for intra-
industry cases in which statutory discrimination is alleged. In its
discretion, and depending in part on the number of statutory employment
discrimination claims filed in its forum, NASD Regulation may choose to
create its own specialized employment roster or may work with other
dispute resolution providers to utilize their rosters of qualified
employment arbitrators.
Proposed Rule 10211(a) provides that only arbitrators classified as
public (non-industry) arbitrators will be selected to consider disputes
involving a claim of employment discrimination, including a sexual
harassment claim, in violation of a statute. Proposed Rule 10211(a)
incorporates by reference the definition of ``public arbitrator'' in
the newly revised list selection rule, Rule 10308, which applies both
to customer disputes and to intra-industry disputes except where
superseded by more specific industry arbitration rules. The definition
of ``public arbitrator'' in Rule 10308 excludes not only securities
industry employees and their immediate family members, but also
attorneys, accountants, and other professionals who have devoted 20% or
more of their professional work in the last two years to clients who
are engaged in the securities business (as described in Rule 10308).
Use of the same definition of public arbitrators throughout the Code
provides for more efficient administration of the list selection
system.
For chairpersons and single arbitrators, NASD Regulation proposes
additional qualifications in proposed Rule 10211(b). These
qualifications include a law degree, membership in the Bar of any
jurisdiction, substantial familiarity with employment law, and ten or
more years of legal experience that included at least five years of one
of the following: law practice; law school teaching; government
enforcement of equal employment opportunity (EEO) statutes; experience
as a judge, arbitrator, or mediator; or experience as an EEO officer or
in-house counsel of a corporation. In addition, the chair or single
arbitrator may not have represented primarily the views of employees or
employers within the past five years. For this purpose, ``primarily''
is defined to mean 50% or more of the arbitrator's business or
professional activities within the last five years. NASD Regulation
believes that it is important to the credibility of the forum for the
single arbitrator or chair not only to be neutral, but to avoid even
the appearance of bias toward either employees or employers.
Rule 10211(c) provides that parties may agree, after a dispute
arises, to waive any of the special qualifications contained in either
paragraph (a) or paragraph (b). Such a waiver is not valid if it is
contained in a predispute arbitration agreement.
Composition of Panels. The current arbitration panel composition
for statutory discrimination claims and certain other employment claims
is identical to the panel used for customer disputes and consists of
either one public (non-industry) arbitrator for single arbitrator
cases, or two public arbitrators and one non-public (industry)
arbitrator for three arbitrator cases. An all-industry panel is used
solely for employment disputes that relate exclusively to claims
involving employment contracts, promissory notes or receipt of
commissions.
As described above, NASD Regulation proposes to change this
practice so that, for cases involving claims of employment
discrimination, whether or not other issues are also involved, all
arbitrators must be classified as public. Therefore, proposed Rule
10212(a) provides for a special panel composition of all public
arbitrators to hear claims of statutory employment discrimination. Rule
10212 provides, however, that parties may agree to a different panel
composition in a particular case.
Proposed Rule 10212(b) provides a higher threshold for single
arbitrator cases than is found elsewhere in the
[[Page 30085]]
Code: a single arbitrator will hear claims of $100,000 or less. This
higher threshold reduces the hearing costs for the parties and results
in more efficient allocation of qualified employment arbitrators.
Proposed Rule 10212(c) provides that the claims for more than $100,000
will be assigned to a three-person panel unless the parties agree to
have their case determined by a single arbitrator. NASD Regulation also
proposes a conforming amendment to Rule 10202, the general intra-
industry panel composition rule, to include a reference to the above
special panel composition rule.
Discovery. The Protocol provides as follows with respect to
discovery:
One of the advantages of arbitration is that there is usually
less time and money spent in pre-trial discovery. Adequate but
limited pre-trial discovery is to be encouraged and employees should
have access to all information reasonably relevant to mediation and/
or arbitration of their claims. The employees' representative should
also have reasonable pre-hearing and hearing access to all such
information and documentation.
Necessary pre-hearing depositions consistent with the expedited
nature of arbitration should be available.
NASD Regulation has determined to adopt the Protocol provision on
discovery. Although the Protocol focuses on the employee's access to
information, there also could be situations in which the employee has
documents that the employer requires to prepare its case, such as
records of the employee's outside business activities or prior
employment. Therefore, NASD Regulation believes the term ``employees''
in the quoted provision should be interpreted to include all parties to
the employment dispute. In any event, the NASD's current rule on pre-
hearing procedures, including discovery, Rule 10321, already meets the
Protocol standard regarding access to information and is not proposed
to be amended at this time. Rule 10321 is cross-referenced in proposed
Rule 10213(b) to make clear that its provisions apply to employment
discrimination disputes.
On the issue of depositions in employment discrimination cases,
NASD Regulation proposes that the Protocol should be the standard for
depositions. NASD Regulation proposes that, in considering the need for
depositions, arbitrators should consider the relevancy of the
information sought from the persons to be deposed and the issues of
time and expense. Such considerations are already provided for in Rule
10321, paragraphs (d) and (e), which set forth procedures for deciding
unresolved issues either at the pre-hearing conference or by
appointment of a selected arbitrator. NASD Regulation has incorporated
the proposed discovery provision relating to depositions in proposed
Rule 10313.
Attorney's Fees. The Protocol provides as follows:
The amount and method of payment for representation should be
determined between the claimant and the representative. We
recommend, however, a number of existing systems which provide
employer reimbursement of at least a portion of the employee's
attorney fees, especially for lower paid employees. The arbitrator
should have the authority to provide for fee reimbursement, in whole
or in part, as part of the remedy in accordance with applicable law
or in the interests of justice.
Although the Code of Arbitration Procedure is silent with respect
to attorneys' fees, such fees may be awarded under current practice.
Normally, parties will brief the arbitrators on applicable law
providing for the award of attorneys' fees in their cases. In view of
provisions in the federal civil rights laws that specifically provide
for the award of attorneys' fee, NASD Regulation proposes that the
Protocol provision be adopted as amended below (additions in italics;
deletions in brackets):
The arbitrator should have the authority to provide for
reasonable attorneys' fee reimbursement, in whole or in part, as
part of the remedy in accordance with applicable law [or in the
interests of justice].
Proposed Rule 10215 incorporates the amended provision. It provides
that the arbitrator has authority to provide for reasonable attorney's
fee reimbursement, in whole or in part, as part of the remedy in
accordance with applicable law. This accords with Title VII of the
Civil Rights Act of 1964, which authorizes a court, in its discretion,
to allow the prevailing party ``a reasonable attorney's fee'' as part
of the costs.\5\ NASD Regulation believes that the language of proposed
rule 10215 is more precise if the Protocol phrase ``or in the interests
of justice'' is omitted, as that phrase may mislead parties into
thinking that no statutory basis is necessary for the award of
attorneys fees.\6\ Rather, the intent of proposed rule 10215 is to
allow the award of attorney's fees if applicable law permits such an
award.
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\5\ 42 U.S.C. 2000e-5(k) (1998).
\6\ A guide for arbitrators drafted by the Securities Industry
Conference on Arbitration (SICA) provides as follows: ``Generally,
parties to an arbitration are responsible for their personal costs
associated with bringing or defending an arbitration action.
Exceptions to the rule do exist. Parties should be prepared to argue
the statutory or contractual basis that permits an award of
attorneys' fees. The arbitrators should consider referring to the
authority relied upon if attorneys' fees are awarded.'' The
Arbitrator's Manual (October 1996). SICA is a group composed of
representatives of the self-regulatory organizations that provide
arbitration forums; public investors; and the securities industry.
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Awards. The Protocol provides as follows with regard to awards and
the authority of the arbitrator:
The arbitrator should be bound by applicable agreements,
statutes, regulations and rules of procedure of the designating
agency, including the authority to determine the time and place of
the hearing, permit reasonable discovery, issue subpoenas, decide
arbitrability issues, preserve order and privacy in the hearings,
rule on evidentiary matters, determine the close of the hearing and
procedures for post-hearing submissions, and issue an award
resolving the submitted dispute.
The arbitrator should be empowered to award whatever relief
would be available in court under the law. The arbitrator should
issue an opinion and award setting forth a summary of the issues,
including the type(s) of dispute(s), the damages and/or other relief
requested and awarded, a statement of any other issues resolved, and
a statement regarding the disposition of any statutory claim(s).
NASD Regulation proposes that the Protocol language be adopted with
one language change described below. The Code already provides
arbitrators with authority similar to the Protocol provisions, although
it does not specifically require a statement regarding the disposition
of any statutory claims. In order to add the requirement for a
statement regarding the disposition of any statutory claims, and to
have all related provisions in the same Rule Series, NASD Regulation
has drafted proposed Rule 10214. Proposed Rule 10214 provides that
arbitrators will be empowered to award any relief that would be
available in court under the law, and sets forth the information that
must be contained in the arbitrator's award. Such information includes
a summary of the issues, including the types of disputes, the damages
or other relief requested and awarded, a statement of any other issues
resolved, and a statement regarding the disposition of any statutory
claims.
NASD Regulation has not used the Protocol's phase ``opinion and
award'' in proposed Rule 10214, but instead has used only the term
``award,'' which is consistent with terminology used elsewhere in the
Code. This avoids confusion that might result from use of the term
``opinion,'' which could mislead parties into expecting a judicial type
of decision, rather than the customary type of arbitration award that
contains the specific elements listed in the proposed rule, but not a
detailed
[[Page 30086]]
explanation. Under current NASD Regulation practice, however, parties
may request that the arbitrators provide reasons for their decision,
and the arbitrators have discretion to grant or deny the request.\7\
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\7\ A booklet prepared by SICA and provided to all claimants
explains this industry-wide practice as follows: ``Arbitrators are
not required to write opinions or provide reasons for the award. A
party, however, may request an opinion. This request should be made
no later than the hearing date.'' Arbitration Procedures (October
1996) (also available via the Internet under the title, Arbitration
Procedures for Investors, on the Arbitration page at www.nasdr.com).
In a 1989 Order approving arbitration rule changes by several self-
regulatory organizations, the Commission decided not to require
written opinions in awards, but express the view that arbitrators
could voluntarily prepare written opinions. See Securities Exchange
Act Rel. No. 26805 (May 10, 1989), 54 FR 21144 (May 16, 1989).
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Other Protocol Provisions. NASD Regulation believes that the other
applicable provisions of the Protocol are already addressed
sufficiently in existing Rules within the Code of Arbitration
Procedure. For example, NASD Regulation already gives parties the right
to representation by counsel and refers claimants to state and local
bar associations for legal referrals in several major cities; parties
receive information on arbitration awards issued by arbitrators who may
hear their cases; arbitrators are required to disclose possible
conflicts of interest; arbitrators have the authority to make necessary
rulings and to allocate fees among the parties; and recent rule changes
approved by the Commission \8\ provide a list selection method for both
customer and intra-industry arbitration proceedings that meets the
Protocol standard.
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\8\ See Securities Exchange Act Rel. Nos. 40555 (October 14,
1998), 63 FR 56670 (October 22, 1998) and 40556 (October 14, 1998),
63 FR 56957 (October 23, 1998).
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Coordination of Claims Filed in Court and in Arbitration. Several
individuals who commented on the recent rule change to allow statutory
discrimination claims to be filed in court predicted that the change
could lead to splitting or bifurcation of cases: the discrimination
claims would proceed in court, while other employment claims that are
subject to mandatory arbitration would proceed in arbitration. As the
Commission noted in its approval order for that rule change, some
commenters argued that such bifurcation could result in the separation
of claims that are often joined together and based on the same alleged
facts.\9\ Some commenters believed bifurcation of statutory and common
law claims could create a financial burden on employees and members,
delay the resolution of claims, and cause scheduling and discovery
disputes.\10\ Therefore, NASD Regulation proposes adoption of a new
rule on coordination of claims that may be filed in court and those
that are normally required to be arbitrated under NASD rules.
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\9\ See Securities Exchange Act Rel. Nos. 40109 (June 22, 1998),
63 FR 35299 (June 29, 1998).
\10\ Id.
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Proposed Rule 10216 would provide that, if the parties agree to
resolve all related matters in court, then the matter need not be
submitted to arbitration. Moreover, if a discrimination claim is filed
in court and related claims subject to mandatory arbitration are filed
in arbitration, a respondent in the arbitration would have the option
to move to combine all claims in court. As described more fully below,
the rule provides several other opportunities for a party to move to
compel that a claim be consolidated with other claims in court. Any
claims not accepted by the court under any of these methods, however,
would continue to be arbitrable.
The proposed rule would include a pre-filing procedure in which the
claimant may certify to the Director of Arbitration that he or she
communicated with the respondent about the possibility of filing all
claims in court initially, in order to save the expense of arbitration
fees and attorneys' fees to draft arbitration claim papers. If the
respondent does not agree to consolidate all claims in court, and an
arbitration claim is then filed, proposed Rule 10216 provides several
methods for coordinating claims filed in court and in arbitration.
Paragraph (a)(1)(A) deals with the situation in which an associated
person files a statutory discrimination claim in court and files
related claims in arbitration against some or all of the same parties.
In that case, any respondent who is named in both proceedings may move
to compel the associated person to bring the related arbitration claims
in the same court proceeding, to the full extent to which the court
will accept jurisdiction over those claims. As noted above, any claims
not accepted by the court would remain in arbitration.
Paragraph (a)(1)(B) requires the respondent that wishes to exercise
this option to notify the claimant in writing, before the time to
answer under Rule 10314 has expired, that it is exercising this option
and to file a copy of such notification with the Director of
Arbitration, or be deemed to have waived its right to exercise the
option, except as provided in paragraph (b), described below. This
notice is intended to motivate parties to discuss their options and
consider consolidating all claims in one forum before further expenses
are incurred by either party.
Paragraph (a)(2)(A) provides that if a party has a pending claim in
arbitration against an associated person who thereafter asserts as
related statutory employment discrimination claim in court against the
party, that party has the option to assert all arbitration claims and
counterclaims in court. This is intended to cover the situation in
which an arbitration claim was filed before the statutory
discrimination claim was filed in court. For purposes of paragraph
(a)(2), the term ``party'' means a member or a current or former
associated person of a member. Paragraph (a)(2)(B) provides notice and
time requirements for the exercise of the option similar to those in
paragraph (a)(1)(B), described above. Paragraph (a)(2)(C) provides that
a party may not exercise this option after the first hearing has begun
on the arbitration claim. This is intended to avoid disruption to the
arbitration proceeding when it is farther along in the process.
Paragraph (b) of proposed Rule 10216 provides that the time for
consolidating claims in court is extended if the claimant files an
amended statement of claim adding new claims not asserted in the
original statement of claim. In that case, a respondent has an
opportunity to move to compel the claimant to assert all related claims
in the same court proceeding, even if those claims were asserted in the
original statement of claim. As above, the respondent wishing to
exercise this option must notify the claimant in writing before filing
an answer to the amended statement of claim or be deemed to have waived
the right to do so, and must file a copy of such notification with the
Director.
Paragraph (c) of proposed Rule 10216 provides that if a party
elects to require a current or former associated person to assert all
related claims in court, the party also must asserts in the same court
proceeding all related claims the party has against the associated
person, to the full extent to which the court will accept jurisdiction
over the related claims.
Paragraph (d) of proposed Rule 10216 provides that a respondent
named in both court and arbitration proceedings may choose to remain in
arbitration, even if another respondent has exercised its option to
consolidate the proceedings against it in court. Any remaining party
may seek a stay of the arbitration proceeding, and the proceeding will
be stayed unless the arbitration panel determines that the stay will
result in substantial prejudice
[[Page 30087]]
to one or more of the parties. The presumption in favor of a stay of
the arbitration proceeding is designed to avoid the situation in which
parties must proceed in two forums at the same time. Nevertheless, a
party may object to the stay and have the matter considered by an
arbitrator.
If no panel has been appointed yet, the Director will appoint a
single arbitrator to consider the application for a stay, using the
Neutral List Selection System to select the arbitrator. That arbitrator
is not required to have the special employment arbitrator
qualifications described in Rule 10211, since there would be no
statutory employment discrimination claims in arbitration at this
point; rather, the provisions of Rule 10202 would determine whether the
single arbitrator should be an industry arbitrator or a public
arbitrator. This means that if the claims that are the subject of the
arbitration proceeding ``relate exclusively to disputes involving
employment contracts, promissory notes or receipt of commissions,'' as
provided in the first sentence of Rule 10202(a), then the single
arbitrator would be an industry arbitrator. In ``all other disputes
arising out of the employment or termination of employment of an
associated person,'' as provided in the second sentence of rule
10202(a), a public arbitrator would be appointed. The single public
arbitrator may later appear on a list of arbitrators to be chosen for
any hearing on the merits in the same arbitration.
Paragraph (e) of proposed rule 10216 provides a procedure for
certifying that the claimant has communicated unsuccessfully with the
respondent(s) concerning the consolidation of all claims in court prior
to filing a Statement of Claim, in an effort to save the expense of
arbitration fees, rather than filing the statutory discrimination
claims in court and the other claims in arbitration. If such a
certification has been filed, and all the respondents later exercise
the option to consolidate all claims in court, the Director will return
the claimant's filing fee and any hearing session deposits for hearings
that have not been held, but will retain the member surcharge and any
accrued member process fees to cover the cost of docketing and
otherwise processing the claim. If there are remaining respondents,
however, the filing fee and any hearing deposits will be adjusted to
correspond to the claims against the remaining respondents.
Paragraph (f) of proposed rule 10216 clarifies that, if an
associated person files a claim in court that includes matters that are
subject to mandatory arbitration, either by the rules of the NASD or by
private agreement, the defending party may move to compel arbitration
of the claims that are subject to mandatory arbitration. This is a
statement of current practice and is intended to apply where the
defending party has not exercised an option under other provisions of
proposed Rule 10216 to combine all claims in court.
Paragraph (g) of proposed rule 10216 provides that, for purposes of
Rule 10216, the term ``related claim'' means any claim that arises out
of the employment or termination of employment of an associated person
and the term ``statutory discrimination claim'' means a claim alleging
employment discrimination, including a sexual harassment claim, in
violation of a statute.
In conjunction with the proposed bifurcation rule, a change is
proposed to Rule 10201 to add a reference to proposed Rule 10216. This
exception is necessary because, under Rule 10216, some claims that
might otherwise be required to be arbitrated may be brought in court,
at the respondent's option.
Disclosure Issues. NASD Regulation proposes adoption of a model
disclosure statement that would be given to persons who are signing the
Form U-4 to apply for registration. This disclosure statement would
explain the nature and effect of the arbitration clause contained in
the Form U-4. It would not address any private arbitration agreement
that the applicant might enter into with the member firm. Rather, the
firm would be responsible for either making proper disclosure to its
employees about its private arbitration agreement, or risking an
adverse decision in later litigation concerning any inadequacy in the
disclosure.
Proposed Rule 3080, entitled ``Disclosure to Associated Persons
When Signing a Form U-4,'' was modeled on the disclosure given to
customs when signing predispute arbitration agreements with member
firms, as contained in current Rule 3110(f) and proposed amendments
thereto contained in File No. SR-NASD-98-74. Because the proposed rule
relates to associated persons, it has been placed in the portion of the
Rules that deal with the responsibilities of members relating to
associated persons, employees and others' employees. The introductory
language of the proposed rule requires members to provide each
associated person, whenever the associated person is asked to sign a
new or amended Form U-4, with certain specified disclosure language.
This means that the disclosure may be given by the same member to the
same associated person on more than one occasion during that person's
employment, if the associated person has reason to re-sign the Form U-
4. The specified disclosure language explains that the Form U-4
contains a predispute arbitration clause, and indicates in which Item
of the Form U-4 the clause is located.\11\ The disclosure language then
advises the associated person to read the predispute arbitration
clause.
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\11\ The member will be responsible for updating this item
number on new disclosure statements if it changes in later versions
of the Form U-4.
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Subparagraph (1) of proposed Rule 3080 paraphrases the arbitration
clause in the Form U-4 and then provides disclosure that the associated
person is giving up the right to sue in court, except as provided by
the rules of the arbitration forum in which a claim may be filed.
Subparagraph (2) incorporates the language of Rule 1021 regarding an
exception to the arbitration requirement for claims of statutory
employment discrimination. Subparagraph (2) also indicates that the
rules of other arbitration forums may be different. Subparagraphs (3)
through (7) track the language of the proposed amendments to Rule
3110(f)(1), which sets forth similar disclosures to customers. Those
subparagraphs inform the associated person that arbitration awards are
generally final and binding, that discovery is generally more limited
in arbitration than in court, that arbitrators do not have to explain
the reasons for their awards, that the panel of arbitrators may include
either public or industry (non-public) arbitrators,\12\ and that the
rules of some arbitration forums may impose time limits for bringing a
claim in arbitration.
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\12\ The language of subparagraph (6) differs slightly from that
of proposed Rule 3110(f)(1)(E) because, following adoption of the
present proposed rule change, the panel composition for statutory
employment discrimination claims will differ from the panel
composition for customer claims.
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2. Statutory Basis
The Association believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Act, which
require that the rules of an association be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade and, in general, to protect investors and
the public interest. The Association believes that the proposed rule
change will protect the public interest by improving the arbitration
process for claims of statutory employment discrimination, and result
in increased satisfaction with that process by both associated persons
and members.
[[Page 30088]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The Association 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, Participation, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the 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 NASD consents, the Commission will:
(A) by order approve the 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 proposal is
consistent with the Act. In particular, the Commission solicits
comments on the following issues:
Proposed Rule 10216 provides procedures for administering disputes
that involve both statutory employment discrimination claims that are
filed in court and other claims that are filed at the NASD Regulation's
arbitration forum. Cases affected by proposed Rule 10216 would
generally involve firms that have not entered into agreements with
their employees to arbitrate statutory employment discrimination
claims.
(1) The proposed rule permits respondents to choose when to
bifurcate claims in these disputes. Does this strike a fair balance?
(2) Is this aspect of the proposal (permitting respondents to
choose when to bifurcate claims) necessary to encourage firms to give
their employees the option of bringing statutory employment
discrimination claims in court? Without this provision, would firms be
more likely to require employees to sign predispute arbitration clauses
governing these claims?
(3) Does the proposal place an unreasonable burden on individual
claimants because they are unable to determine the forum in which they
will assert claims related to their stautory employment discrimination
claims, or does the ability to bring their dominant, statutory
employment discrimination claims in court provide for the appropriate
balance?
(4) Does the presumption in favor of a stay of proceedings for
those parties who remain in arbitration while other claims are being
litigated unduly infringe on the parties bargain to arbitrate?
The Commission welcomes suggestions as to how objectionable
procedures could be changed without imposing undue litigation costs in
either party to a dispute.
Persons making written submissions should file six copies thereof
with the Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 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 at the Commission's Public
Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of the NASD. All
submissions should refer to File No. SR-NASD-99-08 and should be
submitted by June 25, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-14210 Filed 6-3-99; 8:45 am]
BILLING CODE 8010-01-M