[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