Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices 35299

8Securities Exchange Act Release No. 36367

(October 13, 1995), 60 FR 54095.

9 15 U.S.C. 78q–1(b)(3)(C).

10 15 U.S.C. 78q–1(b).

11 15 U.S.C. 78q–1(b)(3).

12 17 CFR 200.30–3(a)(16).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Letter from Dennis C. Vacco, Attorney General

of the State of New York (‘‘Attorney General’’), to

Jonathan G. Katz, Secretary, Commission, dated

December 17, 1997 (‘‘Attorney General Letter’’);

Gilbert F. Casellas, Chairman, U.S. Equal

Employment Opportunity Commission (‘‘EEOC’’),

to Secretary, Commission, (‘‘EEOC Letter’’); Jeffrey

L. Liddle, Liddle & Robinson, L.L.P., to Secretary,

Commission, dated January 2, 1998 (‘‘Liddle

Letter’’); W. Hardy Callcott, Vice President and

Deputy General Counsel, Charles Schwab

(‘‘Schwab’’), to Jonathan G. Katz, Secretary,

Commission, dated January 6, 1997 [sic] (‘‘Schwab

Letter’’); William J. Fitzpatrick, Attorney, to

Secretary, Commission, dated January 8, 1997 [sic]

(‘‘Fitzpatrick Letter’’); Stuart J. Kaswell, Senior Vice

President and General Counsel, Securities Industry

Association (‘‘SIA’’), to Jonathan G. Katz, Secretary,

Commission, dated January 13, 1998 (‘‘SIA Letter’’);

Helen Norton, Director, Equal Opportunity

Programs, Women’s Legal Defense Fund (‘‘WLDF’’),

to Jonathan G. Katz, Secretary, Commission, dated

January 7, 1998 (‘‘WLDF Letter’’); Cliff Palefsky,

Chair, Securities Industry Arbitration Committee,

National Employment Lawyers Association

(‘‘NELA’’), to Secretary, Commission, dated January

6, 1998 (‘‘NELA Letter’’); and George A. Schieren,

Senior Vice President and General Counsel, Merrill

Lynch, to Jonathan G. Katz, Secretary, Commission,

dated January 16, 1998 (‘‘Merrill Letter’’).

4Letter from Jean I. Feeney, Attorney, NASD

Regulation, to Katherine A. England, Assistant

Director, Market Regulation, Commission, dated

April 14, 1998. Amendment No 2 amends the

language of the proposed rule change in Section

10201(b) of the code to state ‘‘A claim alleging

employment discrimination, including a sexual

harassment claim, [or sexual harassment] in

violation of a statute is not required to be

arbitrated.’’ Amendment No. 2 also amends the

effective date of the proposed rule change to

January 1, 1999. In addition, Amendment No. 2

responds to the comment letters.

5 17 CFR 240.15b7–1. The rule provides as

follows:

No registered broker or dealer shall effect any

transaction in, or induce the purchase or sale of,

any security unless any natural person associated

with such broker or dealer who effects or is

involved in effecting such transaction is registered

or approved in accordance with the standards of

training, experience, competence, and other

qualification standards (including but not limited to

submitting and maintaining all required forms,

paying all required fees, and passing any required

examinations) established by the rules of any

national securities exchange or national securities

association of which such broker or dealer is a

member or under the rules of the Municipal

Securities Rulemaking Board (if it is subject to the

rules of that organization).

Treasury securities as the underlying

instrument.8 Currently, repurchase

agreement transactions constitute the

majority of the transactions cleared by

DCC.

As a part of its temporary registration,

DCC was granted a temporary

exemption from the requirements of

Section 17A(b)(3)(C),9 which requires

that the rules of a clearing agency assure

the fair representation of its

shareholders or members and

participants in the selection of its

directors and administration of its

affairs. While Commission staff and

DCC staff have had ongoing discussions

on DCC’s proposed method of

complying with Section 17A(b)(3)(C),

the Commission believes that the issue

of DCC’s compliance with the fair

representation requirements should be

completely resolved before DCC

receives permanent registration as a

clearing agency under Section 17A(b) of

the Act.10

In light of DCC’s past performance,

the Commission believes that DCC

complies with the statutory

prerequisites for registration as a

clearing agency contained in Section

17A(b)(3) of the Act except for the fair

representation requirement discussed

above.11 Therefore, the Commission

believes that DCC should continue to be

registered on a temporary basis.

Comments received during DCC’s

temporary registration will be

considered in determining whether DCC

should receive permanent registration as

a clearing agency.

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing

application. Persons making written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, NW., Washington, DC 20549.

Copies of the application and all written

comments will be available for

inspection and copying at the

Commission’s Public Reference Room

450 Fifth Street, NW., Washington, DC

20549. All submissions should refer to

the File No. 600–24 and should be

submitted by July 29, 1998.

It is therefore ordered, pursuant to

Section 19(a) of the Act, that DCC’s

registration as a clearing agency (File

No. 600–24) be and hereby is

temporarily approved through July 31,

1999.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–17234 Filed 6–26–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40109; File No. SR–NASD–

97–77]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Granting Approval

to Proposed Rule Change Relating to

the Arbitration of Employment

Discrimination Claims

June 22, 1998.

I. Introduction

On October 17, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’), by and

through its wholly owned subsidiary

NASD Regulation, submitted to the

Securities and Exchange Commission

(‘‘Commission’’), pursuant to Section

19(b)1) of the Securities Exchange Act of

1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change to

amend Rule 10201 of the NASD’s Code

of Arbitration Procedure (‘‘Code’’) to

remove the requirement to arbitrate

statutory claims of employment

discrimination.

Notice of the proposed rule change,

together with the substance of the

proposal, was published for comment in

Securities Exchange Act Release No

39421 (December 10, 1997), 62 FR

66164 (December 17, 1997). Nine

comment letters were received on the

proposal.3 NASD Regulation

subsequently filed Amendment No. 2 to

the proposed rule filing on April 15,

1998.4

II. Description

The proposed rule change will modify

the current requirement that associated

persons arbitrate all disputes arising out

of their employment or termination of

employment with a member broker/

dealer. The proposed rule provides that

associated persons are no longer

required, solely by virtue of their

association or their registration with the

NASD, to arbitrate claims of statutory

employment discrimination. Associated

persons still will be required to arbitrate

other employment-related claims, as

well as any business-related claims

involving investors or other persons.

Background

The requirement for associated

persons to register with the NASD arises

from Section 15A(g)(3)(B) of the Act,

which provides that the NASD may

‘‘require a natural person associated

with a member, or any class of such

natural persons, to be registered with

the association in accordance with

procedures so established [by the rules

of the association].’’ The registration

requirement for associated persons who

effect securities transactions was made

mandatory by Rule 15b7–1 under the

Act in 1993.5 The NASD, other selfregulatory organizations (‘‘SROs’’), and
35300 Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices

6The Form U–4 was adopted effective October 1,

1975.

7The relevant language on the Form U–4 states:

I agree to arbitrate any dispute, claim or

controversy that may arise between me and my

firm, or a customer, or any other person, that is

required to be arbitrated under the rules,

constitutions, or by-laws of the organizations

indicated in Item 10 as may be amended from time

to time and that any arbitration award rendered

against me may be entered as a judgment in any

court of competent jurisdiction.

From page 4 of the Form U–4 as revised in

November 1991. A new version of the Form U–4

was approved by the Commission on July 5, 1996.

Securities Exchange Act Release No. 37407 (July 5,

1996), 61 FR 36595 (July 11, 1996). Use of the

revised form has been deferred pending related

changes to the Central Registration Depository

(‘‘CRD’’). Securities Exchange Act Release No.

37994 (November 27, 1996), 61 FR 64549

(December 5, 1996). The substance of the quoted

language was not changed in the revision.

8As one court explained, ‘‘Section 1 [now Rule

10101] defines the general universe of issues that

may be arbitrated, and Section 8 [now Rule 10201]

describes a subset of that universe that must be

arbitrated under the Code.’’ Armijo v. Prudential

Ins. Co. of Am., 72 F.3d 793, 798 (10th Cir. 1995).

9Securities Exchange Act Release No. 32802

(August 25, 1993), 58 FR 45932 (August 31, 1993).

In its order approving this change and a related

change in the composition of arbitration panels to

hear employment disputes, the Commission

recognized that claims based on allegations of age,

sex, or race discrimination, or relating to sexual

harassment, were subject to the arbitration

requirement.

10Higgins v. Superior Court of Los Angeles

County, No. B057028 (Cal. App. Oct. 8, 1991),

review denied and decision ordered not officially

published, 1 Cal. Rptr. 2d 57 (1992). The state court

noted the difference between the NYSE rule (at

issue in the Supreme Court’s Gilmer decision,

discussed below), which refers to disputes arising

out of the employment or termination of

employment of an associated person, and the NASD

rule, which at the time did not contain the phrase

relating to employment. A federal court reached the

same conclusion while the rule change was pending

approval. Farrand v. Lutheran Bhd., 993 F.2d 1253

(7th Cir. 1993). The Association stated in its rule

filing that the amendment was a clarification of

existing intent rather than a new policy; some

courts accepted this view, while other courts

interpreted the rule amendment as a change in

policy. See Kuehner v. Dickinson & Company, 84

F.3d 316, 320 n.1 (9th Cir. 1996) (describing splits

in the Seventh, Tenth and Eleventh Circuits on this

issue).

11 500 U.S. 20 (1991). Those challenges included

contentions that anti-discrimination laws are

designed to further important social policies that

should be addressed in a public forum, that

arbitration panels may be biased, that discovery is

more limited in arbitration than in court, that

arbitrators often do not issue written opinions, that

arbitration procedures do not provide for broad

equitable relief and class actions, and that there is

unequal bargaining power between employers and

employees. The Court noted the most of these

contentions were generalized attacks on arbitration

that had been rejected in prior Supreme Court

decisions. Id. at 30.

12 Id. at 35. The Court cited its earlier holding

that, ‘‘So long as the prospective litigant effectively

may vindicate [his or her] statutory cause of action

in the arbitral forum, the statute will continue to

serve both its remedial and deterrent function.’’ 500

U.S. at 28, quoting Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985).

13See, e.g., Alford v. Dean Witter Reynolds, Inc.,

939 F.2d 229 (5th Cir. 1991); Cremin v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 957 F. Supp.

1460 (N.D.Ill. 1997). But see Rosenberg v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 1998 U.S. Dist.

Lexis 877 (D.Mass. 1998).

14See, e.g., Austin v. Owens-Brockway Glass

Container, Inc., 78 F.3d 875, 881 (4th Cir.), cert.

denied, 117 S. Ct. 432 (1996).

15See, e.g., Kaliden v. Shearson Lehman Hutton,

Inc., 789 F. Supp. 179, 180 (W.D. Pa. 1991).

16See, e.g., Metz v. Merril Lynch Pierce, Fenner

& Smith, Inc., 39 F.3d 1482, 1488 (10th Cir. 1994).

17See, e.g., Commission on Future of WorkerManagement Relations (‘‘Dunlop Commission’’),

Report and Recommendations 33 n.15 (1994); Equal

Employment Opportunity Commission, Policy

Statement on Mandatory Binding Arbitration of

Employment Discrimination Disputes as a

Condition of Employment n.2 (1997).

18Letter from Representatives Edward J. Markey,

Anna G. Eshoo, and Jesse L. Jackson, Jr., to Arthur

Levit, Chairman, SEC (February 3, 1997). The

Commission’s Division of Market Regulation

determined that there was no clear answer and

suggested that the SROs should address the issue

in the first instance.

19H.R. 983 and S. 63, 105th Cong. (1997).

20Under the proposed legislation, the parties

could agree, after a dispute arose, whether to

resolve it by arbitration or by court proceedings.

state regulatory authorities require all

applicants for registration as persons

associated with a broker/dealer

(registered representatives, assistant

representatives or principals) to

complete and sign the Form U–4, the

‘‘Uniform Application for Securities

Industry Registration or Transfer.’’ 6

Form U–4 requires registered persons to

submit to arbitration any claim that is

eligible under the rules of the

organizations with which they register

(as indicated in Item 10 of the Form U–

4).7 thus, the Form U–4 incorporates by

reference the rule of the SRO with

which the individual is to be registered.

NASD Rule 10101 provides as follows:

The Code of Arbitration Procedure is

prescribed * * * for the arbitration of any

dispute, claim, or controversy arising out of

or in connection with the business of any

member of the Association, or arising out of

the employment or termination of

employment of associated person(s) with any

member, with the exception of disputes

involving the insurance business of any

member which is also an insurance company

* * * between or among members and

associated persons * * *.

For industry and clearing controversies,

Rule 10201 requires that all matters

eligible under Rule 10101 be submitted

to arbitration at the request of any

member or associated person.8 Rules

10101 and 10201 were amended in 1993

to include the language relating to

disputes ‘‘arising out of the employment

or termination of employment’’ of an

associated person.9 This language was

added in order to clarify that

employment disputes were required to

be arbitrated, since a California court

had held that the Code of Arbitration

Procedure did not cover such disputes,

but only covered disputes arising out of

or in connection with business

transactions.10

Over the past several years,

employees have raised several

challenges to the mandatory arbitration

of employment discrimination disputes.

In 1991, the Supreme Court established

the framework for considering the issues

raised by such challenges in Gilmer v.

Interstate/Johnson Lane Corp.11 In

Gilmer, which involved a person

registered with the New York Stock

Exchange, the Court examined

numerous challenges to the adequacy of

arbitration procedures raised by the

registered representative and found that

none was sufficient to prevent the Court

from enforcing the representative’s

agreement, pursuant to his signing of

the Form U–4, to arbitrate his federal

age discrimination claim. The Court

held that Mr. Gilmer had not met his

burden of showing that Congress

intended to preclude arbitration of

claims under the Age Discrimination in

Employment Act (‘‘ADEA’’) of 1967.12

Subsequent to the Glimer decision,

several courts have declined to find a

Constitutional or statutory bar to

enforcement of the agreement to

arbitrate contained in the Form U–4.

Indeed, they have extended the

reasoning of Glimer to cover disputes

arising under Title VII of the Civil

Rights Act of 1964,13 the Americans

with Disabilities Act,14 and state

statutes of a similar nature.15 Courts also

have extended the application of Glimer

to the NASD, since its rules are similar

to the NYSE rule at issue Glimer,16 The

Commission notes, however, that the

U.S. Court of Appeals for the Ninth

Circuit, in Duffield v. Robertson

Stephens & Co., 1998 U.S. App. Lexis

9284 (9th cir. 1998), recently held that

Item 10 of Form U–4, incorporating the

current mandatory provision of Rule

10101 and 10201, is unenforceable as

applied to Title VII claims.

Registered persons and others have

continued to question the policy of

requiring the arbitration of statutory

discrimination claims.17 In February of

1997, three members of Congress wrote

to the SEC and questioned the authority

of the NASD and other SROs to require

arbitration of statutory discrimination

claims in employment disputes through

an associated person’s signing of the

Form U–4.18 Legislation was introduced

that year in both the House and

Senate 19 that would prohibit employers

and employees from entering into

predispute arbitration agreements

concerning claims of unlawful

employment discrimination.20
Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices 35301

21See Amendment No. 2, supra note 4.

22A report by the NASD’s Arbitration Policy Task

Force (‘‘Task Force Report’’) observed that

arbitration of employment-related disputes offers

advantages in terms of speed and cost, and that

arbitration’s essentially equitable approach to

dispute resolution is fully capable of vindicating

the important public rights expressed in antidiscrimination statutes. Task Force Report at 119.

Therefore, the NASD expects that many employees

will continue to file their discrimination claims in

arbitration if the proposed rule becomes effective,

and the NASD states that it intends to make further

enhancements to its arbitration forum to make it

even more attractive to parties. Firms and their

employees who agree to arbitrate discrimination

claims may agree to use any arbitration forum.

23Sexual harassment has been held to be a form

of sex discrimination, and thus a violation of Title

VII. Meritor Savings Bank v. Vinson, 477 U.S. 57,

64 (1986).

24The NASD intends the term ‘‘statute’’ to be

interpreted broadly, as defined in Black’s Law

Dictionary 1410 (6th Ed. 1990): ‘‘A formal written

enactment of a legislative body, whether federal,

state, city, or county.’’

25Such judicially created causes of action might

include, for example, claims alleging ‘‘wrongful

discharge’’ without any accompanying claim of

discrimination on account of age, sex, race, or other

status protected by a specific law.

26See Amendment No. 2, supra note 4.

27Accordingly, under the proposal, on January 1,

1999, claims may be filed in court for past conduct

if they are within the applicable statutes of

limitation and other statutory requirements and no

other predispute arbitration agreements apply.

28Liddle Letter; Fitzpatrick Letter; Schwab Letter.

29See Amendment No. 2, supra note 4.

30Fitzpatrick Letter.

31 Id. the SIA also noted that critics of the

arbitration process have not offered any empirical

data to support a claim that SRO arbitration is not

a fair forum for employees to resolve statutory

employment discrimination claims and employees

actually do better in arbitration than in

overcrowded court systems.

32Schwab noted that the NASD did state its

intent to provide increased training in employment

related issues to arbitrators and to assign arbitrators

based on their subject-matter expertise.

33Liddle Letter. He stated that the decision to

exclude statutory employment claims from

mandatory arbitration reflects the NASD’s view that

its arbitration process is not suited to handle

resolution of these claims because it is

fundamentally unfair and does not afford a claimant

with an employment claim a full and fair

opportunity to vindicate his or her rights.

34Attorney General Letter; Liddle Letter. Another

commenter stated that the proposed rule change

should be expanded to cover all statutory

employment rights, including those under ERISA,

the Family and Medical Leave Act, and other laws.

WLDF Letter.

35Attorney General Letter.

Details of the Proposed Rule Change

Paragraph (a) of the proposed rule

adds a prefatory phrase indicating that

the requirement to arbitrate employment

disputes contains an exception, set forth

in paragraph (b).

New paragraph (b) provides that

claims alleging employment

discrimination, including sexual

harassment, in violation of a statute are

not required to be arbitrated by NASD

rules.21 This means that such claims

may be filed in the appropriate court, if

the employee chooses to do so and is

not under an enforceable predispute

obligation to arbitrate the dispute. An

employee also may agree to arbitrate

after a dispute arises.22

Paragraph (b) applies only to claims

alleging employment discrimination,

including sexual harassment,23 in

violation of a statute.24 Paragraph (b)

does not apply to causes of action

created solely by judicial precedents or

to other causes of action under state or

federal law, which remain subject to

mandatory arbitration under paragraph

(a).25

Paragraph (c) of the proposed rule is

former paragraph (b), which is

unchanged except for the renumbering.

Effective Date

The NASD originally requested that

the proposed rule become effective one

year from the date of Commission

approval. However, the NASD is now

asking that the proposed rule change

become effective on January 1, 1999.26

NASD Regulation states that the rule

change will apply to claims filed on or

after the effective date of the rule

change.27 NASD Regulation states that

this method is the one most commonly

used with regard to changes to the Code

and is the most efficient to administer.

III. Summary of Comments

The Commission received nine

comment letters on the proposed rule

change. Six commenters supported the

proposed rule change, with

recommended modifications. Three

commenters opposed the proposed rule

change.28 The comment letters focused

on three main issues: (1) whether the

rule will lead to the bifurcation of

claims in arbitration and in court; (2)

whether the one-year delayed effective

date was appropriate; and (3) whether

the rule should be amended to permit

only post-dispute agreements to

arbitrate. NASD Regulation responded

to the comment letters.29

Overview of the Proposed Rule Change

Many of those who support the

proposed rule change do so because

they believe employment discrimination

claims do not belong in arbitration. The

EEOC, for example, applauded the

proposal as a ‘‘first step’’ toward

bringing the securities industry into

harmony with the intent of federal antidiscrimination statutes. The WLDF

asserted that it will help protect

important civil rights. NELA argued that

the NASD does not have the jurisdiction

to compel the waiver of fundamental

statutory rights and remedies as a

condition of employment, and that

statutory claims of this sort do not

belong in the present arbitration system.

The New York Attorney General

supported the proposed rule change,

maintaining that industry arbitrators

lack training and experience relating to

interpreting and applying employment

discrimination law.

One commenter opposed the

proposed rule change, contending that it

is against public policy, is contrary to

case law and federal legislation

encouraging the use of arbitration,

ignores the concerns of courts,30 and

undermines a long history of a system

of SRO arbitration of employment

matters without any empirical evidence

of a problem.31 Similarly, Schwab stated

that although it is willing to resolve

statutory discrimination claims in court,

because arbitration is the preferable

forum, it does not support the proposed

rule change in its current form. In

Schwab’s view, arbitration is

fundamentally fair as a dispute

resolution process and the NASD

should address any concerns by

working to improve the process, not by

removing some classes of cases from the

process.32 On the other hand, one

commenter opposed the proposed rule

change as not going far enough. He

maintained that the Commission should

prohibit arbitration of all employment

claims in any instance.33

NASD Regulation responded that its

arbitration forum is fair and that it

provides many benefits to employees as

well as to members, and that the

proposed rule change does not in any

way indicate a lack of confidence in the

current arbitration system.

Comments Concerning Bifurcation of

Claims

Several letters voiced concerns that,

as presently drafted, the rule presents

the possibility that claimants will be

required to pursue different claims in

different forums. A number of

commenters asserted that the proposal

should be expanded to cover all

common law claims concerning

employment-related matters,34 such as

wrongful termination, defamation,

negligent supervision, invasion of

privacy, tortious interference with

economic opportunity, and intentional

infliction of emotional distress.35 Those

commenters argued that since the

proposed rule change allows the

statutory discrimination claims to be

brought in court, while requiring

employees to bring the common law and

all other statutory claims in arbitration,

it will result in the separation of claims

that are often joined together and based
35302 Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices

36Attorney General Letter; Liddle Letter; Schwab

Letter; Fitzpatrick Letter.

37Liddle Letter.

38Schwab Letter. Schwab noted that the court

case and arbitration case might occur in different

states, requiring different lawyers and further

increasing the costs of final resolution.

39Attorney General Letter; Liddle Letter; Schwab

Letter.

40Schwab Letter. In addition, Schwab observed

that parties may file pretextual claims in court to

gain the advantage of more liberal discovery in

court than in arbitration, or that multiple

proceedings may result in orders that conflict with

one another. Schwab argued that, because it is more

likely that arbitrations and investigations will now

occur at the same time because the arbitration

necessarily will not resolve the discrimination

claims, the proposal creates the potential for

conflict between investigations by the EEOC or

comparable state or local agencies, and arbitrations.

Schwab also maintained that parties to arbitration

would then subpoena the investigatory files and

submit the information to the arbitration panel, who

are likely to misunderstand the information in those

files, which may be gathered without due process

or significant input from the parties involved.

Schwab suggested that EEOC and comparable state

investigative files should not be subject to discovery

or admissible as evidence in arbitration.

41Liddle Letter; Schwab Letter.

42Attorney General Letter; EEOC Letter; WLDF

Letter; NELA Letter.

43EEOC Letter; WLDF Letter; NELA Letter.

44Attorney General Letter.

45The NASD stated that it intended to improve

the arbitration process to ensure procedural

adequacy and to safeguard employee rights,

including providing for greater disclosure to

employees of the effect of signing the Form U–4, the

features of arbitration, and their rights under the

proposed rule.

46Fitzpatrick, who oppose the proposed rule

change, nevertheless supported the one-year period

in the event the Commission approves the proposed

rule change.

47Schwab requested that the NASD and the

Commission clarify precisely how the one-year

effective date is intended to operate. Schwab

questioned whether the proposed rule change will

apply to any court case filed more than a year form

the approval of the proposal (which could

encourage people to wait to file a case), or whether

it will apply only to employees who sign the Form

U–4 after one year has passed (which would result

in different employees having different rights in

incidents occurring at the same time).

48Attorney General Letter; EEOC Letter. The

Attorney General further stated that opposition to

pre-dispute arbitration agreements is widespread,

including some members of Congress, the EEOC,

and the Commission on the Future of Workeron the same alleged facts.36 In their

view, such bifurcation of the statutory

and common law claims could create a

financial burden on employees 37 and

members or member firms,38 delay the

resolution of claims,39 and cause

scheduling and discovery disputes.40

Several commenters also voiced

concerns about the possible res judicata

or collateral estoppel effects of the

arbitration on the court proceeding.41

NASD Regulation responded that the

proposed rule change is an exception to

a long-standing rule requiring the

arbitration of disputes between

members and associated persons and

that the interest groups who expressed

their concerns focused on federal antidiscrimination legislation, not on

common law claims or other federal

laws. In addition, NASD Regulation

stated it will continue to observe

developments in this area (as will the

Commission).

Comments Concerning the Effective

Date

Several commenters recommended

that the proposal become effective

earlier than one year after Commission

approval.42 Several commenters

suggested immediate effectiveness,43

while one suggested effectiveness three

months after Commission approval.44

The EEOC was of the view that the rule

should be effective immediately upon

Commission approval because securities

industry employees should not be

locked into an agreement that conflicts

with the principles underlying the antidiscrimination laws. The EEOC was not

persuaded otherwise by the NASD’s

justification that a one-year delay will

allow it to improve its arbitral forum 45

and stated that the NASD can still

pursue those steps notwithstanding an

immediate effective date. The EEOC

stated that existing deficiencies in the

arbitral process militate against delaying

the effective date. The EEOC was

concerned that the year delay will allow

firms time to implement their own

mandatory arbitration agreements to

replace the requirement eliminated by

the NASD. Similarly, NELA’s view is

that the real purpose of the waiting

period is to allow member firms time to

implement their own mandatory

arbitration requirements in employee

contracts in order to circumvent the

positive benefits of the rule change. The

WLDF objected to the one-year waiting

period because it argued that victims of

sexual harassment and other forms of

illegal discrimination will continue to

be denied important safeguards, while

NELA opposed the one year waiting

period as being inconsistent with the

purpose and spirit of the proposal and

stated it would be unconscionable to

keep in place for a year a system that is

‘‘admittedly inadequate’’ for the

resolution of statutory discrimination

claims.

On the other hand, the SIA and

Merrill Lynch supported the one-year

phase in period.46 The SIA stated that

employees and firms need time to

consider what agreements they may

wish to enter into with each other and

that firms need time to consider and

implement the changes. The SIA also

noted that the NASD intends to use the

year to enhance the quality of its

arbitration programs, to increase the

level of confidence that employees have

in the fairness of the NASD arbitration

forum, and to work with other

regulators to consider whether other

change sin the industry registration

process are warranted. The SIA argued

that the proposal does not need to be

implemented immediately to protect

employee rights because (1) the

Supreme Court has stated that parties

who agree to arbitrate their claims do

not forgo any substantive statutory

rights, and (2) it is not true that

arbitration is improper and unfair to

employees. Similarly, Merrill Lynch

supported a one-year waiting period

because, in its view, arbitration is not

unfair, as found by the Supreme Court

in Gilmer, and employees fare better in

SRO arbitration than in court. Merrill

Lynch stated that because the proposed

rule change represents a significant

change in industry practice, other SROs

(who have not followed the NASD’s

lead in this area) and the industry need

time to resolve the issues created by the

new rule.47

NASD Regulation responded that the

publicity that has surrounded the

proposed rule has always included the

fact that the rule would take effect one

year after Commission approval, so

firms and employees have not been on

notice that they should act more

quickly. NASD Regulation also stated

that making the rule change effective

shortly after Commission approval

would be problematic because other

SROs that require arbitration of

employee/employer disputes may wish

to amend their rules to be consistent

with the NASD and this process could

take several months. Nonetheless, the

NASD stated that it understands the

desirability of a definitive effective date

and moved the effective date to January

1, 1999. In the view of NASD

Regulation, this date gives other SROs,

members and employees sufficient time

to take action to respond to the rule.

With regard to the significance of the

effective date, NASD Regulation stated

that the rule change will apply to claims

filed on or after the effective date of the

rule change. NASD Regulation asserted

that this method is the one most

commonly used with regard to changes

to the Code and is the most efficient to

administer, as it does not involve

subsidiary determinations as to the

dates of other transactions.

Comments Concerning Voluntary PostDispute Agreements

Several commenters argue that predispute agreements to arbitrate should

not be allowed because they are never

truly voluntary,48 because of the
Federal Register / Vol. 63, No. 124 / Monday, June 29, 1998 / Notices 35303

Management Relations (‘‘Dunlop Commission’’).

Legislation was introduced in the House and the

Senate that would prohibit parties from entering

into agreements to resolve employment

discrimination claims unless they voluntarily enter

into them after such claims arise.

49Attorney General Letter.

50EEOC Letter.

51Attorney General Letter; EEOC Letter; Liddle

Letter.

52Attorney General Letter. NASD Regulation

responded that the content of private arbitration

agreements is not germane to the proposed rule

change, which simply removes the arbitration

requirement imposed through the signing of the

Form U–4 from the NASD’s rules.

53 the Commission oversees the arbitration

programs of the SROs, like the NASD, through

inspections of the SRO facilities and the review of

SRO arbitration rules. Inspections are conducted to

identify areas where procedures should be

strengthened, and to encourage remedial steps

either through changes in administration or through

the development of rule changes.

54 15 U.S.C. 78o–3(b)(6).

55 15 U.S.C. 78c(f).

56Because Amendment No. 2 is technical in

nature, it is not subject to a notice and comment

requirement.

57 15 U.S.C. 78s(b)(2).

58 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Also on March 3, 1998, the PCX filed proposed

rule change SR–PCX–98–13 (‘‘Companion filing’’),

requesting the Commission to approve a one-year

pilot of the Program. See Securities Exchange Act

Release No. 39825 (April 1, 1998), 63 FR 17250. The

Companion filing originally was to become effective

at the expiration of the temporary, 90-day Program.

On March 12, 1998 the PCX filed Amendment No.

1 to the proposed rule change. See Letter from

Michael D. Pierson, Senior Attorney, Regulatory

Policy, PCX, to Marc McKayle, Attorney, Division

of Market Regulation (‘‘Division’’), Commission

Continued

unequal bargaining power of employers

and employees,49 and because they are

contrary to the fundamental principles

reflected in this nation’s antidiscrimination laws.50 These

commenters argued that the

Commission should only allow

agreements that are truly voluntary and

that are entered into after a dispute has

arisen.51 In addition, one commenter

supported voluntary post-dispute

agreements to arbitrate employment

disputes only to the extent that such

agreements preserve the substantive

protections and remedies afforded by

statute, and argued that the NASD

should amend its proposal to include

such protections.52

The NASD Regulation stated it

considered the above issues and does

not take a position on the desirability of

private arbitration agreements between

members and their employees, but

instead simply determined to remove

from its rules the mandatory

requirement as to claims of statutory

employment discrimination.

IV. Discussion

Under the Act, SROs, like the NASD,

are assigned rulemaking and

enforcement responsibilities to perform

their role in regulating the securities

industry for the protection of investors

and other related purposes. Pursuant to

Section 19(b)(2) of the Act, the

Commission is required to approve a

rule change of an SRO like the NASD if

it determines that the proposal is

consistent with applicable statutory

standards.53 These standards include

Section 15A(b)(6) of the Act, which

provides that the NASD’s rules must be

designed to, among other things,

‘‘promote just and equitable principles

of trade;’’ and ‘‘protect investors and the

public interest.’’ Section 15A(b)(6) also

provides that the NASD’s rules may not

be designed to ‘‘regulate * * * matters

not related to the purposes of the

[Exchange Act] or the administration of

the [NASD].’’

By changing its rule, the NASD will

no longer require associated persons,

solely by virtue of their association or

registration with the NASD, to arbitrate

claims of statutory employment

discrimination. NASD’s proposal is

consistent with the applicable statutory

standards.54 The statutory employment

anti-discrimination provisions reflect an

express intention by legislators that

employees receive special protection

from discriminatory conduct by

employers. Such statutory rights are an

important part of this country’s efforts

to prevent discrimination. It is

reasonable for the NASD to determine

that in this unique area, it will not, as

a self-regulatory organization, require

arbitration.

With respect to the bifurcation issue

raised by the commenters, the Supreme

Court, in Dean Witter Reynolds, Inc. v.

Byrd, 470 U.S. 213, 217 (1985),

acknowledge the appropriateness of

bifurcation between federal statutory

and pendant state law claims.

With respect to the issue raised by

commenters of whether the rule should

be effective immediately or have a

delayed effective date, notwithstanding

this rule change by the NASD, other

SROs continue to have rules that will

require employees of their members to

arbitrate statutory discrimination

claims. The NASD’s decision to move

the effective date from one year after

approval of the proposed rule change to

January 1, 1999 is a reasonable

compromise. The January 1, 1999 date

will permit other SROs to change their

rules as the NASD has done, so that

employees of member firms of other

SROs will not be required to arbitrate

these claims.

With respect to other comments that

suggested that the NASD should enact

other rules concerning employer/

employee arbitration agreements or

extend this rule to other causes of

action, these issues are left to the NASD

to consider in the first instance.

In approving this rule, the

Commission notes that it has considered

the proposed rule’s effects upon

efficiency, competition, and capital

formation.55

Amendment No. 2 is a technical

amendment; it changes the rule

language to clarify that sexual

harassment is a form of sex

discrimination prohibited under Title

VII (as well as certain state statutes).

This change will make it clear to the

securities industry that sexual

harassment claims are encompassed

within the term ‘‘employment

discrimination’’ claims. In addition, as

discussed more fully above,

Amendment No. 2 also amends the

effective date of the proposal to an

earlier date, while at the same time still

allowing enough time for members and

member firms to consider and

implement the changes.56

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,57 that the

proposed rule change, as amended, (SR–

NASD–97–77) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.58

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–17150 Filed 6–26–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40108; File No. SR–PCX–

98–14]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval to Amendment

No. 2 To Extend the Supervisory

Specialist Pilot Program

June 22, 1998.

I. Background

On March 3, 1998, the Pacific

Exchange, Inc. (‘‘PCX’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’ or ‘‘SEC’’)

a proposed rule change pursuant to

Section 19(b)(2) of the Securities

Exchange Act of 1934 (‘‘Act’’),1 and

Rule 19b–4 thereunder,2 to establish a

temporary, 90-day, Supervisory

Specialist Pilot Program (‘‘Program’’).3