Document ID: SEC-2005-0172-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-10-31T05:00Z

[Federal Register: October 31, 2005 (Volume 70, Number 209)]
[Notices]               
[Page 62362-62364]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31oc05-83]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52658; File No. SR-NASD-2005-046]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.: Order Approving Proposed Rule Change and Amendment Nos. 
1 and 2 Thereto Amending the Arbitration Fees Applicable to Certain 
Statutory Employment Discrimination Claims

October 24, 2005.

I. Introduction

    On April 8, 2005, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change relating to 
arbitration fees applicable to certain statutory employment 
discrimination claims. On April 25, 2005, NASD filed Amendment No. 1 
(``Amendment No. 1'') to the proposed rule change.\1\ On June 23, 2005, 
NASD filed Amendment No. 2 (``Amendment No. 2'') to the proposed rule 
change.\2\ The proposed rule change was published for comment in the 
Federal Register on June 30, 2005.\3\ The Commission received three 
comments on the proposal, as amended.\4\ For the reasons discussed 
below, the

[[Page 62363]]

Commission is approving the proposed rule change.
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    \1\ Amendment No. 1 replaces the original rule filing in its 
entirety.
    \2\ See Amendment No. 2. Amendment No. 2 clarified certain 
aspects of the rule text.
    \3\ Securities Exchange Act Release No. 51921 (June 24, 2005), 
70 FR 37887 (June 30, 2005) (The ``Notice'').
    \4\ See letter to Jonathan Katz, dated July 21, 2005, by Richard 
P. Ryder, President, Securities Arbitration Commentator, Inc. 
(``Ryder Letter''); letter to Jonathan Katz, dated July 21, 2005, by 
Steven B. Caruso, P.C., Maddox Hargett & Caruso (``Caruso Letter''); 
letter to Jonathan Katz, dated July 26, 2005, by Rosemary J. 
Shockman, President Public Investors Arbitration Bar Association 
(``Shockman Letter'').
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II. Description of the Proposed Rule Change

A. Description of the Proposal

    The purpose of the proposed rule change is to limit the arbitration 
filing fees applicable to certain statutory employment discrimination 
claims. The Rule 10210 Series contains special rules applicable to the 
arbitration of employment discrimination claims. The rules, which set 
forth the procedures that relate specifically to statutory employment 
discrimination claims, supplement and, in some instances, supersede the 
provisions of the Code of Arbitration Procedure (Code) that apply to 
the arbitration of other employment disputes. The Rule 10210 Series, 
however, does not provide a separate fee schedule for statutory 
employment discrimination claims. Instead, associated persons who bring 
statutory employment discrimination claims pay according to the 
schedule of fees (which are based on the dollar value of the claim) set 
forth in Rule 10332.
    During the 1990s, Federal appeals courts were split on whether 
employers could require mandatory arbitration of statutory employment 
discrimination claims and then require the employee to pay all or part 
of the arbitrators' fees.\5\ The United States Supreme Court considered 
the issue of fees in connection with the arbitration of Federal 
statutory claims in 2000.\6\ The Supreme Court found that the existence 
of large arbitration costs could preclude a person from effectively 
vindicating his or her Federal statutory rights in arbitration. 
Therefore, the Supreme Court established a case-by-case approach 
whereby a person can invalidate an arbitration agreement by showing 
that the arbitration would be prohibitively expensive. Since the 
respondent never presented any evidence regarding her likely 
arbitration costs, the Supreme Court did not specify how ``detailed the 
showing of prohibitive expense must be before the party seeking 
arbitration must come forward with contrary evidence.'' \7\
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    \5\ Previously, the United States Supreme Court had determined 
that mandatory arbitration of employment discrimination claims was 
permissible so long as the prospective litigant could effectively 
vindicate his or her statutory cause of action in the arbitral 
forum, thereby allowing the statute to continue to serve both its 
remedial and deterrent function, Gilmer v. Interstate/Johnson Lane 
Corp., 500 U.S. 20, 28, (1991) (citing Mitsubishi Motors Corp. v. 
Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1995)). 
Specifically, the courts disagreed as to whether requiring claimants 
in statutory employment discrimination claims to pay arbitral forum 
fees and expenses would prevent them from effectively vindicating 
their claims. The United States Court of Appeals for the District of 
Columbia Circuit, found that an employee could not be required to 
agree to arbitrate statutory claims if the agreement required the 
employee to pay all or even part of the arbitrator's fees and 
expenses. Cole v. Burns International Security Services, et al., 105 
F.3d 1465 (D.C. Cir 1997) (``Cole v. Burns''). The court noted that 
``it would undermine Congress's intent to prevent employees who are 
seeking to vindicate statutory rights from gaining access to a 
judicial forum and then require them to pay for the services of an 
arbitrator when they would never be required to pay for a judge in 
court.'' Id. at 1484. On the other hand, the United States Court of 
Appeals for the Fifth Circuit found that although the allocation of 
arbitration costs may not be used to prevent effective vindication 
of Federal statutory claims, this does not mean that the assessment 
of any arbitral forum fees against an employee bringing such claims 
is prohibited. William v. Cigna Financial Advisory Inc., 197 F.3d 
752, 763-64 (5th Cir. 1999) (citing Gilmer v. Interstate/Johnson 
Lane Corp., 500 U.S. 20 (1991)).
    \6\ Green Tree Finance Corp. of Alabama v. Randolph, 531 U.S. 79 
(2000) (``Green Tree'').
    \7\ Id. at 92.
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    In light of the case law, and in order to ensure that associated 
persons who have statutory employment discrimination claims are able to 
effectively vindicate such claims, the proposed rule change revised the 
arbitration fees applicable to certain statutory employment 
discrimination claims.\8\ Specifically, the proposed rule change 
provided that a current or former associated person who brings a 
statutory employment discrimination claim that is subject to a 
predispute arbitration agreement will pay no more than a $200 filing 
fee (which is non-refundable) at the time that the associated person 
asserts such a claim.\9\ The member that is a party to a statutory 
employment discrimination arbitration proceeding will pay the remainder 
of the filing fee, if any, as well as all forum fees. While the filing 
and forum fees will not be subject to allocation by the arbitrator(s), 
the panel will have the ability, as it does currently under the Code, 
to allocate various costs associated with arbitration, including the 
adjournment of hearings (Rule 10319); the production of documents 
(Rules 10321 and 10322); the appearance of witnesses (Rule 10322); and 
the recording of proceedings (Rule 10326). In addition, arbitrators 
will still have the ability to allocate attorneys' fees, in accordance 
with applicable law, as currently provided for in Rule 10215.
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    \8\ The new rule will apply only to disputes that are subject to 
a predispute arbitration agreement. The regular fee schedule set 
forth in Rule 10332 will apply to claims that are not subject to 
such an agreement. Thus, if a member does not require its employees 
to arbitrate employment disputes, but the employee chooses to file a 
statutory employment discrimination claim in arbitration, the 
employee will be subject to the regular fee schedule. See Rule 
10201(b) (statutory employment discrimination claims that are not 
subject to a predispute arbitration agreement may be arbitrated only 
if all parties agree to do so).
    \9\ As previously mentioned, associated persons who have 
statutory employment discrimination claims currently pay the filing 
fees and hearing session deposits provided in Rule 10332 at the time 
that they file a claim. These charges, which are based on the amount 
of the claim, range from $25 to $600 for filing fees and from $25 to 
$1,200 for hearing sessions deposits. Under the proposed rule, the 
filing fee will continue to be based on the amount of the claim as 
set forth in Rule 10332, but will be capped at $200. Thus, an 
associated person who files a claim requesting damages of $4,000 
would pay a $50 filing fee, while the filing fee for a $4 million 
claim would be $200.
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    NASD believes that the proposed rule will allow those associated 
persons who agree to arbitrate statutory employment discrimination 
claims as a condition of employment to pursue their rights in 
arbitration, because their filing fee will be limited to a maximum of 
$200 which is comparable to the cost of filing a civil claim in State 
or Federal court.\10\ At the same time, the proposed rule will not 
result in any additional delays or uncertainty in the arbitral process 
as it provides for a straightforward sliding-scale fee with a cap 
rather than a case-by-case analysis of such things as the claimant's 
ability to pay for arbitration and the cost differential between 
arbitration fees and court filing fees.
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    \10\ In October 2004, NASD surveyed the State and Federal court 
filing fees for civil cases in the five states where it believes the 
largest number of NASD arbitrations are filed (California, Florida, 
Illinois, New York, and Texas). NASD found that, in these 
jurisdictions, the State court filing fees ranged from $160 to $305 
and the Federal court filing fee was $150.
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B. Comment Summary

    The proposal was published for comment in the Federal Register on 
June 30, 2005.\11\ We received three comments on the proposal.\12\ Two 
commenters believed that the treatment accorded to employees with 
statutory discrimination claims should be extended to customer 
claims.\13\ One of these commenters stated that as there are 
significantly more customers than there are associated persons, the 
NASD should expand the fee relief to customer claims, and stated that 
the NASD had not justified its determination to treat associated 
persons more favorably than customers.\14\ One commenter expressed 
concern that arbitration fees are higher than fees in court 
proceedings, discouraging arbitration claims, and stated that 
arbitration should be equally accessible to customers as to 
employees.\15\ This commenter did not believe that the NASD had 
sufficiently justified its decision to provide fee relief for statutory 
employment

[[Page 62364]]

discrimination claims but not customer claims, and believed that fee 
relief for customer claims was necessary for vindication of customers' 
rights. The commenter cited the fee-relief rules of other arbitration 
associations in support of the argument that such fee relief was 
appropriate.
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    \11\ See Note 3, supra.
    \12\ See Note 4, supra.
    \13\ See Caruso Letter, Shockman Letter.
    \14\ See Caruso Letter.
    \15\ See Shockman Letter.
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    One commenter was concerned that charging the broker-dealer 
``virtually all'' the fees for a statutory discrimination claim would 
create distortions in the process, lengthening and encouraging 
dissatisfaction with the process and providing incentives to bring a 
weak discrimination claim.\16\ This commenter believed that assessing 
attorneys' fees for frivolous claims would not have any deterrent 
effect, and also believed that weak discrimination claims would be 
dismissed and the dismissal would be inappropriately blamed on 
arbitrator bias. Citing LaPrade v. Kidder Peabody (``LaPrade''),\17\ 
the commenter expressed disagreement with the NASD's decision to shift 
the greater part of the forum fees to the employer, and criticized the 
NASD's reliance on and interpretation of Cole v. Burns and Green Tree. 
The commenter stated that the rationale for fee-shifting in these court 
cases could not be limited to fee-shifting in statutory employment 
discrimination claims, and expressed concern that the proposed rule 
change would accelerate demand for fee-shifting across all 
arbitrations. The commenter believed that an occasional waiver rather 
than a blanket exemption would be preferable.
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    \16\ See Ryder Letter.
    \17\ 246 F.3d 702 (DC Cir., 2001) (holding that Cole v. Burns 
does not preclude an arbitrator from assessing certain fees against 
a claimant.
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    NASD responded to the commenters by observing that the proposed 
rule change was intended to be very limited in scope, only addressing 
situations in which an employee must enter into a predispute 
arbitration agreement for statutory employment discrimination claims, 
specifically the issue addressed in Cole v. Burns. NASD stated that 
such claims form a very small percentage of the total number of claims 
filed with NASD. NASD also stated that it neither intended nor believes 
that there is a compelling reason for the proposed fee changes to be 
applied to all statutory securities claims brought by customers. 
Furthermore, NASD stated that it does not believe that the arbitration 
process will be impaired by the change because arbitrators will be able 
to identify and dispose of frivolous or marginal claims, as well as 
allocate costs and attorneys' fees. Lastly, NASD stated that it 
believes that waivers, rather than uniform fee-shifting, will introduce 
significant delays and uncertainty to the arbitration process.
    In connection with one commenter's \18\ objection to the fee-
shifts, NASD noted that NASD is the only forum for statutory employment 
discrimination claims based on presdispute arbitration agreements. In 
this context, NASD stated that it believes that it is ``fair and 
reasonable for members, who require their employees to enter into 
predispute arbitration agreements, to pay additional filing and forum 
fees for this service.''
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    \18\ See Ryder Letter.
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III. Discussion and Findings

    The Commission finds the proposed rule change is consistent with 
the Act, and in particular with Sections 15A(b)(5) \19\ of the Act, 
which requires that the NASD's rules provide for the equitable 
allocation of reasonable dues, fees, and other charges among members 
and issuers and other persons using any facility or system that the 
NASD operates or controls. The Commission believes that the proposed 
rule change is consistent with the provisions of the Act noted above 
because it will permit employees subject to predispute arbitration 
agreements to vindicate statutory employment discrimination claims 
without significant financial barriers to adjudication.
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    \19\ 15 U.S.C. 78o-3(b)(5).
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    We do not believe that NASD is required, in connection with this 
proposal, which addresses a limited number of statutory employment 
discrimination claims, to expand the fee relief in the proposal to fees 
for statutory securities claims brought by customers. The NASD's 
proposal deals with an extremely limited set of claims brought in its 
arbitration forums. The NASD states that in each of the last five 
years, statutory employment discrimination claims accounted for less 
than one percent of all claims filed with NASD. In connection with 
providing a forum for arbitration of such claims, the NASD has 
determined to provide fee relief consistent with Cole v. Burns, which 
was concerned with the accessibility of the adjudicatory system to a 
claimant subject to a predispute arbitration agreement in a statutory 
employment discrimination claim. We note that Cole v. Burns provides 
justification for the fee relief, and would not require expansion of 
fee relief into other statutory securities claims. In this context, we 
agree with NASD's rationale for limiting the proposed fee reduction to 
statutory employment discrimination claims based on predispute 
agreements.
    With regard to the proposed rule change's determination to shift 
certain fees to employers, we note particularly that NASD provides the 
only forum for employers in which such claims can be adjudicated, and 
that very few of the claims adjudicated by NASD's arbitration system 
involve statutory employment discrimination claims. LaPrade, the case 
cited by the commenter for the proposition that Cole v. Burns does not 
bar the assessment of all forum fees against the claimant, does not 
preclude NASD from determining that it will assess certain fees against 
an employer in this extremely limited number of cases. Further, given 
the extremely limited number of these cases adjudicated by the NASD, 
automatic fee-shifting for employment discrimination claims based on 
predispute agreements should not pose a significant hardship to 
employers. We agree with the NASD's position that requiring a waiver 
analysis of every case involving statutory employment discrimination 
claims would most likely introduce significant delays, complexity and 
uncertainty to the arbitration process.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\20\ that the proposed rule change (SR-NASD-2005-046) be, and hereby 
is, approved.\21\
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    \20\ 15 U.S.C. 78s(b)(2).
    \21\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5991 Filed 10-28-05; 8:45 am]

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