Senate Banking, Housing and Urban Affairs Committee

Oversight Hearing on Mandatory Arbitration Agreements
in Employee Contracts in the Securities Industry

Thank you Chairman D'Amato for calling this hearing on the issue of mandatory, binding arbitration of employment disputes in the securities industry. I must say, I am quite impressed with your concern and understanding of this important matter.

There is a disturbing and growing trend in employment contracts, in particular within the securities industry. Many employers are conditioning employment or professional advancement upon their employees' willingness to submit claims of discrimination or harassment to arbitration, rather than pursuing their suits in the courts. Although several Fortune 500 companies utilize mandatory arbitration, the securities industry is unique in that it is the only industry which requires its employees to waive their rights to bring such claims in court as a precondition of employment.

Today, over 550,000 registered representatives of the securities industry must resolve their employment disputes, including discrimination and sexual harassment claims, before an industry sponsored arbitration panel. All securities employees are required to sign a Form U-4, which is the Uniform Application For Securities Industry Registration or Transfer. In other words, the Form U-4 is a regulatory safeguard that an employee is required to sign prior to gaining employment in the industry.

Unfortunately, the Form U-4 contains a clause which mandates that all such employees file any employment dispute - - even a federal civil rights or sexual harassment claim -- before an arbitration panel.

An important point must be made here -- because the practice of requiring mandatory, binding arbitration is industry sponsored, employees cannot simply change firms to avoid arbitration. In short, if someone wishes to work within the securities industry, they have no choice but to acquiesce to this unfair and potentially biased practice.

Make no mistake, however. This problem is not limited to what we commonly consider the center of the securities industry, New York. Rather mandatory, binding arbitration of employment disputes affects people nation wide. Indeed, recently, a man who worked for a firm in Wisconsin was fired from his job. The man alleged that he was let go not for just cause, but because he was too old; therefore, he filed an age discrimination claim against his employer.

The plaintiff in this case felt that he should have the right to bring his civil rights claim in court, but a Court of Appeals for Wisconsin held that he was bound by the mandatory, binding arbitration clause in his employment contract, and thus, must submit his case to an arbitration panel.

The court noted that if this man's case were decided under Wisconsin law -- that is, under the Wisconsin Arbitration Act -- he would have had the right to file his claim in court. But because the Supreme Court held in Southland Corp. v. Keating that the Federal Arbitration Act preempts such state laws and because the Supreme Court held in Gilmer v. Interstate/Johnson Lane Corp. that such an age discrimination claim could be subject to compulsory arbitration pursuant to the arbitration agreement in the Form U-4, the court had no choice but to force the man to forego his right to file his claim in a court of law.

To put an end to this troubling practice, I have introduced the Senate version of the Civil Rights Procedures Act -- Representative Markey has sponsored the House companion bill. This measure would amend seven civil rights statutes to guarantee that a federal civil rights or sexual harassment plaintiff can still seek the protection of the U.S. courts rather than being forced into mandatory, binding arbitration. Simply stated, this bill would ensure that an employer cannot use her or his superior bargaining power to coerce her or his employees to capitulate to an agreement which diminishes their civil rights protections.

Mr. Chairman, Representative Markey and I are by no means the only people concerned about this issue. The Women's Legal Defense Fund, the Mexican American Legal Defense and Education Fund, the National Asian Pacific American Legal Consortium, the National Women's Law Center, the National Council of La Raza, the Coalition of Labor Union Women, the National Employment Lawyers' Association, the American Civil Liberties Union, the D.C. Lawyers' Committee for Civil Rights and Urban Affairs, Women Employed, and recently the Attorney General in your home state of New York have noted their support for our bills.

As you know Mr. Chairman, the New York Attorney General, Dennis Vacco, recently held a public hearing on the issue of discrimination and sexual harassment in the securities industry. In a letter sent to me last week by Attorney General Vacco, he noted the importance of this country's civil rights and sexual, harassment laws and the need to protect such a plaintiffs right to bring her or his suit in court. In addition, he also noted the "deficiencies of the arbitral process". These included, and I quote:

• "The inherent inequality of bargaining power between individual employees and employers necessitates the proscription of mandatory arbitration of employment discrimination claims";
  
  
• "Discovery is typically more limited in arbitration, than in court proceedings";
  
  
• "Some remedies available in court, such as punitive damages, are not available in arbitration";
  
  
• "The right to a trial by jury is not available in arbitration"; and
  
  
• "Arbitration proceedings are typically private in nature. Arbitration decisions are usually not required to be written and typically go unpublished. Moreover, arbitral decisions are subject to review only under limited circumstances. As a result: (1) arbitrators' decisions, as well as employers and their practices, are not subject to public scrutiny or accountability; (2) the failure of arbitrators to correctly interpret and apply the law is not subject to correction; and (3) the development of our civil right's laws is severely hampered."

While it is true that the National Association of Securities Dealers -- the NASD's -- proposed rule change eliminating the requirement of mandatory, binding arbitration was recently approved by the Securities and Exchange Commission, this rule change will not go into effect until January 1999. Moreover, many commentators have criticized the rule's implementation delay and argue that it is nothing more than a stall tactic by the industry to allow firms time to institute their own private binding arbitration rules.

The right to seek redress in a court of law -- the right to a jury trial -- is one of the most basic rights accorded to employees in this nation. In The Civil Rights Act of 1991, Congress expressly created this right to a jury trial for employees when it overwhelmingly voted to amend Title VII of the Civil Rights Act of 1964.

The truth of the matter is that today the intent of the Civil Rights Act of 1991 and other civil rights and labor laws, such as the Age Discrimination in Employment Act of 1967, are being circumvented by the securities industry by requiring all employees to submit to mandatory, binding arbitration. In other words, the industry is compelling this practice without regard to the basic civil rights of American workers or their right to secure final resolution of such disputes in a court of law under the rules of fairness and due process.

How then does the practice of mandatory, binding arbitration comport with the purpose and spirit of our nation's civil rights and sexual harassment laws? The answer, in short -- it does not.

Thank you again Mr. Chairman for calling this hearing. I hope we can work together put an end to this disturbing practice which robs employees -- especially securities industry employees -- of the full protection of our federal civil rights and sexual harassment laws.

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