NASD Regulation operates the largest dispute resolution forum in the United States for securities market participants. NASD Regulation now handles 90% of all securities arbitration claims filed with the Self Regulatory Organizations (SROs) annually. In 1997, 6,000 arbitration claims were filed with NASD Regulation, most of them involving investor disputes; only 20% (about 1200 claims) involved intra-industry disputes (member-member or employee-member) and, of these, only 139 -- about 2.3% of all claims --alleged employment discrimination.
For many years, the SROs have required registered persons (individuals working for a broker/dealer and engaged in the securities business) to arbitrate employment disputes. Registered persons sign a uniform registration Form U-4 used by all SROs and state securities regulators, agreeing to arbitrate all disputes between the employee and a customer, firm, or other registered person.
Judicial Rulings - In 1991, the Supreme Court held in the Gilmer case that claims of age discrimination were subject to mandatory arbitration under SRO rules where the employee had signed a Form U-4. Gilmer has since been expanded by federal courts in most circuits to cover other claims of discrimination under various federal and state statutes.
Arbitration Policy Task Force - In September 1994 the NASD formed a task force to study NASD arbitration policy, chaired by former SEC Chairman David S. Ruder. The 1996 Task Force Report focused on investor arbitration, but found that employment arbitration offers the same advantages of speed and reduced costs, that statutory discrimination claims are usually interwoven with industry specific issues, and that arbitration is fully capable of protecting the public rights expressed in the anti-discrimination statutes. It recommended that employment disputes remain eligible for arbitration, but suggested that the NASD continue to monitor this evolving area.
Advisory Committee on Employment Discrimination Claims - NASD Regulation established an advisory committee in May 1997 to consider the issues relating to mandatory arbitration of employment discrimination claims. After considering the views presented to it during a two-day meeting, and in light of the public perception that civil rights claims may present important legal issues better dealt with in a judicial setting, the NASD Board determined in August 1997 to remove the mandatory arbitration requirement from NASD's rules.
NASD Rule - The SEC approved the NASD's rule proposal to eliminate mandatory arbitration of statutory employment discrimination claims under NASD rules on June 22, 1998, effective January 1, 1999.
Working Group on Employment Discrimination Claims - NASD Regulation has
convened a working group to consider procedural enhancements for the arbitration
of discrimination claims. It is considering: panel composition for discrimination
cases, a special roster of employment arbitrators, model arbitration disclosures for
employees, the application of new investor arbitration rules to employment
arbitration, and a requirement that firm arbitration agreements select a forum that
meets certain procedural standards.
I am Linda D. Fienberg, Executive Vice President for Dispute Resolution and Chief Hearing Officer of NASD Regulation.
I thank the Committee for this opportunity to testify on the role of the NASD in the resolution of discrimination claims by employees of the securities industry.
The NASD, working with other regulators, the industry, and employee representatives, has been active in addressing concerns about the mandatory arbitration of employment discrimination claims in the securities industry, and welcomes this opportunity to report to the Committee on its efforts.
Let me first briefly outline the role of the NASD in the regulation and operation of our securities markets. Established under authority granted by the 1938 Maloney Act Amendments to the Securities Exchange Act of 1934, the NASD is the largest self-regulatory organization, or SRO, for the securities industry in the world. Although not funded by taxpayer dollars, the activities of all SROs are subject to federal oversight by the Securities and Exchange Commission. Every broker/dealer in the U.S. that conducts a securities business with the public is required by law to be a member of the NASD. The NASD's membership comprises more than 5,500 securities firms that operate in excess of 67,000 branch offices and employ more than half a million registered securities professionals.
The NASD is the parent company of The Nasdaq Stock Market, Inc. and NASD Regulation, Inc. These wholly-owned subsidiaries operate under delegated authority from the parent, which retains overall responsibility for ensuring that the organization's statutory and self-regulatory functions and obligations are fulfilled.
The NASD is governed by a 27-member Board of Governors, a majority of whom are not affiliated with the securities industry. Board members are drawn from leaders of industry, academia, and the public. Among many other responsibilities, the Board, through a series of standing and select committees, monitors trends in the industry and promulgates rules, guidelines, and policies to protect investors and ensure market integrity.
NASD Regulation is responsible for the regulation of the securities activities of broker/dealers and for the surveillance, oversight, and enforcement of trading rules of The Nasdaq Stock Market. It also operates the largest dispute resolution forum in the United States for participants in the securities markets. NASD Regulation carries out its examination, disciplinary, and other regulatory responsibilities through its Washington D.C. headquarters and 13 District Offices located in major cities throughout the country. Through close cooperation with federal and state authorities and other self-regulators, overlap and duplication are minimized, freeing governmental resources to focus on other areas of securities regulation.
NASD Regulation Dispute Resolution Program
NASD Regulation offers a dispute resolution program, governed by the NASD's Code of Arbitration Procedure, as a service to investors, firms, and registered persons. NASD Regulation's program includes two non-judicial methods of resolving disputes: arbitration and mediation.
Arbitration is a non-judicial dispute resolution mechanism that determines liability and damages. In arbitration, an impartial person or panel hears all sides of the issues as presented by the parties, studies the evidence, and then decides how the matter should be resolved. Arbitration is final and binding, subject to review by a court only on a very limited basis.
Mediation is an informal, voluntary approach in which a mediator facilitates negotiations between adverse parties, helping them to find their own mutually acceptable resolution.
Generally, non-judicial dispute resolution methods (called alternative dispute resolution or ADR) such as arbitration and mediation are faster and less expensive than state or federal court litigation. They also are less formal than court proceedings. NASD Regulation arbitrators and mediators are carefully selected from a broad cross-section of people; they are not employees of NASD but, rather, serve as neutrals for an honorarium. In all NASD arbitration cases involving a customer and in all employment discrimination cases, the arbitration panel hearing the claim must have a majority of public (that is, non-industry) members on the panel.
NASD Regulation operates the largest dispute resolution forum in the United States for participants in the securities markets. NASD Regulation now handles approximately 90% of all securities arbitration claims filed with the SROs annually. In 1997, 6,000 arbitration claims were filed with NASD Regulation, most of them involving investor disputes. Only about 20% (or 1200) of the claims involved intra-industry disputes, and, of those, only 139 -- less than 3% of our total claims -- alleged employment discrimination.
Securities Industry Employment Arbitration
Now, I would like to describe briefly the background of employment arbitration in the securities industry. For many years, the securities industry SROs, such as the stock exchanges and NASD, have required registered representatives and principals to arbitrate employment disputes. This requirement is imposed when registered persons (individuals working for a broker/dealer and engaged in the securities business) sign a uniform registration form known as the Form U-4; this regulatory form is used by all SROs and state securities regulators. Administrative and clerical employees who work for a broker/dealer are not required to register and thus do not sign a Form U-4. By signing the Form U-4, each registered person agrees to arbitrate, according to the rules of the organizations with which the employee is to be registered, all disputes that may arise between the employee and a customer, member firm, or other registered person.
In 1991, the Supreme Court held in the Gilmer case,(1) that claims of age discrimination were subject to mandatory arbitration under the New York Stock Exchange's (NYSE) arbitration rules where the employee had signed a Form U-4.
Soon after the Gilmer decision was announced, a court in California noted some differences between the arbitration rule language of the NYSE and NASD. It determined that the NASD's rule, which required arbitration of disputes Aarising out of or in connection with the business of any member,@ was meant to encompass only disputes over business transactions and was not specific enough to require registered persons to arbitrate employment disputes.(2)
In the wake of the California case, the NASD added to its Code of Arbitration Procedure specific language that mirrored the NYSE language and clarified that employment disputes were meant to be covered by the Form U-4 arbitration agreement. The new language covered all disputes Aarising out of the employment or termination of employment of associated persons.@ In its rule filing with the SEC, the NASD described the types of employment disputes that might be included in the requirement, such as those arising under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, and other similar equal employment opportunity statutes. The SEC approved the rule change as being consistent with the Securities Exchange Act of 1934, and the rule has been in effect since October 1, 1993.
The holding in the Supreme Court's 1991 Gilmer case has since been applied to cases arising under NASD's rules and has been expanded by federal courts in most circuits in securities and non-securities cases to encompass claims of discrimination under various federal and state statutes.(3)
However, the Ninth Circuit recently held in its May 8th Duffield decision(4) that, following the United States Civil Rights Act of 1991, employers may not, as a condition of employment, compel individuals to waive their right to a judicial forum in cases alleging employment discrimination. The Ninth Circuit is the only U.S. Court of Appeals to reach this conclusion. A month after the Duffield decision was issued, the Third Circuit in its Seus decision disagreed with the Ninth Circuit's interpretation of the 1991 amendments and sided with the majority of circuits in holding that the Form U-4 arbitration agreement is enforceable as to Title VII claims.(5)
Arbitration Policy Task Force
In September 1994 the NASD formed the Arbitration Policy Task Force to study NASD arbitration policy generally and to suggest reforms. The Task Force, chaired by former SEC Chairman David S. Ruder, delivered its report to the NASD Board of Governors in January 1996.(6) Although the Task Force focused on investor arbitration, it found that employment arbitration offers the advantages of speed and cost that are associated with customer arbitration, and that statutory discrimination claims are usually interwoven with industry specific issues. The Task Force also believed that arbitration's equitable approach to dispute resolution is fully capable of protecting the important public rights expressed in the anti-discrimination statutes. The Task Force report recommended that employment-related disputes, including statutory discrimination claims, remain eligible for arbitration with a number of enhancements to the arbitration process, many of which were recommended elsewhere in the report.
While the number of employment discrimination claims filed with the NASD has grown over the past five years, it still represents a very small fraction of overall claims:
|NASD Employment Discrimination Claims 1993-97|
|Employment discrimination claims||40||48||65||109||139|
|Percent of total NASD arbitration claims||.7%||.9%||1.1%||1.9%||2.3%|
Nevertheless, there are many groups and individuals who believe that statutory discrimination claims should not be subject to mandatory pre-dispute arbitration agreements.
Advisory Committee on Employment Discrimination Claims
Responding to continuing interest in the issue of employment arbitration by the news media, the Equal Employment Opportunity Commission, employee organizations, and the new NASD and NASD Regulation leadership, we assembled a six-member Advisory Committee on Employment Discrimination Claims in May of 1997. The Advisory Committee was established to assist NASD Regulation in considering suggested enhancements to the employment arbitration process. It was made up of two members appointed from the NASD Regulation Board (one an industry member representing a member firm and one a public member who was a former state securities commissioner) and four other members of the public with distinguished backgrounds in business or academia.
The Advisory Committee held a two-day meeting in Washington and heard from representatives of civil rights organizations, the Equal Employment Opportunity Commission, general counsels of member firms, lawyers who represent employees, employee organizations, lawyers who represent firms, and arbitration experts. The Committee then met with the NASD's senior management to discuss the major issues.
After considering all of the views presented, and in light of the public perception that civil rights claims may present important legal issues better dealt with in a judicial setting, the NASD and NASD Regulation Boards determined in August 1997 to remove the mandatory arbitration requirement from NASD's rules. In particular, the Boards approved the following proposals to:
Amend NASD rules to remove from the mandatory arbitration requirement all employment discrimination and sexual harassment claims under federal, state, or local statutes.
Keep all other types of employment disputes in arbitration.
Require that any firm arbitration agreements select an arbitration forum meeting certain procedural standards to be recommended by a newly formed Working Group, subject to approval by the NASD Board and the SEC.
Provide for better disclosure of rights and arbitration features to registered persons.
Work with other securities regulators (SROs, the SEC, and the North American Securities Administrators Association) so that Form U-4:
- Informs applicants they must arbitrate all disputes with customers and all non-discrimination employment disputes, and
- Compares the features of arbitration with court proceedings.
The rule proposal to eliminate mandatory employment discrimination arbitration under NASD rules was submitted to the SEC on October 17, 1997, and published in the Federal Register on December 17, 1997. It was approved by the SEC on June 22, 1998.
The NASD originally requested that the rule become effective one year from SEC approval to allow firms and employees to prepare for the rule's implementation. However, in light of comments received in response to the SEC's publication of the rule proposal, and in consultation with the SEC staff, the NASD amended its proposal in April to set the effectiveness of the rule for January 1, 1999. The rule will apply to all claims filed on or after that date without regard to either the date of the alleged discrimination or the date the employee signed the Form U-4.
Working Group on Employment Discrimination Claims
NASD Regulation has convened a Working Group on Employment Discrimination Claims to consider procedural enhancements to the arbitration process. This ten-member group includes representatives from securities firms, lawyers who represent employees, neutrals (arbitrators and mediators), and the NYSE. In particular, the group has been considering various aspects of a due process protocol that several dispute resolution organizations have adopted.
This working group has met numerous times and will make general suggestions to the NASD staff, which will in turn present recommendations to the NASD Board this fall.
The enhancements being considered by the working group include recommendations on:
Panel composition for employment discrimination cases,
Selection of arbitrators for a specialized employment roster,
Model disclosures for employees about arbitration and the effect of signing arbitration agreements,
Guidelines about how new investor arbitration rules apply to employment arbitration, and
A possible requirement that any arbitration agreements used by firms select, as the arbitration forum, either an SRO or another forum that meets procedural standards adopted by the NASD Board.
In conclusion, NASD Regulation continues to support its dispute resolution program as an efficient and fair method to resolve employment discrimination disputes. We believe we have a responsibility to provide a forum for the resolution of disputes for employees who choose arbitration over court or who enter into private agreements with their employer to arbitrate those disputes. At the same time, we already have taken steps to remove from NASD rules the mandatory arbitration requirement for employment discrimination claims, and we are moving forward expeditiously to enhance further the forum in ways that should make it even more attractive to employees.
The NASD thanks the Committee for this opportunity to discuss the evolution of
its dispute resolution program for employment discrimination cases and the issues
surrounding it. I would be pleased to respond to any questions you may have.
1. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).
2. Higgins 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).
3. See, e.g., Cole v. Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997); Seus v. John Nuveen & Co., Inc., 1998 U.S. App. LEXIS 11907, 1998 WL 294020 (3d. Cir. June 8, 1998); Austin v. Owens-Brockway Glass Container, Inc., 78 F.3d 875 (4th Cir. 1996); Alford v. Dean Witter Reynolds, Inc., 939 F.2d 229 (5th Cir. 1991); Willis v. Dean Witter Reynolds, Inc., 948 F.2d 305 (6th Cir. 1991); Metz v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 39 F.3d 1482 (10th Cir. 1994); Bender v. A.G. Edwards & Sons, Inc., 971 F.2d 698 (11th Cir. 1992).
4. Duffield v. Robertson Stephens & Co., No. 97-15698, 1998 U.S. App. LEXIS 9284 (9th Cir. May 8, 1998).
5. Seus v. John Nuveen & Co., Inc., 1998 U.S. App. LEXIS 11907 (June 8, 1998).
6. I served as a member of the Task Force and as its reporter. In that capacity, I was the principal author of the report.
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