The Securities and Exchange Commission ("Commission") has been a strong advocate for civil
rights of securities industry employees. The Commission believes that in order to assure that
securities industry employees are not subject to illegal discrimination, they deserve to have the
opportunity to pursue their rights under the various federal civil rights statutes.
Recent National Association of Securities Dealers, Inc. ("NASD") Rule Change: The Commission recently approved an important change to the rules of the NASD which eliminates the NASD's requirement that securities industry employees arbitrate statutory employment discrimination claims.
Civil Rights Procedures Protection Act of 1997: The Commission believes that the decision as to whether to amend the federal civil rights laws and the Federal Arbitration Act with respect to
the arbitration of employment discrimination claims is uniquely an issue for Congress to decide.
The Commission supports the bill if Congress believes it will enhance the civil rights of
securities industry employees. The issue of whether employee discrimination disputes may be
the subject of predispute arbitration contracts is important, and the Commission stands ready to
assist the Congress as it moves forward on this issue.
Chairman D'Amato, Senator Sarbanes, and Members of the Committee:
I appreciate the opportunity to testify on behalf of the Securities and Exchange Commission ("Commission") regarding the arbitration of employment discrimination disputes in the securities industry. Thank you, Chairman D'Amato, for requesting the Commission's views on this important and timely issue.
Under the leadership of Chairman Levitt, the Commission has been a strong advocate for civil rights of securities industry employees. The Commission firmly believes that securities industry employees deserve to work free of illegal discrimination. I and other members of the Commission have spoken out against discrimination in any form in our industry. The Commission, moreover, believes that in order to assure that securities industry employees are not subject to illegal discrimination, they deserve the opportunity to pursue their rights under the various federal civil rights statutes through any available forum.
I. Recent NASD Rule Change
As I am sure you know, the Commission recently approved an important change to the rules of the National Association of Securities Dealers, Inc. ("NASD") which eliminates the NASD's requirement that securities industry employees arbitrate statutory employment discrimination claims.(1) This important rule change distinguishes discrimination claims from other employment related disputes, and removes the NASD's requirement that statutory employment discrimination claims be arbitrated. The rule change puts the vast majority of the securities industry in the position of many other industries; that is, it is designed to permit the disputing parties to decide for themselves how best to resolve their differences. The Commission has encouraged and expects the other SROs to adopt similar rule changes industry-wide.
The Commission's approval of the NASD rule change does not indicate that the Commission necessarily considers arbitration to be an inappropriate forum for resolving discrimination claims fairly. The United States Supreme Court has upheld contracts for the resolution of these claims within securities industry arbitration.(2) The Commission is committed to ensuring that securities industry arbitration is a fair and equitable forum for resolving the full range of disputes that arise between broker-dealers, their employees, and investors.
The NASD rule change is responsive to concerns raised by members of Congress, the Equal Employment Opportunity Commission ("EEOC"), civil rights groups, and others that statutory employment discrimination claims should not be subject to arbitration by operation of SRO rules approved by the Commission pursuant to the Securities Exchange Act of 1934 ("Exchange Act"). The Commission noted in approving the NASD rule change that the statutory employment anti-discrimination provisions reflect Congress's express intention that employees should receive special protection from discriminatory conduct by employers.(3) Such statutory rights are an important part of this country's efforts to prevent discrimination. We encouraged and agreed with the NASD's determination that, in this unique area, it should not require arbitration.
The Commission believes that the securities industry and its employees should be free to the same extent as other industries and employees to use arbitration or any other alternative dispute mechanism to resolve disputes. The Commission is aware, of course, that the NASD's rule change does not affect private agreements that firms might enter into with their employees -- these are governed by contract law and the Federal Arbitration Act. One practical effect of the NASD's rule change could be that many firms would simply require their employees to agree as a condition of employment to the arbitration of discrimination claims through separate agreements. I think a good indication that this will not happen is that one major broker-dealer employer already has stated that it will not require its employees to enter into predispute agreements requiring them to arbitrate statutory employment discrimination claims. We expect other firms also to consider seriously giving their employees the option of going to court or going to arbitration after a dispute arises. We expect to monitor with the SROs changes in the use or the terms of separate employment contracts of securities firms with their employees to learn whether there are issues that should be addressed.
The Commission also agrees that it is very important for the SROs to look very closely at their existing procedures concerning training, arbitrator selection, and administration for cases involving employment discrimination claims. In 1994, the Director of the Commission's Division of Market Regulation wrote to all of the SROs that administer arbitration programs to encourage them to take aggressive action to train existing arbitrators or to recruit new arbitrators with expertise in discrimination law to assure party confidence in panels selected for these cases. He noted that at that time, when there were very few cases with discrimination claims on the SROs' dockets, arbitrators generally did not have a solid foundation in discrimination law. Moreover, he advised the SROs to assure that training is developed to provide for a balanced presentation of the discrimination issues that may arise in industry disputes, and that recruiting efforts should be sensitive to the continuing need for balanced and impartial panels.(4) The Division's letter followed the General Accounting Office's ("GAO") March 30, 1994 report entitled Employment Discrimination: How Registered Representatives Fare in Discrimination Disputes. The GAO had several suggestions for improving the administration of cases involving discrimination disputes that the Commission and SROs implemented.
Since that time, we understand that the SROs that have administered arbitration cases with discrimination allegations have in fact expanded their arbitrator recruitment to reach out both to arbitrators with appropriate expertise and to greater numbers of women and minorities. I think the SROs have identified the fact that they need to strengthen even more their approach to resolving all employment law cases. We are aware that currently a committee composed of representatives of the NASD Regulation, Inc. and the NYSE, as well as employment lawyers, an academic, and securities industry representatives, is studying these issues, including: arbitrator selection methods, disclosure issues, and whether or how to use a "due process protocol" used in other alternative dispute resolution forums, among other issues. I look forward to learning more about the committee's work, and hope that the result of its efforts is that the arbitration forums become more attractive for the resolution of discrimination disputes, and that employees will elect to use them, even if some of those employees also have the option to proceed in court.
II. Civil Rights Procedures Protection Act of 1997
The Commission's approval of the NASD's recent rule change removes any regulatory requirement that NASD member employees pursue their federal civil rights claims in arbitration. Like the NASD's action approved by the Commission, S. 63, Senator Feingold's bill, distinguishes employment discrimination claims from other claims between employers and employees. The bill establishes special rules in the civil rights laws and Federal Arbitration Act for the resolution of these disputes. Securities industry employers and employees would be treated like any other industry group.
The decision as to whether to amend the federal civil rights laws and the Federal Arbitration Act is uniquely an issue for Congress to decide. The Commission supports the bill if Congress believes it will enhance the civil rights of securities industry employees. In formulating its own approach to the NASD's rule, the Commission looked to the studies and conclusions of the EEOC, the Commission on the Future of Worker-Management Relations ("Dunlop Commission"), and others with expertise in this area,(5) and also considered the views of employers and employees. We understand that Congress will do the same in considering S. 63, and the Commission would be happy to assist you as Congress moves forward.
III. Background on Arbitration in the Securities Industry
I would also like to provide you with some regulatory background that may help you to understand the place of arbitration within the securities industry. A broker-dealer may not effect securities transactions through employees who are not qualified by and registered with a national securities association -- the NASD -- or a national securities exchange -- such as the NYSE.(6) As you know, under the federal securities laws, broker-dealers have an independent obligation to supervise their employees. In the course of meeting this obligation, broker-dealers and their employees sometimes have disputes that relate to the firm's or employee's obligations under the federal securities laws. Arbitration of these disputes, in which neither firms nor employees assert employment discrimination issues, generally provides fair, expert, and efficient dispute resolution.
The securities industry has relied on the expertise of arbitrators since at least 1872 to equitably resolve disputes with less disruption to the business of securities firms than court litigation may involve.(7) It is generally believed that solving securities disputes between securities industry parties within arbitral forums benefits the industry because such disputes can be more quickly and cost effectively resolved in those forums.
As you know, the Commission carefully reviews and approves all SRO arbitration rules, and inspects their programs for the fair administration of them. The Commission's inspection staff conducts periodic reviews to assess the SROs' procedures to ensure the even-handed administration of the arbitration rules. Arbitration has played, and will continue to play, an important part in resolving industry disputes.
The issue of whether employment discrimination disputes may be the subject of predispute arbitration contracts is important. The Commission believes that the NASD's rule change and the decisions individual industry members are making in this area will help to provide industry employees with more meaningful choices on how to resolve disputes under the federal civil rights laws. As a result of the rule change, employers and employees can negotiate over whether to resolve any statutory discrimination claims in a court of law or in arbitration. If some statutory employment discrimination cases remain in arbitration, the Commission believes that the SROs should continue to analyze closely their procedures to address whether they must be modified for these special cases.
We thank you for offering us the opportunity to appear here today, and to provide our thoughts
for your consideration. The Commission and its staff stand ready to provide the Committee with
assistance on this important issue.
1. Securities Exchange Act Release No. 40109, 63 FR 35299 (June 29, 1998). Each self-regulatory organization ("SRO") applies its own arbitration rules to its members. The NASD's arbitration rules, for example, generally provide that any dispute concerning the business of an NASD member, or arising out of the employment or termination of employment of an associated person, with certain exceptions, must be submitted to arbitration at the request of an investor, or in intra-industry cases, at the request of either party. The other SROs, like the New York Stock Exchange ("NYSE"), have similar requirements.
2. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). Recently, several courts have reviewed the adequacy of SRO arbitration forums in the context of statutory discrimination cases. Compare Desiderio v. NASD, Inc., 1998 WL 195271 (S.D.N.Y. April 27, 1998) with Rosenberg v. Merrill Lynch, Pierce, Fenner and Smith, Inc., 995 F. Supp. 190 (D. Mass. 1998).
3. 63 FR 35299, 35303 (June 29, 1998).
4. See, e.g., Letter dated June 2, 1994 from Brandon Becker, Director, Division of Market Regulation to Robert S. Clemente, Director of Arbitration, New York Stock Exchange.
5. See, e.g., Dunlop Commission, Report and Recommendations (1994); and Equal Employment Opportunity Commission, Policy Statement on Mandatory Binding Arbitration of Employment Discrimination Disputes as a Condition of Employment (1997).
6. See, e.g., NASD Rule 1031 and NYSE Rule 311. One important way the Commission and SROs encourage investor protection and healthy and vigorous securities markets is through requiring the registration of most securities industry personnel. Registration requirements permit the Commission, the SROs, and state regulatory authorities to control who enters and exits the securities industry, and to track the activities of persons currently in the industry. Registration also empowers investors by providing them with background information -- such as prior sanctions or criminal convictions -- about the person who advises them on investing their savings.
Sections 6(c)(3)(B) and 15A(g)(3) of the Exchange Act permit the NYSE and NASD to establish registration requirements for their members and persons associated with their members. The NASD, other SROs, and state regulatory authorities meet their registration obligations in part by requiring all applicants for registration as persons associated with a broker-dealer to complete and sign the Form U-4, the "Uniform Application for Securities Industry Registration or Transfer." Among other things, the Form U-4 includes an agreement by registered persons to arbitrate any claim that is eligible for arbitration under the rules of the SRO with which they register. As a result of the NASD's rule change, statutory discrimination claims will no longer be covered by this clause.
7. See Constantine N. Katsoris, Foreword: New York Stock Exchange, Inc. Symposium on Arbitration in the Securities Industry, 63 Fordham L. Rev. 1501 (1995); Philip J. Hoblin,
Securities Arbitration Procedures, Strategies, Cases 1-2 (2d ed. 1992).
Home | Menu | Links | Info | Chairman's Page