No one was the least bit surprised when the NASD made its Aug. 7 announcement that it intended to make discrimination and sexual harassment claims exempt from its mandatory arbitration requirement. In the face of mounting criticism from the Equal Employment Opportunity Commission (EEOC), Rep. Edward Markey (D.-Mass.), and SEC Commissioners Steven Wallman and Isaac Hunt, it was clear in advance that the NASD had been cornered into making the change.
The requirement to arbitrate all employment disputes is contained in SRO rules, and registered employees promise to follow SRO rules when they sign a U-4 form.
But "for cases that allege a violation of a person's civil rights, employees will have the choice to have their claim heard in court," said Frank Zarb, NASD chairman, CEO and president in the August press release announcing the change of policy.
Once the rule becomes effective, it will apply to all employees--not just future hires. The effective date will likely be sometime late next year.
But there was another part of the Aug. 7 press release that initially caused confusion. It was a one-liner that took the civil rights bar by complete--and pleasant--surprise: "The NASD's proposed new rule also would require any brokerage firm which uses private arbitration agreements with its employees to specify an arbitration forum that meets standards similar to those articulated in the American Bar Association's (ABA) 'Due Process Protocol.'" (See "Industry Forums aren't Up to ABA Snuff," Page 122. For the entire NASD release, see http://www.nasdr.com.)
That would mean that if firms were to substitute their own contracts mandating arbitration--which many are planning to do, according to the Securities Industry Association--any discrimination and harassment complaints bound by private arbitration agreements would have to be adjudicated by a neutral third party--not the NASD or the NYSE. So the NASD appeared to be removing itself completely from the business of hearing discrimination and harassment complaints.
But within 24 hours, NASDR President Mary Schapiro confirmed to Dow Jones that firms could still write their own contracts mandating arbitration at the NASD or the NYSE.
Linda Fienberg, executive vice president for dispute resolution at the NASDR, later confirmed in an interview with RR that "We've not done anything to interfere with the ability of employees and firms to negotiate contracts or agreements that include provisions for mandatory arbitration."
The next battleground is now clear: Whether employers will make pre-dispute arbitration agreements a condition of employment. In other words, will employees and prospective employees be coerced into signing such agreements?
The issue is of intense interest to the EEOC. On July 10, the EEOC issued an 18-page "Policy Statement on Mandatory Binding Arbitration of Employment Discrimination Disputes as a Condition of Employment" (http://www.eeoc.gov). The EEOC position is that it doesn't object to arbitration, but it does object to mandatory arbitration as a condition of employment.
Arnold Zack, president of the National Academy of Arbitrators and chair of the task force that wrote the ABA's 1995 Due Process Protocol, notes that other government agencies such as the U.S. Department of Labor, the National Labor Relations Board and the Massachusetts Commission Against Discrimination, have already adopted the EEOC's position that "post-dispute is fair; pre-dispute is not."
Ellen Vargyas, the EEOC's legal counsel in Washington, D.C., says she won't comment on the NASD's new policy until she sees the NASD's official submission to the SEC.
But Congressman Markey didn't waste any time in bringing that EEOC document to the attention of SEC Chairman Arthur Levitt. Markey sent his letter to Levitt the next day.
"I urge you to ensure that any action taken by the SEC regarding the NASDR employment arbitration requirements is fully consistent with the EEOC's policy statement," Markey wrote.
A bill Markey co-sponsored with Congresswoman Connie Morella (R-Md.)-H.R. 983--would make it illegal for any employer to demand that a prospective (or current) employee sign an arbitration agreement as a condition of employment. According to Tamara Fucile, one of Markey's legislative assistants, the bill is still in committee, "and we're currently looking for a larger bill that deals with labor or civil rights issues so that we can offer our bill as an amendment." That's because it's difficult "to try to get momentum behind very small, single-issue bills," Fucile says. The bill now has 47 co-sponsors in the House.
NASD spokesperson Michael Robinson insists that another key part of the regulator's plan is that brokers and licensed sales assistants will get "enhanced disclosure" about their rights. The details of how that disclosure will be made had not yet been worked out as of mid-September, but Robinson emphasizes that: "We will make sure that people know there is this choice" between signing a private arbitration agreement and reserving the right to go to court.
The NASD's announcement noted that "the effective date for this rule change will be one year from SEC approval."
When the press release was issued, Fienberg was on vacation, and when she returned in late August, her staffer who was actually drafting the language of the proposed rule change was also on vacation.
Therefore, "nothing is likely to be filed [with the SEC] until late September," Fienberg says.
Once the SEC receives the NASD's filing, there will be a 21-day public comment period.
That means, at a minimum, the new rule won't be effective until October 1998, assuming the SEC goes for the one-year delay. The estimated effective date also assumes the SEC doesn't kick the proposal back to the NASD for revisions.
Why the wait?
Fienberg says: "We thought that since this was a dramatic change and does in many ways modify existing relationships, it was only fair to give people an opportunity to consider what they wanted to do, if anything, as a consequence of our rule change."
Cliff Palefsky, a San Francisco-based attorney and chairman of the National Employment Lawyers Association's Securities Industry Arbitration Committee, says the delay is "a bone thrown to the industry, probably to get it past the [NASD's] board of governors." The intent, he believes, is to "allow the firms enough time to undermine the purpose of the rule by compelling arbitration themselves."
Wallman, in a telephone interview with RR, says he "would also like to see this occur sooner rather than later."
But despite his criticisms, Palefsky acknowledges that the NASD's move is "a significant development and one for which it deserves some credit--there was enormous industry opposition to it."
The New York City office of the Equal Employment Opportunity Commission (EEOC) has issued a "determination" letter stating that if employees are made "to sign employment agreements which require them to submit employment discrimination claims to arbitration" that, in and of itself, "violates Title VII," the federal civil rights act.
The five-paragraph determination letter, dated Sept. 9, a copy of which was obtained by RR magazine, was made in the context of a claim filed by Eileen Valentino, a former Smith Barney broker and one of the 23 plaintiffs in the Smith Barney sexual harassment and discrimination case.
Since the EEOC made its determination in the context of a claim against Smith Barney, it only applies to the brokerage firm. And it doesn't have the same force of law as a ruling made in court and cannot be cited as a precedent.
But the determination letter is an indication to any employee in any industry "that they might consider going to the EEOC to challenge these [mandatory arbitration] clauses, and this indicates that the EEOC is willing to accept those charges and pursue them," says Cliff Palefsky, a San Francisco attorney and chairman of a securities arbitration committee for the National Employment Lawyers Association.
Title VII "not only prohibits discrimination, it also protects people who oppose unlawful practices," Palefsky says. "You can't refuse to hire someone, or fire someone, who's refusing to waive their rights."
Plaintiffs' attorneys like Palefsky see the move as a significant step toward eliminating mandatory arbitration as a condition of employment, in line with a policy statement issued by the Washington, D.C., headquarters of the EEOC on July 10. He adds that the EEOC finding has no impact on the settlement discussions currently under way in the Smith Barney case.
The New York EEOC office, in its letter, notes: "Upon finding that there is reason to believe that violations have occurred, the Commission attempts to eliminate the alleged unlawful practices by informal methods of conciliation. Therefore, the Commission now invites the parties to join with it in reaching a just resolution of this matter."
Smith Barney's general counsel George Saks issued the following statement: "While we are aware of the EEOC's view, numerous courts, including the Supreme Court, have consistently upheld the fairness of employee arbitration. We're happy to discuss this further, as the EEOC has suggested." The firm had no further comment.
Securities industry arbitration forums aren't "neutral" by American Bar Association standards.
When the NASD announced in a press release that it would offer employees a choice of pursuing discrimination claims in court or through private arbitration agreements, the NASD surprised some people by stating that any firm using private agreements would have to offer a forum that "meets standards similar to those articulated in the American Bar Association's (ABA) 'Due Process Protocol.'"
It became clear that the key word in the NASD's press release was "similar." Strict adherence to the protocol would eliminate industry forums from consideration.
According to Arnold Zack, president of the National Academy of Arbitrators and the person who chaired the task force that wrote the1995 due process protocol, the NASD will never be in compliance with the protocol so long as it sponsors and administers the panels. One of the protocol's leading tenets is that for arbitration to be fair to both sides, it has to be administered by a neutral third party, Zack says. By definition, the NASD and the NYSE, being membership organizations of the firms, are not neutral third parties.
But what the NASD is attempting to do is to make its procedures "come very, very close" to "most of what we consider to be the critical protocols," says Linda Fienberg, executive vice president for dispute resolution at the NASDR.
By the time this rule is effective, the NASDR will have instituted arbitrator-selection changes, increased diversity in the arbitrator pool and offered arbitrators training in hearing discrimination claims, Fienberg says.
In addition, Fienberg says that the NASDR has under consideration another one of Zack's chief criticisms--that NASDR arbitrators do not have to issue written opinions explaining their decisions. Written opinions are a critical part of the ABA protocol, Zack explains, because arbitration is "a substitute for the courts," and the "courts have to be able to monitor [arbitrators'] conduct, to see if they have followed the law."
Fienberg says the NASDR is considering whether to require written opinions from panelists.