NASD Proposes Arbitration Disclosure to Brokers

In a Feb. 1 filing with the SEC, the NASD is proposing that member firms be required to provide brokers with an arbitration disclosure statement. The statement would be provided whenever a rep signs a new or amended U-4, and would explicitly point out that under the U-4s arbitration clause, brokers are agreeing to give up their right to pursue claims in court--with the exception of discrimination

In a Feb. 1 filing with the SEC, the NASD is proposing that member firms be required to provide brokers with an arbitration disclosure statement. The statement would be provided whenever a rep signs a new or amended U-4, and would explicitly point out that under the U-4s arbitration clause, brokers are agreeing to give up their right to pursue claims in court--with the exception of discrimination and sexual harassment claims.

Currently registered brokers who do not amend their U-4s would not be given the disclosure statement.

The disclosure proposal is a follow-up to the NASDs new policy of exempting discrimination and sexual harassment complaints from mandatory arbitration, which went into effect Jan. 1.

The proposed disclosure outlines the possible disadvantages of arbitration, including the fact that arbitration awards are generally final and binding, that the ability to have them reversed or modified by a court is very limited, and that evidence discovery is generally more limited in arbitration than in court.

The statement also informs brokers that the arbitrators do not have to issue an opinion that would explain their findings. Brokers would also be told that the panel might include arbitrators who were or are affiliated with the securities industry.

The filing says the disclosure statement would not apply to any private arbitration agreement a rep might enter into with an employer. Individual firms can still require employees to arbitrate all disputes, including discrimination and harassment claims. However, the NASD warns in its filing that firms would be responsible for making proper disclosure with private agreements.

The NYSE, the Boston Stock Exchange and the Chicago Stock Exchange have put through new rules that bar the exchanges from hearing discrimination and sexual harassment cases based on predispute agreements, unless both sides agree. Those rule changes are in accordance with an Equal Employment Opportunity Commission policy statement that says such agreements are intrinsically unfair and a violation of federal civil rights laws.

The NASD filing says discrimination and harassment cases can still be brought to the NASD if the parties have agreed to arbitrate it, either before or after the dispute arose.

If the rule is approved, the NASD and NYSE would treat bifurcated claims differently. These cases can occur when a plaintiff files a discrimination and/or harassment claim in court while asserting other claims that are still bound to arbitration, such as wrongful termination or defamation. The NASD rule would allow the defendant, but not the plaintiff, to exercise the right to combine all of the claims in court. The NYSE, in its new rule, allows either party to opt for a consolidated court proceeding.

At press time in early March, the SEC had not yet put the proposed rule out for comment.-

In its rule filing, the NASD is proposing new rules that will apply only to discrimination cases.

In cases involving claims of employment discrimination, whether or not other issues are also involved, all panelists must be classified as public arbitrators, the filing says. The NASD is also proposing the use of a more specialized roster of arbitrators who are qualified to hear discrimination cases.

Under the proposal, any claim of $100,000 or less (versus the current amount of $50,000 or less) would be heard by a single arbitrator. The NASD says that this higher threshold reduces the hearing costs for the parties and results in more efficient allocation of qualified employment arbitrators.

Cliff Palefsky, San Francisco-based chairman of the National Employment Lawyers Associations securities arbitration committee, says few claims are filed for less than $100,000. Therefore, most of these cases would still be heard by a three-person panel. The industry perceives [three-person panels] to be to their advantage, he says, because the compromising that goes on slows down the process and tends to limit awards.

A 1995 due process protocol, which was created by a task force under the auspices of the American Bar Association to govern the mediation and arbitration of employment disputes, calls for single arbitrators to hear cases, Palefsky notes. One of the stated purposes of this latest proposed rule change is to make the NASDs procedures more similar to those outlined in the protocol, according to the rule filing, which included a copy of the protocol as an attachment.

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