The SEC is now considering a proposed NASD rule that would change the way employee discrimination claims are handled in NASD arbitration forums.
The proposed change is an addition to the rule that eliminated the regulator's policy of forcing arbitration of statutory discrimination claims. The NASD still allows individual firms to require arbitration of these claims.
When a discrimination claim is arbitrated under a firm's contract, the proposal would require arbitration procedures similar to an American Bar Association protocol (see "NASD Looks to ABA Protocol," Page 44). The rule would also require that firms provide registered employees with arbitration disclosures whenever they sign a new or amended U-4 (see box, below).
It's unknown how soon the SEC might act on the filing, but Linda Fienberg, NASDR executive vice president for dispute resolution, says she's hoping for approval by year-end.
Fienberg also confirms that the NASDR is not considering banning predispute arbitration agreements for discrimination claims, in line with what the NYSE, the Boston Stock Exchange and the Chicago Stock Exchange have done.
Several items in the proposal have sparked industry reaction. One issue is a requirement that arbitrators state in writing how they decided a discrimination claim. Arbitrators typically don't detail their rulings.
In a comment letter, Cliff Palefsky, a San Francisco attorney and chair of the National Employment Lawyers Association's securities industry arbitration committee, argued that detailed written opinions are needed so that "some minimum level of judicial review would be possible."
Fienberg promises that there will be "more discussion" on this point when the NASDR files its response to public comments.
The proposal also spells out that depositions should be allowed in statutory employment cases. Under current NASD arbitration practice, depositions are discouraged and rarely used.
In their comment letters, both the Securities Industry Association and Merrill Lynch urged more clarification about the use of depositions. The SIA says "it is critical that the use of depositions be discouraged" to preserve the efficient nature of arbitration.
Also sparking disagreement is the proposal's provision to have only public arbitrators hear discrimination claims. Public panelists are defined as those who've spent less than 20 percent of their time working for securities industry clients in the past two years.
The SIA believes screening out potential panelists is "offensive in its anti-industry sentiment." But Palefsky thinks the proposal doesn't go far enough to cut arbitrators who could be perceived as working for an industry-friendly law firm.
The proposed change would actually affect few cases. As of Aug. 10, 40 discrimination cases had been filed with the NASDR in 1999, nine of which asserted sexual harassment, Fienberg says. In 1997 and 1998, statutory discrimination cases numbered about 100.
The NASD is proposing to follow several key points of an American Bar Association (ABA) protocol relating to arbitrating discrimination claims. But the regulator comes up short on one criteria: offering a neutral forum.
The ABA's due process protocol states that arbitration must be conducted by a neutral third party. The NASDR is participating in a pilot to allow public customers the option of filing for non-SRO arbitration at private organizations such as the American Arbitration Association (see February 1999 RR, Page 38). Employees don't have that option. "We don't have anything [similar] planned [for employees] at this time," says Linda Fienberg, NASDR executive vice president for dispute resolution.
Arnold Zack, the Harvard professor who chaired the task force that wrote the ABA's protocol, says he has no problem with the NASD's arbitration forum as long as both parties in a dispute also have the right to go to a neutral forum. "If they don't have that option, then I don't think it's neutral," he says. "It's an industry-controlled agency."
In its proposed rule now at the SEC, the NASD would adopt some of the American Bar Association's (ABA) protocol on handling discrimination disputes. Among the key items the proposal calls for are:
* Depositions and access to firm records by an employee. The NASD adds that firms should have access to information held by the employee as well, such as records of outside business activity.
* Arbitration panels made up of public members.
* Awards of attorneys' fees if available under applicable law. This differs with the ABA protocol, which allows such awards under the law and also "in the interests of justice."
* A statement from arbitrators as to the disposition of any statutory claim. The NASD has omitted the ABA protocol's requirement for an "opinion and award," which the SRO says could mislead parties into expecting a judicial type of decision.