==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-38076 \ December 23, 1996 Admin. Proc. File No. 3-8889 ------------------------------------------------ : In the Matter of the Application of : : McLAUGHLIN PIVEN VOGEL SECURITIES, INC. : 30 Wall Street : New York, NY 10005 : : For Review of Disciplinary Action Taken by the : : NEW YORK STOCK EXCHANGE, INC. : -----------------------------------------------: OPINION OF THE COMMISSION NATIONAL SECURITIES EXCHANGE -- REVIEW OF DISCIPLINARY PROCEEDINGS Violation of Exchange Rule Where member required certain employees, as a condition of employment, to sign a form contract purporting to waive provisions of Exchange rule enabling them to compel arbitration of certain employment-related disputes, held, Exchange's finding that the conduct violated Exchange rule, and sanctions imposed, sustained. APPEARANCES: Thomas T. Loder, Rubin & Associates, P.C., for McLaughlin Piven Vogel Securities, Inc. Regina C. Mysliwiec, Rex W. Mixon, Jr., and Nancy B. Goldstein, for the New York Stock Exchange, Inc. Appeal filed: December 1, 1995 Last brief received: February 28, 1996 I. McLaughlin Piven Vogel Securities, Inc. ("McLaughlin Piven" or the "Firm"), formerly a member of the New York Stock Exchange, Inc. ("NYSE" or the "Exchange"), appeals from NYSE disciplinary action. -[1]- The NYSE found that McLaughlin Piven required certain employees, as a condition of employment, to sign a form contract purporting to waive provisions of Exchange Rule 347 ("Rule 347"). -[2]- The NYSE censured McLaughlin Piven and fined it $15,000. The NYSE further required the Firm to notify each employee who had signed the contract of his or her right to compel arbitration of disputes arising since the contract's execution. Our findings are based on an independent review of the record. II. In early 1990, McLaughlin Piven began using a special contract for employees with no prior securities industry experience who would be trained by the Firm to work as registered representatives. The contract, titled "Employment Agreement," placed restrictions on the employee's subsequent employment in the securities industry, disclosure or use of the Firm's confidential proprietary information, and solicitation of the Firm's customers and other employees. The contract specified that the employee agreed "voluntarily [to] submit to the jurisdiction of the Supreme Court of the State of New York for Nassau County for the purposes of resolving any disputes which arise out of the terms, or the enforcement thereof," of the contract. The contract further specified: Employee further expressly waives and releases any right, either express or implied, which Employee may have to compel any such disputes to be arbitrated before the New York Stock Exchange, including whatever rights Employee may have by virtue of Rule 347 of the Constitution of the New York Stock Exchange, and/or New York Stock Exchange Form U-4, and/or any other rule or form ---------FOOTNOTES---------- -[1]- In late 1994, a few months before the NYSE Hearing Panel (the "Panel") issued its decision in this matter, McLaughlin Piven resigned its Exchange membership. -[2]- Rule 347 states: Any controversy arising between a registered representative and any member or member organization arising out of the employment or termination of employment of such registered representative by and with such member or member organization shall be settled by arbitration, at the instance of any such party, in accordance with the arbitration procedure prescribed elsewhere in these rules. ==========================================START OF PAGE 3====== of the New York Stock Exchange (emphasis added). -[3]- McLaughlin Piven thus intended that each trainee waive his or her right to compel arbitration of certain types of employment- related disputes. The Exchange became aware of the waiver provision during an April 1990 sales practice examination of the Firm. The examiner testified before the Panel that James McLaughlin, the Firm's Chairman and Chief Executive Officer, told him during the examination that McLaughlin Piven had developed the waiver provision because the Firm had lost a number of NYSE arbitration cases. Following the examination, the examiner prepared a report, which he then discussed with McLaughlin Piven officials. That report stated, in relevant part: The firm's employment contract for trainees waived the trainees' right to use arbitration. It forces any dispute to New York state court. This matter is to be reviewed by the Exchange with regard to a possible conflict with Rule 347. In a subsequent letter dated August 8, 1990, the Exchange notified McLaughlin Piven that the Exchange's Office of the General Counsel "viewed as unacceptable" the purported waiver of an employee's right to compel arbitration pursuant to Rule 347. The letter advised the Firm to remove the waiver provision from its contract and to have new agreements signed by every present employee who had signed the contract. One month later, in its response to the Exchange, McLaughlin Piven refused to alter the contract and suggested that the Firm had consulted with several attorneys about its use. -[4]- ---------FOOTNOTES---------- -[3]- The contract signed by Firm employees who previously were registered with another securities firm did not contain this waiver provision. -[4]- McLaughlin Piven later submitted to the Panel nearly identical affidavits from four attorneys who had represented McLaughlin Piven in actions to enforce the terms of the contract. The affiants asserted that Rule 347 allows NYSE members and their registered representatives to choose whether to elect court or arbitration and that the waiver provision "is perfectly valid and legal" under Rule 347. Firm President Allan Vogel testified before the Panel that the waiver provision had been developed in consultation with counsel in order to "protect the interests of the firm" (continued...) ==========================================START OF PAGE 4====== The propriety of McLaughlin Piven's waiver provision apparently was not considered again until the Exchange's sales practice examination of the Firm in late 1991. The examiner's report found that the Firm continued to use a contract for trainees that purported to waive the employee's right to arbitrate in violation of Rule 347. McLaughlin Piven responded to that report with a written request that Exchange counsel meet with Firm representatives to discuss the matter. The record does not indicate that any such meeting occurred. In late 1993, -[5]- the Exchange examined McLaughlin Piven's sales practices and again concluded that the Firm's contract for trainees did not comport with Rule 347. The examiner's report stated that, when the issue was raised during the examination, Firm President Allan Vogel asserted that McLaughlin Piven "will review the contract with representatives of the Exchange in the near future for corrective action." In a subsequent November 1993 letter, the Exchange's Division of Enforcement notified McLaughlin Piven that the Firm could face disciplinary action for its use of the contract. The letter stated that NYSE members may not require their employees to waive, or to vary the scope of, an Exchange rule and gave McLaughlin Piven twenty days in which to submit a statement outlining reasons why the Firm should not be charged with violating Rule 347. Responding on behalf of the Firm in early December 1993, McLaughlin asserted, among other things, that the terms of an employee's contract were developed through negotiation with the employee and his attorney and that employees "may have their own reasons for avoiding industry arbitration." -[6]- In early 1994, the Exchange's Division of Enforcement indicated informally to McLaughlin Piven's counsel that the Exchange intended to initiate a disciplinary proceeding against the Firm. Shortly thereafter, McLaughlin requested and obtained a meeting with the head of the Exchange's Division of Enforcement, who confirmed the Division's position that the ---------FOOTNOTES---------- -[4]-(...continued) without "violating the rules [sic] of the prospective employee." -[5]- In 1992, the Exchange conducted a financial and operations examination of the Firm, the report for which did not reference the Firm's use of the waiver provision. -[6]- Other evidence in the record suggests that employees were offered the contract on a "take it or leave it" basis. ==========================================START OF PAGE 5====== waiver provision in the Firm's contract for trainees is inconsistent with the requirements of Rule 347. In late April 1994, the Exchange's Division of Enforcement issued a Charge Memorandum against McLaughlin Piven. Through July 1994, McLaughlin Piven continued to include the waiver provision in its contract. -[7]- III. When McLaughlin Piven became an NYSE member, the Firm agreed to abide by the Constitution and Rules of the Exchange, including Rule 347. -[8]- McLaughlin Piven insists that its contract for trainees comports with Rule 347. It does not. Rule 347 directs that arbitration of an employment-related dispute may be compelled "at the instance of either party." -[9]- While the contract does not restrict in any way McLaughlin Piven's right to compel arbitration of a dispute arising under the contract, it purports to waive the employee's right to do so. -[10]- ---------FOOTNOTES---------- -[7]- Between early 1990 and July 1994, approximately 280 McLaughlin Piven trainees signed contracts containing the waiver provision. -[8]- Article II,  5 of NYSE Constitution. The courts have held that the Constitution and Rules of the NYSE constitute a binding contract between the Exchange and its members. See, e.g., Muh v. Newburger, Loeb & Co., Inc., 540 F.2d 970, 973 (9th Cir. 1976) and cases therein cited. -[9]- Cf. Haviland v. Goldman Sachs & Co., 947 F.2d 601, 606 (2d Cir. 1991), cert. denied, 504 U.S. 930 (1992) (claims involving significant aspects of employment relationship subject to compulsory arbitration under Rule 347). -[10]- McLaughlin Piven knew from experience that the Firm could be compelled to arbitrate disputes alleging misappropriation of firm records and solicitation of firm customers by former employees. A few years before it added the waiver provision to its contract for trainees, McLaughlin Piven filed a complaint in New York state court for permanent injunctive relief, alleging that five of its former employees had used the Firm's customer lists to solicit business for their new employer. McLaughlin, Piven, Vogel Inc. v. W.J. Nolan & Co., Inc., 114 A.D.2d 165 (N.Y. App. Div. (continued...) ==========================================START OF PAGE 6====== McLaughlin Piven contends that it has an "absolute right," of constitutional dimensions, to contract with its employees to preclude arbitration of certain disputes and to resolve matters through the courts. -[11]- The Firm exercised its right to contract when it had entered into a membership agreement with the Exchange. That membership agreement requires McLaughlin Piven to arbitrate employment-related disputes with its employees and is enforceable under the Federal Arbitration Act. -[12]- McLaughlin Piven's subsequent use of a contract that restricts an employee's right to compel arbitration breached the Firm's contractual obligation to the Exchange. -[13]- McLaughlin Piven asserts that the Exchange failed to establish an "actual" violation of Rule 347 because it did not offer proof that a particular employee had sought to arbitrate a dispute and the Firm had denied that request. We find this assertion unavailing, as it does not account for employees who ---------FOOTNOTES---------- -[10]-(...continued) 1986). The court granted defendants' motion for an order compelling arbitration, holding that the Constitution and Rules of the Exchange constituted a written agreement between the parties to arbitrate and that the subject matter of the dispute was arbitrable under Rule 347. Id. at 169-71. -[11]- McLaughlin Piven claims that, to the extent Rule 347 "purports to strip away this critical right," the rule is an unconstitutional infringement of what it asserts is its absolute right to contract, under Article I of the U.S. Constitution, and its absolute right, under the First Amendment, of access to the court system. -[12]- 9 U.S.C.  2 (arbitration provisions in contracts involving interstate commerce "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract"). -[13]- McLaughlin Piven compares its waiver provision to a customer's decision to delete the arbitration clause from a broker-dealer's standard client agreement. This comparison is not appropriate because the customer is not bound to arbitrate disputes by an existing contract with its regulator. Broker-dealers, however, are bound by Exchange rules to resolve by arbitration disputes with customers, and this obligation cannot be waived by contract. ==========================================START OF PAGE 7====== may have been deterred by the waiver provision from requesting arbitration. As the NYSE Board of Directors observed, the language of the contract may have led employees to believe that, by signing the contract, they had waived any right they may have had to compel arbitration of any employment-related dispute. In any event, requiring each trainee to sign a contract containing the waiver provision -- whether or not that provision later was invoked by the Firm -- violates Rule 347's directive that employees and NYSE members be afforded the opportunity to compel arbitration of disputes. Finally, even assuming that McLaughlin Piven relied in good faith upon the advice of counsel when it initially included the waiver provision in its contract for trainees, -[14]- the Firm acted at its peril in continuing to utilize the contract once the Exchange informed it that the waiver provision was "unacceptable" in light of Rule 347. At that point, McLaughlin Piven was obligated either to press to a resolution its legal position that the waiver provision comports with Rule 347 or to remove that provision from its contract. McLaughlin Piven did neither. Rather, the Firm disregarded the Exchange's directive to remove the waiver provision and continued its use of the contract. -[15]- Based on the foregoing, we conclude that the waiver ---------FOOTNOTES---------- -[14]- Although McLaughlin Piven has not invoked explicitly this defense, the Firm proffered documents reflecting counsel's involvement in McLaughlin Piven's development and use of the contract. We note that, even if the Firm could establish the defense of reliance on the advice of counsel, it is not a complete defense but is merely one factor to consider. SEC v. Savoy Industries, Inc., 665 F.2d 1310, 1314 n.28 (D.C. Cir. 1981). Further, this defense usually is not available in cases, such as that before us, where intent is not an element of the violation. See David M. Haber, Securities Exchange Act Rel. No. 35564 (April 5, 1995), 59 SEC Docket 59, 65. -[15]- McLaughlin Piven has offered various explanations for its failure to take prompt corrective action, none of which excuses the Firm's conduct. Cf. Richard R. Perkins, 51 S.E.C. 380, 384 n.20 (1993) (regulatory authority's failure to take early action against a securities law violator neither operates as estoppel of later action against that wrongdoer nor cures the violation) and cases therein cited. ==========================================START OF PAGE 8====== provision contained in McLaughlin Piven's contract for trainees is inconsistent with the requirements of Rule 347 and that the Firm properly was disciplined for its use of this provision. IV. McLaughlin Piven made no good-faith effort to resolve its disagreement with the Exchange over inclusion of the waiver provision in its contract for trainees, and the Firm continued to use the contract for three months after the Exchange instituted this proceeding. Particularly under the circumstances, we conclude that the sanctions imposed by the Exchange on McLaughlin Piven -- a censure, a $15,000 fine and a requirement that the Firm notify every employee who had signed the contract of his or her right to compel arbitration of disputes arising since the contract's execution -- are neither excessive nor oppressive. An appropriate order will issue. -[16]- By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary ---------FOOTNOTES---------- -[16]- All of the contentions advanced by the parties have been considered. The contentions are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-38076 \ December 23, 1996 Admin. Proc. File No. 3-8889 : In the Matter of the Application of : : McLAUGHLIN PIVEN VOGEL SECURITIES, INC. : 30 Wall Street : New York, NY 10005 : : For Review of Disciplinary Action Taken by the : : NEW YORK STOCK EXCHANGE, INC. : : ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY NATIONAL SECURITIES EXCHANGE On the basis of the Commission's opinion issued this day, it is ORDERED that the disciplinary action taken by the New York Stock Exchange, Inc. against McLaughlin Piven Vogel Securities, Inc. be, and it hereby is, sustained. By the Commission. Jonathan G. Katz Secretary