SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-39421; File No. SR-NASD-97-77)

December 10, 1997

Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc.
Relating to the Arbitration of Employment Discrimination Claims.

     Pursuant to Section 19(b)(1) of the Securities Exchange Act
of 1934 ("Act"), 15 U.S.C. 78s(b)(1), notice is hereby given that
on October 17, 1997, the National Association of Securities
Dealers, Inc. ("NASD" or "Association") filed with the Securities
and Exchange Commission ("SEC" or "Commission") the proposed rule
change as described in Items I, II, and III below, which Items
have been prepared by the self-regulatory organization.  The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
I.   Self-Regulatory Organization's Statement of the Terms of
     Substance of the Proposed Rule Change

     NASD Regulation is proposing to amend Rule 10201 of the
NASD's Code of Arbitration Procedure ("Code") to remove the
requirement to arbitrate claims of statutory employment
discrimination.  Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in
brackets.* * *
CODE OF ARBITRATION PROCEDURE
10200.  INDUSTRY AND CLEARING CONTROVERSIES
10201.  Required Submission
     (a) Except as provided in paragraph (b), [Any] a dispute,
claim, or controversy eligible for submission under the Rule
10100 Series between or among members and/or associated persons,
and/or certain others, arising in connection with the business of
such member(s) or in connection with the activities of such
associated person(s), or arising out of the employment or
termination of employment of such associated person(s) with such
member, shall be arbitrated under this Code, at the instance of:
          (1) a member against another member;
          (2) a member against a person associated with a member
     or a person associated with a member against a member; and
          (3) a person associated with a member against a person
     associated with a member.
     (b) A claim alleging employment discrimination or sexual
harassment in violation of a statute is not required to be
arbitrated.  Such a claim may be arbitrated only if the parties
have agreed to arbitrate it, either before or after the dispute
arose.
     [(b)] (c)  Any dispute, claim or controversy involving an
act or failure to act by a clearing member; a registered clearing
agency; or participants, pledgees, or other persons using the
facilities of a registered clearing agency, under the rules of
any registered clearing agency with which the Association has
entered into an agreement to utilize the Associationžs
arbitration facilities and procedures shall be arbitrated in
accordance with such agreement and the rules of such registered
clearing agency.
II.  Self-Regulatory Organization's Statement of the Purpose of,
     and Statutory Basis for, the Proposed Rule Change

     In its filing with the Commission, the self-regulatory
organization included statements concerning the purpose of and
basis for the proposed rule change and discussed any comments it
received on the proposed rule change.  The text of these
statements may be examined at the places specified in Item IV
below.  The self-regulatory organization has prepared summaries,
set forth in Sections A, B, and C below, of the most significant
aspects of such statements.
     A.   Self-Regulatory Organization's Statement of the Purpose
          of, and Statutory Basis for, the Proposed Rule Change

          1.   Purpose

     The proposed rule change will modify the current requirement
that associated persons arbitrate all disputes arising out of
their employment or termination of employment with a member
broker/dealer.  The proposed rule provides that associated
persons are no longer required, solely by virtue of their
association or their registration with the NASD, to arbitrate
claims of statutory employment discrimination.  Associated
persons still will be required to arbitrate other employment-
related claims, as well as any business-related claims involving
investors or other persons.
Background
     Although most arbitration claims submitted to the NASD
involve disputes between members and customers, a growing number
of matters involve employment-related disputes between members
and their associated persons.  The growth in this area is the
result of several recent court decisions concerning the
requirement of persons associated with a broker/dealer to
arbitrate their employment disputes. 
     The requirement for associated persons to register with the
NASD arises from Section 15A(g)(3)(B) of the Act, which provides
that the NASD may "require a natural person associated with a
member, or any class of such natural persons, to be registered
with the association in accordance with procedures so established
[by the rules of the association]."  The registration requirement
was made mandatory by Exchange Act Rule 15b7-1 in 1993.  The
NASD, other self-regulatory organizations ("SROs"), and state
regulatory authorities require all applicants for registration as
persons associated with a broker/dealer (registered
representatives, assistant representatives or principals) to
complete and sign the Form U-4, the "Uniform Application for
Securities Industry Registration or Transfer."  Form U-4
requires registered persons to submit to arbitration any claim
that is eligible under the rules of the organizations with which
they register (as indicated in Item 10 of the Form U-4).  The
relevant language on the Form U-4 states: 

     I agree to arbitrate any dispute, claim or controversy
     that may arise between me and my firm, or a customer,
     or any other person, that is required to be arbitrated
     under the rules, constitutions, or by-laws of the
     organizations indicated in Item 10 as may be amended
     from time to time and that any arbitration award
     rendered against me may be entered as a judgement in
     any court of competent jurisdiction.

Thus, the Form U-4 incorporates by reference the rules of the SRO
with which the individual is to be registered.  NASD Rule 10101
provides as follows:
     This Code of Arbitration Procedure is prescribed . . .
     for the arbitration of any dispute, claim, or
     controversy arising out of or in connection with the
     business of any member of the Association, or arising
     out of the employment or termination of employment of
     associated person(s) with any member, with the
     exception of disputes involving the insurance business
     of any member which is also an insurance company . . .
     between or among members and associated persons . . . .

For industry and clearing controversies, Rule 10201 requires that
all matters eligible under Rule 10101 be submitted to arbitration
at the request of any member or associated person.  Rules 10101
and 10201 were amended in 1993 to include the language relating
to disputes žarising out of the employment or termination of
employmentž of an associated person.  This language was added in
order to clarify that employment disputes were required to be
arbitrated, since a California court had held that the Code of
Arbitration Procedure did not cover such disputes, but only
covered disputes arising out of or in connection with business
transactions.  The Commission found the amendment to be
consistent with Section 15A(b)(6) of the Act and approved the
rule change.
     Over the past several years, employees have raised several
challenges to the mandatory arbitration of employment
discrimination disputes.  Such challenges were addressed by the
Supreme Court in Gilmer v. Interstate/Johnson Lane Corp.  In
Gilmer, which involved a person registered with the New York
Stock Exchange, the Court examined many challenges to the
adequacy of arbitration procedures raised by the registered
representative and found that none was sufficient to prevent the
Court from enforcing the representative's agreement, pursuant to
his signing of the Form U-4, to arbitrate his federal age
discrimination claim.  Therefore, the Court held that Mr. Gilmer
had not met his burden of showing that Congress intended to
preclude arbitration of claims under the Age Discrimination in
Employment Act of 1967.  
     Subsequent to the Gilmer decision, courts have declined to
find a Constitutional or statutory bar to enforcement of the
agreement to arbitrate contained in the Form U-4.  They have
extended the reasoning of Gilmer to cover disputes arising under
Title VII of the Civil Rights Act of 1964, the Americans with
Disabilities Act, and state statutes of similar nature. 
Courts also have extended the application of Gilmer to the NASD,
since its rules are similar to the NYSE rule at issue in
Gilmer.  Nevertheless, registered persons and others have
continued to challenge the requirement to arbitrate claims of
statutory employment discrimination.
Task Force Views
     In January 1996, the NASDžs Arbitration Policy Task Force
("Task Force") released its Report on Securities Arbitration
Reform ("Report").  The Task Forcežs Report made numerous
recommendations to improve the arbitration process.  Since the
Report was released, NASD Regulation has been engaged in a major
effort to implement the Task Force recommendations.
     Employment arbitration was not an area of major focus for
the Task Force.  The Task Force found, however, that such
arbitration offers the advantages of speed and cost that are
identified with customer arbitration, and observed that statutory
discrimination claims are almost always interwoven with industry-
specific issues.  Moreover, the Task Force believed that
arbitration's equitable approach to dispute resolution is fully
capable of vindicating the important public rights expressed in
the anti-discrimination statutes.  The Task Force, therefore,
found compelling reasons to keep employment-related disputes
within NASD arbitration.  The Task Force Report recommended that
employment-related disputes, including statutory discrimination
claims, remain eligible for arbitration with certain enumerated
enhancements, many of which had been recommended elsewhere in the
Report in the context of customer arbitration.  The NASD
intends to implement many of the recommended enhancements to its
arbitration forum in the next year. 
Controversy Surrounding the Issue
     In the past year, there has been a great deal of activity
and public discussion about the arbitration of employment
discrimination disputes.  In February of 1997, three members of
Congress wrote to the SEC and questioned the authority of the
NASD and other SROs to require arbitration of discrimination
claims in employment disputes through an associated personžs
signing of the Form U-4.  Legislation was introduced this year
in both the House and Senate that would prohibit employers and
employees from entering into predispute arbitration agreements
concerning claims of unlawful employment discrimination.  Under
the proposed legislation, the parties could agree, after a
dispute arose, whether to resolve it by arbitration or to go to
court.
     The NASD has received letters on this subject from groups
with differing points of view, such as the Securities Industry
Association, the Equal Employment Opportunity Commission
("EEOC"), the National Womenžs Law Center, the Womenžs Legal
Defense Fund, the American Civil Liberties Union, the National
Employment Lawyers Association, the National Association of
Investment Professionals, several members of Congress, and
attorneys representing parties in employment disputes. 
Recent NASD Actions
     To gather a wide assortment of views on this issue, NASD
staff met with various groups and individuals, including national
and regional member firms, members of NASD Regulation District
Committees, attorneys representing employees and attorneys
representing employers in employment litigation, members of the
Bar of the City of New York Labor and Employment Committee, and
staff of the New York Stock Exchange.  In general, the groups
from or representing the securities industry believed the current
practice is fair, and that it is more cost-effective for all
parties than going to court.  The groups representing employees
were unanimous in believing that the NASD and other SROs should
remove the requirement for registered persons to arbitrate
employment discrimination disputes as a condition of registration
in the industry.  
     Many persons meeting with NASD staff recommended that the
SROs adopt the Due Process Protocol endorsed by the American Bar
Association and various dispute resolution organizations.  Some
attendees expressed a willingness to work with the SROs in
revising the process if arbitration of discrimination claims were
made voluntary.
     In May 1997, NASD Regulation formed an Advisory Committee to
assist it in reaching a decision on the outstanding questions. 
The Advisory Committee consisted of six persons of varying and
distinguished backgrounds.  The Advisory Committee held a meeting
in Washington, D.C. on June 16, 1997 and invited to speak
representatives of civil rights organizations, the EEOC, general
counsels of member firms, attorneys who represent employees,
representatives of employee organizations, and attorneys who
represent member firms.  Afterwards, the Advisory Committee spoke
with neutral experts in the alternative dispute resolution field,
and discussed the issues with NASD management and staff.
     After consideration of all the views presented, and in light
of the public perception that civil rights claims may present
important legal issues better dealt with in a judicial setting,
the NASD determined that the appropriate action was to remove the
arbitration requirement for such claims, but to further improve
the forum so that it is viewed by both registered employees and
firms as the fairest and most efficient forum for resolving all
employment disputes.  In August 1997, proposals were presented to
the NASD Regulation and NASD Boards, which authorized the
proposed rule change. 
Details of the Proposed Rule Change
     Paragraph (a) of the proposed rule adds a prefatory phrase
indicating that the requirement to arbitrate employment disputes
contains an exception, set forth in paragraph (b).
     New paragraph (b) provides that claims alleging employment
discrimination or sexual harassment in violation of a statute are
not required to be arbitrated by NASD rules.  This means that
such claims may be filed in the appropriate court, if the
employee chooses to do so and is not under a separate predispute
obligation to arbitrate the dispute.  An employee also may
agree to arbitrate after a dispute arises, and may choose to do
so for a number of reasons.  
     Paragraph (b) applies only to claims alleging employment
discrimination or sexual harassment in violation of a
statute.  Paragraph (b) does not apply to causes of action
created solely by judicial precedents.  Similarly, it does not
apply to other causes of action under state or federal law, which
remain subject to mandatory arbitration under paragraph (a).
     Paragraph (c) of the proposed rule is former paragraph (b),
which is unchanged except for the renumbering.
Effective Date and Related Issues 
     The NASD has requested that the proposed rule become
effective one year from the date of Commission approval for
several reasons.  The NASD believes that a one year period from
the date of Commission approval would permit employees and firms
to determine what agreements they might wish to reach with regard
to dispute resolution.  During this period, the NASD will make
related enhancements to the forum so that employees will have
confidence that there are adequate procedures and safeguards of
their rights in NASD arbitration.  The NASD has formed an
advisory working group to explore various options for the
employment arbitration area, including additional due process
standards, standard discovery lists, arbitrator list selection,
and other related issues.  It is expected that the working group
will be able to provide advice to NASD management and the Boards
during 1998.  Such enhancements to the NASDžs arbitration forum
are expected to be the subject of future rule proposals. 
     In this connection, the NASD also plans to provide improved
disclosure to employees of the effect of signing the Form U-4,
their rights under the proposed rule, and the features of
arbitration, so that they can make informed decisions.
     Finally, the NASD intends to work with other regulators to
consider expanded disclosure on the Form U-4 itself.  Amendment
to the Form U-4, an industry-wide form, requires the agreement of
the SROs, the state regulatory authorities, and NASAA, as well as
approval by the Commission.  This process could take several
months or longer. 
          2.   Statutory Basis
     NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Act
in that the amendment will protect the public interest by
allowing associated persons to choose whether to pursue their
statutory claims of employment discrimination in court or in
arbitration, and by improving partiesž confidence in the
arbitration process.
     B.   Self-Regulatory Organization's Statement on Burden on
          Competition

     The NASD does not believe that the proposed rule change will
impose any inappropriate burden on competition.
     C.   Self-Regulatory Organization's Statement on Comments on
          the Proposed Rule Change Received from Members,
          Participants, or Others

     No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
     for Commission Action

     Within 35 days of the publication of this notice in the
Federal Register or within such longer period (i) as the
Commission may designate up to 90 days of such date if it finds
such longer period to be appropriate and publishes its reasons
for so finding or (ii) as to which the self-regulatory
organization consents, the Commission will:
     (A)  by order approve the proposed rule change, or
     (B)  institute proceedings to determine whether the proposed
rule change should be disapproved.
IV.  Solicitation of Comments
     Interested persons are invited to submit written data,
views, and arguments concerning the foregoing.  Persons making
written submissions should file six copies thereof with the
Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549.  Copies of the submission, all
subsequent amendments, all written statements with respect to the
proposed rule change that are filed with the Commission, and all
written communications relating to the proposed rule change
between the Commission and any person, other than those that may
be withheld from the public in accordance with the provisions of
5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Room.  Copies of such filing will
also be available for inspection and copying at the principal office of the NASD.  All submissions should refer to File No. SR-
NASD-97-77 and should be submitted by [insert date 21 days from
date of publication].
     For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.

                                             Jonathan G. Katz
                                                  Secretary