[Federal Register Volume 59, Number 108 (Tuesday, June 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13734]


[[Page Unknown]]

[Federal Register: June 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34141; File No. SR-MSE-93-9]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Inc. Relating to Proposed 
Amendments to Its Arbitration Rules

June 1, 1994.
    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 April 
26, 1993, the Chicago Stock Exchange, Inc. (``CHX'' or ``Exchange'') 
(on the date that the proposal was filed, the CHX was named the 
``Midwest Stock Exchange'' or ``MSE'') filed with the Securities and 
Exchange Commission (``Commission'' or ``SEC'') the proposed rule 
change as described in Items, I, II and III below, which Items have 
been prepared by the self-regulatory organization. On March 31, 1994, 
the Exchange submitted to the Commission Amendment No. 1 to the 
proposed rule change.\1\ On June 1, 1994, the Exchange submitted to the 
Commission Amendment No. 2 to the proposed rule change.\2\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\See letter from David T. Rusoff, Attorney, Foley & Lardner, 
to Sandra Sciole, Special Counsel, SEC, dated March 30, 1994.
    \2\See letter from David T. Rusoff, Attorney, Foley & Lardner, 
to Sandra Sciole, Special Counsel, SEC, dated May 31, 1994. 
Amendment No. 2 made certain changes to Interpretation and Policy 
.01 and .02 to Rule 24.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CHX proposes to amend its arbitration rules as set out in Rule 
24 of Article VIII in order to have them conform more closely with the 
Uniform Code of Arbitration developed by the Securities Industry 
Conference on Arbitration (``SICA'').\3\
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    \3\SICA is comprised of a representative from each self-
regulatory organization (``SRO'') that administers an arbitration 
program, a representative of the securities industry, and four 
representatives of the public. The SROs that administer an 
arbitration program are the New York Stock Exchange, American Stock 
Exchange, Boston Stock Exchange, Cincinnati Stock Exchange, CHX, 
Pacific Stock Exchange, Philadelphia Stock Exchange, the Chicago 
Board Options Exchange, the National Association of Securities 
Dealers, and the Municipal Securities Rulemaking Board.
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    In addition to the conforming changes to Rule 24, the Exchange also 
proposes to make other changes to Rule 24 as well as changes to Rule 
23, Article VIII (Arbitration of Member Disputes), as set forth in the 
purpose section of this rule filing.\4\
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    \4\The text of the proposed rule change was attached to the 
filing as Exhibit A. Copies of the proposal are available at the 
Commission as well as at the CHX.
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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 purpose of the proposed rule change is to bring the Exchange's 
arbitration rules more closely in line with SICA's Uniform Code of 
Arbitration (the ``Uniform Code'' or ``Code''). To that end, the 
Exchange is proposing several conforming changes to its arbitration 
rules and is also proposing other changes which will facilitate the 
administration of the CHX arbitration forum in general.
    The Exchange is also redesignating most of the section references 
to Rule 24 in order to conform its rule reference to SICA's Uniform 
Code.
    The CHX is proposing to add a provision (CHX Rule 24, Section 1(c)) 
to its arbitration rules providing that class actions will not be 
eligible for submission to arbitration. However, an individual may 
pursue a claim in arbitration if class certification is denied; the 
case is decertified; the customer is excluded from the class; or the 
customer elects not to participate in the putative or certified class 
action or has complied with other court prescribed conditions for 
withdrawal. The Exchange is amending Section 33 of Rule 24 
(redesignated as Section 31) requiring the addition of a provision to 
pre-dispute arbitration agreements regarding the ineligibility of class 
actions for arbitration.\5\
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    \5\Rule 24, Section 31, Paragraph 5 is proposed to state that 
all agreements shall include a statement that ``no person shall 
bring a punitive or certified class action to arbitration, nor seek 
to enforce any pre-dispute arbitration agreement against any person 
who has initiated in court a putative class action; who is a member 
of a putative class who has not opted out of the class with respect 
to any claims encompassed by the putative class action until (i) the 
class certification is denied; or (ii) the class is decertified; or 
(iii) the customer is excluded from the class by the court. Such 
forbearance to enforce an agreement to arbitrate shall not 
constitute a waiver of any rights under this agreement except to the 
extent stated herein.''
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    Rule 24, Section 1 adds Interpretation and Policy .01 which 
addresses an existing Exchange policy regarding the determination 
whether to accept a claim for arbitration at the Exchange. The 
Exchange's policy is to accept a claim for arbitration if the Exchange 
is the Designated Examining Authority (``DEA'') of the Respondent 
member or if the enforcement of the applicable rules has not been ceded 
to another self-regulatory organization (``SRO'') pursuant to its Rule 
17d-2 Agreement.\6\ In other cases, the Exchange may decline the use of 
its arbitration facilities if the nexus between the dispute and the 
Exchange is minimal.
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    \6\Pursuant to Rule 17d-2 under the Act, any two or more SROs 
may file with the Commission a plan for allocating among the SROs 
the responsibility to receive regulatory reports from persons who 
are members or participants of more than one of such SROs to examine 
such persons for compliance, or to enforce compliance by such 
persons, with specified provisions of the Act, the rules and 
regulations thereunder, and the rules of such SROs, or to carry out 
other specified regulatory functions with respect to such persons. 
See 17 CFR 240.17d-2 (1994).
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    The Exchange considers claims submitted to the arbitration 
department on a case-by-case basis and examines the policy described 
above in determining whether a claim will be accepted. Under the 
Exchange's policy, the only discretion on whether the Exchange will 
accept a claim for arbitration occurs when the Exchange is not the DEA 
for the Respondent member and the enforcement of a particular rule has 
not been ceded to another SRO pursuant to Rule 17d-2. In this event, as 
stated above, the Exchange may reject the claim for arbitration if the 
nexus between the dispute and the Exchange is minimal. This can be 
demonstrated by the following example. Suppose a Respondent member firm 
was a member of the New York Stock Exchange, Inc. (``NYSE``), National 
Association of Securities Dealers, Inc. (``NASD''), and the CHX, and 
the NYSE was the firm's DEA. Suppose that the dispute involved alleged 
NASD sales practice violations covering 150 transactions. Suppose 
further that out of those 150 transactions, only two were executed on 
the CHX. In that event, the Exchange would most likely decline the use 
of its arbitration facilities based on minimal contacts that the 
dispute had with the Exchange.
    The Exchange believes that the policy places fair limitations upon 
the responsibility of the Exchange to make its arbitration facilities 
available by requiring that the underlying dispute have some minimal 
nexus (or contacts) to the Exchange.
    Rule 24, Section 1 also adds interpretation and policy .02 which 
extends jurisdiction over former members and member organizations for 
controversies which had their genesis during the period in which the 
former member was an Exchange member.\7\
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    \7\Proposed Interpretation and Policy .02 to Rule 24, Section 1 
states that for purposes of this Rule and Rule 23 under Article 
VIII, the terms ``member,'' ``member organization,'' ``associated 
person'' and an ``employee of a member,'' shall be deemed to 
encompass those persons and entities who were Exchange members or 
persons associated with a member at the time the circumstances 
occurred which gave rise to the controversy.
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    Rule 24, Section 2(c) (Simplified Arbitration) amends the fee 
requirements for simplified arbitrations (cases not exceeding a dollar 
amount of $10,000).\8\ The proposed fee schedule for simplified 
arbitrations and regular arbitrations is set out in Section 32 
(redesignated as Section 30).
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    \8\Rule 24, Section 2(c) is proposed to state that the Claimant 
shall pay a filing fee and remit a hearing deposit as specified in 
Section 30 of this Rule upon filing the Submission Agreement. The 
final disposition of the sum shall be determined by the arbitrator. 
The proposal would also amend Section 2(d) to state that the costs 
to the Claimant under either proceeding shall in no event exceed the 
total amount specified in Section 30 of this Rule.
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    Rule 24, Section 2(h) provides a mechanism, for resolving pre-
hearing matters in a simplified proceeding. This change codifies the 
applicability of the discovery procedures set forth in Section 14 
(redesignated as Section 20) to simplified arbitrations.
    Rule 24, Section 8(a)(2)(v) will classify individuals who are 
registered under the Commodities Exchange Act or are members of a 
registered futures association or any commodities exchange as being 
from these securities industry for purposes of classification of 
arbitrators.
    Rule 24, Section 10 is amended to clarify the time limitations 
applicable to a party wishing to utilize a peremptory challenge.
    Rule 24, Section 13(c)(5) is proposed to be amended to state that 
the Director of Arbitration may extend any time period in this section 
(whether such be denominated as a Claim, Answer, Counterclaim, Cross-
Claim, Reply, or Third-Party pleading).
    Rule 24, Section 13(d) is proposed to be amended to clarify the 
rule with respect to joinder and consolidation. It also authorizes the 
Director of Arbitration to make preliminary determinations in cases 
where issues concerning joinder and consolidation are in dispute. 
However, all further determinations with respect to joinder and 
consolidation will remain with the arbitration panel.\9\
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    \9\In addition, the Exchange proposes to amend Section 13(d) to 
state that in arbitrations where there are multiple Claimants, 
Respondents or Third party Respondents, the Director of Arbitrations 
shall be authorized to determine preliminarily whether such parties 
should proceed in the same or separate arbitrations. Such 
determinations will be considered subsequent to the filing of all 
responsive pleadings. The Director of Arbitration shall be 
authorized to determine preliminarily whether claims filed 
separately are related and shall be authorized to consolidate such 
claims for hearing and award purposes.
    Section 13(d)(1) is proposed to state that all persons may join 
in one action as Claimants if they assert any right to relief 
jointly, severally, or arising out of the same transaction, 
occurrence, or series or transactions or occurrences and if any 
questions of law or fact common to all these Claimants will arise in 
the action. All persons may be joined in one action as respondents 
if there is asserted against them jointly or severally any right to 
relief arising out of the same transaction, occurrence, or series of 
transactions or occurrences and if any questions of law or fact 
common to all respondents will arise in the action. A Claimant or 
respondent need not assert rights to or defend against all the 
relief demanded. Judgment may be given for one or more of the 
claimants according to their respective rights to relief, and 
against one or more respondents according to their respective 
liabilities.
    Rule 24, Section 14 is proposed to be amended to state that the 
time and place for the initial hearing shall be determined by the 
Director of Arbitration and each hearing thereafter by the 
arbitrators. Notice of the time and place for the initial hearing 
shall be given at least eight business days prior to the date fixed 
for the hearing by personal service, registered, or certified mail 
to each of the parties unless the parties shall, by their mutual 
consent, waive the notice provisions under this section. Notice for 
each hearing, thereafter, shall be given as the arbitrators may 
determine. Attendance at a hearing waives notice thereof.
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    Rule 24, Section 19 (redesignated as Section 18) requires a party 
requesting an adjournment to deposit a fee, not to exceed $1,000, upon 
making the request. If granted, the arbitrators may waive the deposit 
or, in their award, return the deposit.\10\
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    \10\Section 18(b) is proposed to be amended to state that a 
party requesting an adjournment after arbitrators have been 
appointed shall, if an adjournment is granted, deposit a fee, equal 
to the initial deposit of forum fees for the first adjournment and 
twice the initial deposit of forum fees, not to exceed $1,000, for a 
second or subsequent adjournment requested by that party. The 
arbitrators may waive the deposit of this fee or in their awards may 
direct the return of the adjournment fee.
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    Rule 24, Section 24 (redesignated as Section 22) clarifies that 
arbitrators are empowered to take appropriate action, which can include 
the assessment of fees or costs, preclusion of documents or witnesses, 
and making disciplinary referrals in order to obtain compliance with 
all rulings by the arbitrators.\11\
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    \11\Proposed Section 22 to Rule 24 provides: ``The arbitrator(s) 
shall be empowered to interpret and determine the applicability of 
all provisions under this Rule and to take appropriate action to 
obtain compliance with any ruling by the arbitrator(s). Such 
interpretations and actions to obtain compliance shall be final and 
binding upon the parties.''
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    Rule 24, Section 28 (redesignated as Section 26) requires parties 
filing amended pleadings to serve such different pleading on all other 
parties. This change relieves the Director of Arbitration from the 
requirement to serve such pleading.\12\
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    \12\Amended Rule 24, Section 26 is proposed to state, in part, 
that the party filing a new or different pleading shall serve on all 
other parties, a copy of the new or different pleading in accordance 
with the provisions set forth in Section 13(b). The other parties 
may, within ten business days from the receipt of service, file a 
response with all other parties and the Director of Arbitration in 
accordance with Section 13(b).
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    Rule 24, Section 30 (redesignated as Section 28) sets forth the 
requirement that all monetary awards be paid within 30 days of receipt 
unless a motion to vacate has been filed with the court. Additionally, 
the section mandates that interest accrue from the date of the award, 
until paid, if the award is not paid within 30 days, or the motion to 
vacate is unsuccessful, or as specified by the arbitrators. Interest 
shall be assessed at the prevailing legal rate in the state where the 
award is rendered or at a rate set by the arbitrator(s). This change 
will encourage the prompt payment of awards.\13\
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    \13\Rule 24, Section 28 is proposed to be amended to include 
Paragraphs (f) and (g). Rule 24, Section 28(f) is proposed to state 
that the awards shall be made publicly available, provided however, 
that the name of the customer party to the arbitration will not be 
publicly available if he or she so requests in writing.
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    Rule 24, Section 32 (redesignated as Section 30) amends the current 
fee schedule in place at the CHX and conforms its fee schedule to those 
at the other SROs. The CHX proposes to adopt the following Schedule of 
Fees:\14\
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    \14\With respect to the following schedule, italicizing 
indicates new material.

               Schedule of Fees--Public Customer Claimant               
------------------------------------------------------------------------
                                                        Hearing deposit 
        Amount in dispute          Filing     Paper  -------------------
                                     fee              1 Arb.*    3 Arb. 
------------------------------------------------------------------------
$1,000 or less..................       $15       $15      *$15  ........
$1,001-$2,500...................        25        25       *25  ........
$2,501-$5,000...................        50        75      *100  ........
$5,001-$10,000..................        75        75      *200  ........
$10,001-$30,000.................       100  ........       300      $400
$30,001-$50,000.................       120  ........       300       400
$50,001-$100,000................       150  ........       300       500
$100,001-$500,000...............       200  ........       300       750
$500,001-$5,000,000.............       250  ........       300     1,000
Over $5,000,000.................       300  ........       300     1,500
------------------------------------------------------------------------
*The 1 Arbitrator column also sets forth the forum fees for pre-hearing 
  conferences with a single arbitrator.                                 


                           Industry Claimant*                           
------------------------------------------------------------------------
                                                        Hearing deposit 
        Amount in dispute          Filing     Paper  -------------------
                                     fee               1 Arb.    3 Arb. 
------------------------------------------------------------------------
$1,000 or less..................      $500       $75     *$300  ........
$1,001-$2,500...................       500        75      *300  ........
$2,501-$5,000...................       500        75      *300  ........
$5,001-$10,000..................       500        75      *300  ........
$10,001-$30,000.................       500  ........       300      $600
$30,001-$50,000.................       500  ........       300       600
$50,001-$100,000................       500  ........       300       600
$100,001-$500,000...............       500  ........       300       750
$500,001-$5,000,000.............       500  ........       300     1,000
Over $5,000,000.................       500  ........       300     1,500
------------------------------------------------------------------------
*This is the fee schedule for claims submitted by members or member     
  organizations, against public customers, registered representatives or
  non-members other than public customers, and for claims submitted by  
  registered representatives or non-members other than public customers 
  against members or member organizations or non-members. The one       
  arbitrator column also sets forth the forum fee for pre-hearing       
  conferences with a single arbitrator.                                 


                          Member Controversies                          
------------------------------------------------------------------------
                                                       Pre-             
            Amount in dispute              Filing     hearing    Hearing
                                             fee    conference   deposit
------------------------------------------------------------------------
$10,000 or less.........................      $100       $150       $200
$10,001 to $100,000.....................       200        300        750
$100,001 or more........................       300        500      1,000
------------------------------------------------------------------------

    Finally, CHX Rule 23 is being amended to clarify that members must 
arbitrate controversies unless the parties agree to bring a matter 
before the Exchange's Floor Procedure Committee.\15\ The rule also 
provides that the Floor Procedure Committee may appoint an arbitrator 
if a member party fails to do so after due notice.\16\
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    \15\The Committee on Floor Procedure has general supervision of 
the conduct and dealings on the Floor of the Exchange and recommends 
for adoption by the Exchange Committee such rules and regulations as 
may be necessary for the convenient and orderly transaction of 
business of the Floor of the Exchange. The Committee has the power 
to enforce such rules and regulations by recommending staff 
investigations for violations thereof, in accordance with the 
procedure provided in Article XII. See CHX Article IV, Rule 3.
    \16\CHX Rule 23(a) would be amended to state that any 
controversy between parties who are members, member organizations or 
their nominees or associated persons which arises out of the 
Exchange business of such parties shall be submitted to arbitration, 
through the Director of Arbitration, to an Arbitration Panel 
composed of members of the Committee on Floor Procedure, unless non-
members are also parties to the controversy. If non-members are also 
parties to such controversies, the arbitrator shall be appointed in 
accordance with Section 8 of Rule 24 under this Article unless the 
non-members consent to arbitration before an arbitration panel 
selected by parties as provided in this Rule. However, controversies 
shall be resolved by the Committee on Floor Procedure if the parties 
to such controversy agree to be bound by the decision of that 
Committee or if Exchange rules otherwise require resolution by the 
Committee on Floor Procedure. The rules and procedures applicable to 
arbitrations which are set forth in Rule 24 do not apply to 
controversies which are to be resolved by the Committee on Floor 
Procedure.
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(2) Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5), in particular in that it is designed to promote just 
and equitable principles of trade and protect investors and the public 
interest by improving the administration of an impartial forum for the 
resolution of disputes relating to the securities industry.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that no burdens will be placed on competition 
as a result of the proposed rule change.

C. Self-Regulatory Organization's Statement of Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No comments were received on the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period as (i) 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 such 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, NW., Washington, DC 20549. 
Copies of the submissions, 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 
principal office of the CHX. All submissions should refer to the file 
number SR-MSE-93-9 and should be submitted by June 28, 1994.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-13734 Filed 6-6-94; 8:45 am]
BILLING CODE 8010-01-M