[Federal Register Volume 59, Number 136 (Monday, July 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17315]


[[Page Unknown]]

[Federal Register: July 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34344; File No. SR-MSE-93-9]

 

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating to Amendments to the 
Exchange's Arbitration Rules

July 11, 1994.

I. Introduction

    On April 26, 1993, the Chicago Stock Exchange, Inc., formally the 
Midwest Stock Exchange, (``CHX'' or ``Exchange'') submitted to the 
Securities and Exchange Commission (``SEC'' or ``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend the Exchange's arbitration rules. On March 31, 1994, the Exchange 
submitted to the Commission Amendment No. 1 to the proposed rule 
change.\3\ On June 1, 1994, the Exchange submitted to the Commission 
Amendment No. 2 to the proposed rule change.\4\
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
    \3\See letter from David T. Rusoff, Attorney, Foley & Lardner, 
to Sandra Sciole, Special Counsel, SEC, dated March 30, 1994.
    \4\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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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 34141 (June 1, 1994), 59 FR 29454 (June 7, 
1994). No comments were received on the proposal. This order approves 
the proposed rule change as amended.

II. Description of the Proposal

    The CHX is amending its arbitration rules as set forth in Rules 23 
and 24 of Article VIII to bring them more closely in line with the 
Uniform Code of Arbitration developed by the Securities Industry 
Conference on Arbitration (``SICA``).\5\ The CHX is amending its 
arbitration rules concerning, among other things, redesignation of the 
section references in Rule 24, class action claims, the circumstances 
under which the CHX will arbitrate a claim, simplified arbitration, 
peremptory challenges, joinder and consolidation, filing amended 
pleadings, monetary awards, and the fee schedule for arbitrating at the 
CHX. The specific amendments are described more fully below.
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    \5\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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    The CHX is adding 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.\6\
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    \6\Rule 24, Section 31, Paragraph 5 is amended 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.\7\ 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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    \7\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 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.
    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.\8\
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    \8\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).\9\
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    \9\Rule 24, Section 2(c) is amended 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 CHX is also amending 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 amendment 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) classifies individuals who are 
registered under the Commodities Exchange Act or are members of a 
registered futures association or any commodities exchange as being 
from the 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 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 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.\10\
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    \10\In addition, the Exchange is amending Section 13(d) to state 
that in arbitrations where there are multiple Claimants, Respondents 
or Third party Respondents, the Director of Arbitration 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 preliminary whether claims filed separately are related 
and shall be authorized to consolidate such claims for hearing and 
award purposes.
    Section 13(d)(1) is amended 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 of 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 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.\11\
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    \11\Section 18(b) is 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.\12\
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    \12\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 pleadings on all other 
parties. This change relieves the Director of Arbitration from the 
requirement to serve such pleadings.\13\
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    \13\Amended Rule 24, Section 26 states, 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.\14\
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    \14\Rule 24, Section 28 is amended to include Paragraphs (f) and 
(g). Rule 24, Section 28(f) states 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 is adopting the following Schedule of Fees:

               Schedule of Fees--Public Customer Claimant               
------------------------------------------------------------------------
                                                      Hearing deposit   
     Amount in dispute          Filing     Paper   ---------------------
                                 fee                 1 Arb.*      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                          
------------------------------------------------------------------------
                                           Filing      Pre-             
           Amount in dispute                fee      hearing    Hearing 
------------------------------------------------------------------------
$10,000 or less........................       $100       $150       $200
$10,001 to $100,000....................        200        300        750
$100,001 or more.......................        300        500      1,000
------------------------------------------------------------------------

    The Exchange is amending Rule 23 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 Executive 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) is 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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    The Exchange believes that the 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.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with Section 6(b)(5) of the Act.\17\ The Commission 
believes the amendments to the CHX's arbitration rules are consistent 
with the Section 6(b)(5) requirements that the rules of an exchange be 
designed to promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market, 
and, in general, protect investors and the public interest.
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    \17\15 U.S.C. 78f (1988).
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    The Commission believes that the Exchange's amendments relating to, 
among other things, class actions, pre-dispute arbitration agreements, 
simplified arbitration, classification of arbitrators, peremptory 
challenges, pleadings, joinder and consolidation, monetary awards, and 
arbitration fees should increase customer confidence in the securities 
markets and promote the efficient resolution of disputes for both 
investors and broker-dealers.
    More specifically, amending Rule 24, Section 1(c) to provide that 
class actions will not be eligible for submission to arbitration should 
ensure that investors and broker-dealers are not put to the expense of 
duplicative litigation by assuring that class action Claimants have 
access to the courts. The amendment relating to simplified arbitration 
proceedings which, among other things, codifies the applicability of 
the discovery procedures to simplified arbitrations, should establish 
clear procedures for discovery requests and document production. This 
will assist in the fair resolution of arbitration controversies 
involving small claims. The amendment to Rule 24, Section 8(a)(2)(v), 
which classifies an individual who is registered under the Commodities 
Exchange Act or are members of a registered futures association or any 
commodities exchange as being from the securities industry for purposes 
of classification of arbitrators, is reasonable given the similarity 
between the futures and securities industry.
    The Commission believes that amending Rule 24, Section 10 to 
clarify the time limitations applicable to a party wishing to utilize a 
peremptory challenge should provide parties with clear guidelines 
regarding the time limitations applicable to peremptory challenges, and 
as a result contribute to the prompt resolution of the parties' 
disputes. In addition, amending Rule 24, Section 30 to require that all 
monetary awards be paid within 30 days of receipt unless a motion to 
vacate has been filed should encourage prompt payment of arbitration 
awards and increase investor confidence in the arbitration process.
    The Commission believes that it is appropriate to amend Section 22 
of Rule 24 to affirm the arbitrators' authority to take appropriate 
action to obtain compliance with any of their rulings and to provide 
that such interpretations and actions to obtain compliance are final 
and binding on the parties. The Commission believes that the amendment 
should raise customer confidence in the arbitration process by assuring 
that those individuals who utilize the CHX's arbitration forum comply 
with the rulings of an arbitrator.
    The Commission also finds that the amendments to Rule 24, Section 
30, which lists the Exchange's arbitration fees is consistent with the 
requirements of Section 6(b)(4) of the Act,\18\ in that it provides for 
the equitable allocation of reasonable dues, fees and other charges 
among members of the Exchange and others using its facilities. 
Specifically, the Commission finds that the amended or newly adopted 
fees in Section 30 are reasonable and should help to reimburse the 
Exchange for various costs incurred pursuant to the arbitration 
process.
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    \18\15 U.S.C. 78f(b)(4) (1988).
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    Finally, the Commission believes that Interpretation and Policy .01 
to Rule 24, Section 1, which adopts the CHX's policy for determining 
whether the Exchange will accept a claim for arbitration, appropriately 
defines the controversies that may be arbitrated at the Exchange. The 
Commission believes that the adopted Interpretation and Policy 
reasonably balances the Exchange's interest in efficiently allocating 
its arbitration resources with investor's interests in obtaining access 
to an open forum to arbitrate claims. For example, while the new 
Interpretation and Policy provides that the CHX may decline the use of 
its arbitration facilities if the nexus between the dispute and the 
Exchange is minimal, the Exchange will accept a claim for arbitration 
if the Exchange is the DEA for the Respondent member, if the 
enforcement of the applicable rules has not been ceded to another SRO 
pursuant to its Rule 17d-2 Agreement, or if the nexus between the 
dispute and the Exchange is more than minimal.
    It therefore is ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change is approved.

    \19\15 U.S.C. 78S(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17315 Filed 7-15-94; 8:45 am]
BILLING CODE 8010-01-M