[Federal Register Volume 60, Number 19 (Monday, January 30, 1995)]
[Notices]
[Pages 5741-5743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2138]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35263; File No. SR-CBOE-94-51]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change by Chicago Board 
Options Exchange, Incorporated Relating to Arbitration Rules

January 23, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on December 2, 
1994,\1\ the Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the CBOE. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.

    \1\The CBOE amended the proposed rule change subsequent to its 
initial filing. The substance of this amendment is included in this 
notice. Amendment No. 1, filed January 17, 1995, was a minor 
technical amendment.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend various rules in Chapter XVIII, 
``Arbitration,'' in order to conform Exchange rules to the Uniform Code 
of Arbitration (``Uniform Code'') developed by the Securities Industry 
Conference on Arbitration (``SICA'').
    The text of the proposed rule change is available at the Office of 
the Secretary, CBOE and at the Commission.

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 Exchange 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 Exchange 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

    The purpose of the proposed rule change is to amend various 
Exchange arbitration rules in order to conform them to the Uniform 
Code. In general, the substantive amendments, which mirror the Uniform 
Code, relate to:
     The ineligibility of class actions for arbitration.
     Discovery procedures in simplified proceedings.
     Classification of persons registered under the Commodities 
Exchange Act as securities industry arbitrators.
     Time limitations for exercising a peremptory challenge.
     Arbitral authority to proceed with a hearing or any 
continuation thereof at which a party fails to appear.
     Authority of the Director of Arbitration to waive an 
adjournment fee.
     Enforcement of rulings by the arbitrators.
    Content of and interest on arbitral awards.
    The Exchange is also proposing miscellaneous editorial and non-
substantive clarifications to its rules governing arbitration. The 
proposed amendments are discussed in detail below.

Rule 18.3(c), Referral of Claims

    The Exchange proposes to adopt new paragraph (c) to Rule 18.3 to 
allow the Director of Arbitration, with a claimant's consent, to refer 
a claim arising out of a readily identifiable market to the arbitration 
forum for that market. SICA adopted this amendment to the Uniform Code 
in order to provide for a more efficient allocation of claims among the 
various self-regulatory organizations (``SROs''). CBOE is proposing 
this amendment to its Rules in order to conform its Rules to the 
Uniform Code.

Rule 18.3A and 18.35(e), Class Action Claims

    Consistent with the Uniform Code, proposed new Rule 18.3A will 
provide that class action claims are not eligible for submission to 
arbitration at the Exchange. Thus, claimants will be allowed to pursue 
such claims in court regardless of the existence of a predispute 
arbitration agreement. The Rule also will exclude claims filed by 
participants in a putative or certified class action in another forum, 
if the claim filed at the Exchange is encompassed by such class action. 
Disputes over whether a claim is [[Page 5742]] encompassed by a class 
action will be referred to an arbitrator(s) pursuant to Exchange Rule 
18.4 or Exchange Rule 18.10 or, at the election of a party, to the 
court with jurisdiction over the class action.
    Notwithstanding the above, a party may proceed in arbitration if 
certification is denied to the class, if the class is decertified, if 
the individual is excluded from the class by the court, or if the 
individual elects not to participate in the class. Concomitantly, the 
provision prohibits members and persons associated with members from 
moving to compel arbitration, pursuant to a predispute arbitration 
agreement, against a customer who is a participant in a class unless or 
until the above list of criteria for proceeding in arbitration are met. 
Proposed paragraph (e) to Rule 18.35, ``Requirements when Using Pre-
Dispute Arbitration Agreements with Customers,'' will require members 
to include a statement setting forth the ineligibility of class actions 
in arbitration in any new predispute arbitration agreement with 
customers.

Rule 18.4, Simplified Arbitration

    The Exchange proposes to amend paragraph (a) of Rule 18.4 to codify 
the existing practice of applying simplified arbitration procedures to 
claims not exceeding $10,000 (``small claims''), without the demand or 
written request of the customer. This amendment also is consistent with 
the Uniform Code. Pursuant to paragraph 18.4(f), a customer continues 
to have the right to demand or consent to a hearing before the 
arbitrator. The Exchange proposes to delete as unnecessary language in 
paragraph (b) that requires that a Statement of Claim filed under the 
simplified procedures indicate when a hearing is not demanded. 
Paragraph 18.4(b) continues to specify that if a hearing is demanded, 
such demand must be set forth in the Statement of Claim.
    Clarifying and non-substantive amendments are proposed to existing 
paragraphs (c) through (f). For example, obsolete language in Rule 
18.4(c) relating to forum fees is proposed to be deleted and reference 
inserted to the schedule of fees contained in Rule 18.33. In addition, 
paragraph (c) is divided and subsequent paragraphs are redesignated 
accordingly.
    The Exchange proposes to amend redesignated paragraph 18.4(d) to 
require that if a respondent raises a third-party claim, the respondent 
must serve the third-party with an executed Submission Agreement, a 
copy of Respondent's Answer containing the third-party claim and a copy 
of the original claim filed by the Claimant. Currently, the Rule 
requires service of only the third-party claim and the original claim.
    As adopted by SICA, the Exchange proposes to amend existing 
paragraph (g), renumbered (h), to provide a mechanism for discovery in 
simplified proceedings. For cases in which an oral hearing is 
requested, the parties are referred to the general provisions governing 
pre-hearing procedures, herein renumbered Rule 18.22. For cases that 
will be decided on the written submissions, new subparagraph (h)(iii) 
provides procedures for resolving disputes over the production of 
documents within shortened time periods. In simplified cases where no 
hearing is demanded, paragraph (h)(iii) will require that all requests 
for documents be served by the parties and filed with the Director of 
Arbitration within ten business days of notification of the appointment 
of an arbitrator. Any response or objection to a request will be 
required to be served on all parties and filed with the Director within 
five business days of receipt of the production request. Finally, 
paragraph (h)(iii) will provide that the selected arbitrator will 
resolve any document production issues on the papers submitted. Such 
abbreviated procedures are consistent with Exchange policy to expedite 
small claims.

Rule 18.10, Designation of the Number of Arbitrators

    Consistent with the Uniform Code, the Exchange proposes to adopt 
new paragraph 18.10(a)(2)(v) in order to classify individuals 
registered under the Commodities Exchange Act or associated with the 
commodities industry as securities industry arbitrators. This provision 
parallels other exclusions in Rule 18.10 which preclude individuals 
with close ties to the securities industry from serving as public 
arbitrators.

Rule 18.12, Challenges

    The Exchange proposes to amend Rule 18.12 to clarify that all 
parties to an arbitration are entitled to one peremptory challenge to 
an appointed arbitrator and to clarify the timing for exercising such 
challenge. As amended, Rule 18.12 will codify existing procedures that 
require a peremptory challenge to be raised within five days of 
notification of an arbitrator named under either the general selection 
procedures set forth in Rule 18.10 or the pre-hearing procedures of 
Rule 18.22 (formerly Rule 18.15(e)), whichever comes first. If a party 
has not objected to an arbitrator selected to handle a pre-hearing 
conference or discovery dispute, that party may not later raise a 
peremptory challenge to the same arbitrator when notified of the names 
of the entire panel. The above-mentioned revisions conform the rule to 
the Uniform Code.
    Because the Rule governs both ``for cause'' and peremptory 
challenges, the title of Rule 18.12 is proposed to be changed from 
``Peremptory Challenges'' to ``Challenges`' and the rule is divided 
into two paragraphs.

Rule 18.15, Initiation of Proceedings

    The Exchange is proposing various minor editorial, non-substantive 
amendments to Rule 18.15. In the interest of clarity, paragraph 
18.15(e), ``General Provision Governing Prehearing Proceeding,'' is 
proposed to be amended and moved to Rule 18.22. The proposed amendments 
to Rule 18.22 are discussed below.

Rule 18.19, Failure to Appear

    The Exchange proposes to amend Rule 18.19 to clarify the authority 
of the arbitrator(s) to proceed with and decide a case when a party 
fails to appear not only at the initial hearing, but also at any 
continuation thereof. Currently, the rule grants arbitrators the 
authority to proceed if ``any of the parties, after due notice, fails 
to appear at a hearing, or any adjourned hearing session.'' Following 
the Uniform Code, the reference to any adjourned hearings is proposed 
to be replaced with ``any continuation of a hearing.''

Rule 18.20, Adjournments

    Consistent with the Uniform Code, the Exchange proposes to amend 
Rule 18.20(b) to provide that an adjournment fee shall be deposited 
with a request for adjournment. Currently, the fee is required upon the 
arbitrators' granting of the request. In addition, as amended, Rule 
18.20(b) will allow the Director of Arbitration to waive the 
adjournment fee in appropriate cases. If an adjournment is not granted 
by the arbitrators, the amended rule will provide that the deposited 
fee will be refunded. If the adjournment is granted, the arbitrators 
may direct a return of the adjournment fee.

Rule 18.22, General Provision Governing Pre-Hearing Proceeding

    In the interest of clarity and conformity with the Uniform Code, 
the Exchange proposes to move paragraph 18.15(e), ``General Provision 
Governing Prehearing Proceeding,'' to new Rule 18.22. Subparagraphs 
within the Rule will be renumbered accordingly. Only conforming, non-
substantive, editorial [[Page 5743]] changes are proposed to the 
renumbered rule.

Rule 18.25, Interpretation of the Code and Enforcement of 
Arbitrator Rulings

    Consistent with the Uniform Code, the Exchange proposes to amend 
Rule 18.25 in order to clarify and codify the arbitrators' existing 
authority to enforce the rulings in the event of non-compliance by a 
party. Appropriate arbitral action under this provision could include 
the assessment of fees or costs, preclusion of documents or witnesses, 
or initiation of a disciplinary referral. Currently, such sanctions for 
non-compliance with the arbitrator's rulings are infrequently ordered 
or requested because the arbitrators and parties may be unaware of an 
arbitrator's power. It is expected that the arbitrators will exercise 
such power primarily in the area of failure to comply with discovery 
requests. As amended, Rule 18.25 will specify that such arbitral 
rulings, as well as interpretations of the Uniform Code, will be final 
and binding upon the parties.

Rule 18.29, Amendments

    Currently, Rule 18.29 requires the Director of Arbitration to serve 
amended pleadings. Consistent with the Uniform Code and existing policy 
and procedures under Rules 18.4 and 18.15 that require the parties to 
serve pleadings after the initial service of the Statement of Claim by 
the Director of Arbitration, the Exchange proposes to amend this Rule 
to require that parties directly serve all other parties with any new 
or amended pleading. Concurrently, the Rule will require filing of the 
new or amended pleading with the Director of Arbitration, along with 
sufficient copies for the panel of arbitrators. Similarly, the Rule 
will require that parties directly serve any responsive pleadings on 
all other parties and the Director of Arbitration. As amended, the Rule 
will conserve arbitral administrative time and expenses.

Rule 18.31, Awards

    Consistent with the Uniform Code, the Exchange is proposing to 
amend paragraph (e) to Rule 18.31 and adopt new paragraph (h). Exchange 
Rule 18.31(e) currently requires that an arbitration award include the 
name of the parties, a summary of the issues, the relief awarded, the 
names of the arbitrators, the date the claim was filed and the award 
rendered, the number and dates of hearing sessions, the location of the 
hearing and the signatures of the arbitrators concurring in the award. 
In order to conform this Rule with the Uniform Code, the Exchange 
proposes to amend Rule 18.31(e) to require that an award also include: 
the names of counsel representing the parties, the type of product or 
security involved, the damages and/or other relief requested, and a 
statement of any other issues resolved.
    New paragraph 18.31(h) will specify when interest is payable on an 
award. Currently, arbitrators may award interest as they deem 
appropriate. As amended, the Rule will provide that all awards shall 
bear interest from the date of the award: (i) If the award is not paid 
within 30 days of receipt, (ii) if the award is the subject of a motion 
to vacate that is denied, or (iii) as specified by the arbitrator(s). 
Paragraph 18.31(h) will also specify that the arbitrator(s) may set the 
interest rate. If not specified by the arbitrator(s), the rate will be 
the legal rate, if any, then prevailing in the state where the award 
was rendered.
    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 the protection of investors and the public 
interest by improving the administration of an impartial arbitration 
forum for the resolution of disputes between members, persons 
associated with members and public investors.

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

    CBOE does not believe that the proposed rule change will impose any 
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 solicited or received with respect to the 
proposed rule change.

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

    CBOE has requested that the proposed rule change be given 
accelerated effectiveness pursuant to Section 19(b)(2) of the Act. In 
that regard, 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, the requirements of Section 6(b)(5) thereof. 
Specifically, the Commission concludes that accelerated effectiveness 
of the proposal is appropriate because all of the substantive 
amendments proposed therein were previously proposed by other SROs and 
have been approved by the Commission. Because the proposal is designed 
to protect investors and the public interest by providing for 
uniformity in the rules governing the administration of arbitration 
facilities offered by the SROs, the Commission finds good cause for 
approving the foregoing rule change on an accelerated basis prior to 
the thirtieth day after the date of publication thereof in the Federal 
Register.

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 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 in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the principal office of CBOE. 
All submissions should refer to the file number in the caption above 
and should be submitted by February 21, 1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act\2\ 
that the proposed rule change SR-CBOE-94-51, amending various Exchange 
rules in Chapter XVIII, ``Arbitration,'' in order to conform these 
rules to the Uniform Code, is hereby approved.

    \2\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2138 Filed 1-27-95; 8:45 am]
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