Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval to Proposed Rule Change by The Chicago Stock Exchange, Inc. and Amendment No. 1 Thereto Relating to the Exchange's Arbitration Rules

[Federal Register Volume 64, Number 5 (Friday, January 8, 1999)]
[Notices]
[Pages 1253-1255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-412]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40873; File No. SR-CHX-98-29]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change by The Chicago 
Stock Exchange, Inc. and Amendment No. 1 Thereto Relating to the 
Exchange's Arbitration Rules

December 31, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'')\1\ and rule 19b-4 thereunder,\2\ notice is hereby 
given that on December 21, 1998, the Chicago Stock Exchange, 
Incorporated (``CHX'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'' or ``SEC'') the proposed rule 
change, as described in Items I and II below, which Items have been 
prepared by the self-regulatory organization. The Exchange filed 
Amendment No. 1 on December 30, 1998 to request accelerated 
approval.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons and to 
grant accelerated approval to the proposal and Amendment No. 1 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ December 30, 1998 letter from Kirsten M. Carlson, Foley & 
Lardner (counsel for the Exchange), to Katherine A. England, 
Assistant Director, Market Regulation, SEC.
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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 Rules 23 and 24 of Article VII to 
exclude, from the CHX arbitration forum, claims of employment 
discrimination, including sexual harassment, in violation of a statute 
unless the parties involved have agreed to arbitrate the claim after it 
has arisen.

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

[[Page 1254]]

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

Purpose
    The purpose of the proposed rule change is twofold. First the rule 
change would exclude any claim alleging employment discrimination, 
including any sexual harassment claim, in violation of a statute \4\ 
from the requirement that all disputes between a nominee or other 
associated person and a member or member organization arising out of 
Exchange business be arbitrated, except where the parties agree to 
arbitrate the claim after it has arisen. (Article VIII, Rule 23.) 
Second, the rule change would amend the Exchange's general arbitration 
rules to provide that any claim alleging employment discrimination, 
including any sexual harassment claim, in violation of a statute shall 
be eligible for submission to arbitration only where the parties have 
agreed to arbitrate the claim after it has arisen. (Article VIII, Rule 
24.)
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    \4\ Claims ``in violation of a statute'' are not limited to the 
federal civil rights laws and include all federal, state and local 
anti-discrimination statutes.
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Background
    Exchange Rule 23 of Article VIII requires that any disputes between 
a nominee or other associated person and a member or member 
organization arising out of Exchange business be settled by 
arbitration. In order to become an associated person, an individual is 
required to sign and file with the Exchange a Form U-4 (Uniform 
application for Securities Registration or Transfer). Form U-4 requires 
persons to submit to arbitration any claim that is required to be 
arbitrated under the rules of the self-regulatory organizations with 
which they register.
    In 1994, the General Accounting Office (``GAO'') conducted a study 
on the arbitration of employment discrimination disputes in the 
securities industry.\5\ While the GAO report did not address the 
adequacy of arbitration as a means of resolving employment 
discrimination disputes, it made several recommendations for improving 
the arbitration process. The recommendations included specialized 
training of arbitrators in discrimination law and the appointment of 
more women and minorities as arbitrators.
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    \5\ Employment Discrimination: How Registered Representative 
Fare in Discrimination Disputes (GAO/HEHS-94-17, March 30, 1994).
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    Despite steps to improve the process, associated persons and others 
continue to oppose mandatory arbitration of discrimination claims 
pursuant to the Form U-4 and other pre-dispute agreements. In July 
1997, the U.S. Equal Employment Opportunity Commission (``EEOC'') 
issued a policy statement that mandatory pre-dispute agreements to 
arbitrate statutory discrimination claims are inconsistent with the 
purpose of the federal civil rights laws.\6\
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    \6\ EEOC Notice No. 915.002, July 10, 1977.
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    Two federal court cases decided in 1998 support the EEOC's 
position. In January 1998, a Massachusetts district court in Rosenberg 
v. Merrill Lynch, 76 FEP 681 (D. Mass. 1998), declined to compel 
arbitration in plaintiff's Title VII and the Age Discrimination in 
Employment Act (``ADEA'') claims pursuant to the agreement to arbitrate 
contained in the Form U-4 plaintiff was required to sign as a condition 
of her employment. In May 1998, the Court of Appeals for the Ninth 
Circuit held, in Duffield v. Robertson Stephens & Company, 144 F.3d 
1182 (9th Cir. 1998), cert. denied, (U.S. Nov. 9, 1998) (No. 98-237), 
that employers could not compel employees to waive their right to a 
judicial forum under Title VII, and therefore plaintiff could not be 
compelled to arbitrate her statutory discrimination claims pursuant to 
form U-4. Prior to these decisions, federal courts had consistently 
upheld the arbitration of employment discrimination claims pursuant to 
the Form U-4.
    On October 17, 1997, the National Association of Securities 
Dealers, Inc. (``NASD'') submitted to the Commission, a proposed rule 
change to remove the requirement from its rules that registered 
representatives must arbitrate statutory employment discrimination 
claims.\7\ Under the NASD's proposal, an employee could file such a 
claim in court unless he was obligated to arbitrate pursuant to a 
separate agreement entered into either before or after the dispute 
arose.\8\ The Commission's order approving the NASD's changes stated 
that the NASD intends to make changes to its arbitration program to 
make arbitration more attractive to parties for the resolution of 
discrimination claims.\9\
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    \7\ Exchange Act Release No. 39421 (December 10, 1997).
    \8\ On September 15, 1998, the New York Stock Exchange, Inc, 
(``NYSE'') submitted to the SEC a proposed rule change to exclude 
from mandatory arbitration disputes between registered 
representatives and members or member organizations and between 
employees and members or member organizations relating to employment 
discrimination, including sexual harassment claims. Unlike the NASD 
rule, however, the NYSE proposed rule would only permit an agreement 
to arbitrate entered into after the dispute arose to be binding. The 
Commission approved the NYSE proposal on December 29, 1998. (See 
Exchange Act Release No. 40858, December 29, 1998).
    \9\ Exchange Act Release No. 40109, June 22, 1998.
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    The Exchange's proposal will create an exception to the Exchange 
rule that requires arbitration of all claims of nominees and other 
associated persons arising out of Exchange business for claims alleging 
employment discrimination, including any sexual harassment claim.
    In addition, the Exchange is going further by proposing rule 
amendments under which statutory discrimination claims will not be 
eligible for arbitration pursuant to any pre-dispute agreement to 
arbitrate. This action brings the Exchange's arbitration policy into 
conformity with the EEOC's ``Policy Statement on Mandatory Binding 
Arbitration of Employment Discrimination Disputes as a Condition of 
Employment.'' \10\
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    \10\ EEOC Notice No. 915.002, July 10, 1997.
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    In its December 1997 comment letter to the SEC regarding the NASD 
proposal, the EEOC reiterated its position ``that pre--dispute 
arbitration agreements, particularly those that mandate binding 
arbitration of discrimination claims as a condition of employment, are 
contrary to the fundamental principles reflected in this nation's 
employment discrimination laws. We recommend therefore, that the 
proposed rule be revised to permit arbitration of statutory employment 
discrimination claims only under post-dispute arbitration agreements.'' 
\11\
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    \11\ Letter of Gilbert F. Casellas, Chairman, EEOC, to Jonathan 
G. Katz, Secretary, SEC, Re: NASD Proposed Rule Change on 
Arbitration of Employment Discrimination Claims, December 1997.
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    The Exchange's proposed amendments will limit the availability of 
the Exchange's forum for the resolution of employment discrimination 
claims that otherwise meet the Exchange's arbitration requirements to 
those cases where the parties have agreed to arbitrate the claim after 
it has arisen, as recommended by the EEOC.
    The Exchange is also proposing to amend Rule 24 which requires the 
arbitration of disputes between customers or non-members and members or 
member organizations, pursuant to any written agreement to arbitrate or 
upon the demand of the customer or non-member. The rule change adds 
paragraph (d) to provide that claims alleging employment 
discrimination, including any sexual harassment claim, shall be 
eligible for submission to arbitration only where the

[[Page 1255]]

parties have agreed to arbitrate the claim after it has arisen. This 
amendment excludes from Exchange arbitration statutory employment 
discrimination claims of non-registered employees (or other persons 
that may not be deemed to be an associated person) pursuant to pre-
dispute arbitration agreements.
    The EEOC and several members of Congress have endorsed arbitration 
as an effective means of resolving discrimination claims, provided the 
parties agree to arbitrate after the claim has arisen. The Exchange's 
proposed amendment provides a forum for those employees who choose 
post-dispute to resolve their statutory employment discrimination 
claims through arbitration.
    Some employment disputes may contain both contract or tort claims 
as well as statutory employment discrimination claims. Under amended 
Rule 23 (and Rule 24 for non-registered employees who have executed 
pre-dispute arbitration agreements) these cases may be bifurcated. The 
employment discrimination claims will be heard in a forum other than 
the exchange, such as court, while any claims subject to arbitration 
may continue to be heard at the Exchange.\12\ The parties may avoid 
bifurcation by agreeing to proceed with all claims in a single forum. 
Given a choice, after a dispute has arisen, employees in many instances 
believe that arbitration is preferable to protracted and expensive 
litigation and will willingly make that choice.\13\
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    \12\ The bifurcation of securities industry claims is not 
unprecedented. Before the Supreme Court's decision in Shearson v. 
McMahon, 482 U.S. 220 (1987) (holding that claims under the 
Securities Exchange Act of 1934 could be compelled to arbitration), 
the Supreme Court decided Dean Witter Reynolds, Inc. v. Byrd, 105 S. 
Ct. 1238 (1985). In Byrd, the dispute involved allegations of 
federal securities laws violations and pendent state law claims. The 
Court compelled the state law claims to arbitration and held that 
the federal securities laws claims could be heard in court.
    \13\ See Duffield v. Robertson Stephens & Company, 144 F.3d 1182 
(9th Cir. 1998), cert. denied, (U.S. Nov. 9, 1998) (No. 98-237).
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    The proposed rule change is consistent with Section 6(b)(5) of the 
Exchange Act in that it is designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons regulating securities transactions, to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    After careful consideration, the Commission has concluded, for the 
reasons set forth below, that the proposed rule change is consistent 
with the requirements of the Exchange Act and the rules and regulations 
thereunder. Further, the Exchange is requesting accelerated approval of 
the proposed rule change pursuant to section 19(b)(2) so that it may 
become effective on or shortly after January 1, 1999, on which date the 
NYSE proposal discussed above becomes effective. The Commission notes 
that the proposal is virtually identical to an NYSE proposal the 
Commission has already approved, one that was subject to the full 
comment period.\14\ It is expected that in the near future other self-
regulatory organizations (``SROs'') will adopt similar rules or issue 
interpretive releases to provide uniformity throughout the securities 
industry. To prevent forum shopping among SROs and to prevent 
prospective plaintiffs from being disadvantaged by any inconsistency in 
the effective dates of SROs' rule changes or interpretative releases, 
the Commission finds good cause for approving the proposal prior to the 
30th day after the date of publication of notice of the filing in the 
Federal Register.
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    \14\ See footnote 8 above.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Exchange Act. 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. 522, will be available for inspection and copying at the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the CHX. All 
submissions should refer to File No. SR-CHX-98-29 and should be 
submitted by January 29, 1999.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\15\ that the proposal, SR-CHX-98-29, and amendment No. 1 
thereto be and hereby is approved.\16\

    \15\ 15 U.S.C. 78s(b)(2).
    \16\ In approving the proposal, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
15 U.S.C. 78c(f).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-412 Filed 1-7-99; 8:45 am]
BILLING CODE 8010-01-M