Self-Regulatory Organizations; Notice of Filings and Immediate Effectiveness of Proposed Rule Change by the Chicago Board Options Exchange, Inc. Relating to Arbitration Jurisdiction

[Federal Register Volume 64, Number 39 (Monday, March 1, 1999)]
[Notices]
[Pages 10033-10035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4958]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41080; File No. SR-CBOE-99-01]


Self-Regulatory Organizations; Notice of Filings and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. Relating to Arbitration Jurisdiction

February 22, 1999.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 11, 1999, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt new Interpretation .03 under 
Exchange Rule 18.1, ``Matters Subject to Arbitration,'' to clarify that 
a claim involving employment discrimination, including sexual 
harassment, is not appropriate for arbitration at the Exchange. The 
text of the proposed rule change follows; additions are italicized.

Chicago Board Options Exchange, Incorporated

Rules
* * * * *
Chapter XVIII
Arbitration
Matters Subject to Arbitration
    Rule 18.1. No Change.
    * * * Interpretations and Policies:
    .03 (a) For the purposes of Rule 18.1(a), the term ``Exchange 
business''

[[Page 10034]]

does not include a dispute, claim or controversy alleging employment 
discrimination, including sexual harassment.
    (b) Notwithstanding the policy set forth in paragraph (a), the 
Exchange may makes its arbitration facilities available for the 
resolution of employment discrimination, including sexual harassment, 
claims if the parties mutually agree to arbitrate the claim after the 
claim has arisen. Any determination pursuant to this paragraph will be 
made by the Director of Arbitration.

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 CBOE 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 CBOE 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

I. Purpose
    The purpose of the proposed rule change is to adopt new 
Interpretation .03 under Exchange Rule 18.1 to clarify that a claim 
involving employment discrimination, including sexual harassment, is 
not appropriate for mandatory arbitration at the Exchange. Exchange 
Rule 18.1 sets forth the authority of the Exchange to compel members 
and persons associated with members to arbitrate a dispute, claim or 
controversy under Exchange rules. Generally, Exchange Rule 18.1requires 
members and associated persons to submit to arbitration if a properly 
filed claim ``arises out of Exchange business'' and is accepted for 
arbitration by the Director of Arbitration.\3\
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    \3\ Procedures for challenging the appropriateness of submitting 
a matter to arbitration and for review by the Board of Directors of 
Arbitration's decision to accept a matter for arbitration are 
contained in paragraph (c) of Exchange Rule 18.1.
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    Due to the controversy surrounding the arbitration of employment 
discrimination claims pursuant to mandatory pre-dispute agreements, the 
Exchange believes it is appropriate to adopt this Interpretation to 
make it clear on the face of the rules that such claims are not deemed 
to be encompassed by the term ``Exchange business.'' Inasmuch as 
discrimination claims have not been administered by the Exchange in the 
past, this clarification is preemptive, i.e., designed to forestall a 
waste of resources caused by a party inappropriately filing an 
employment discrimination claim with the Exchange.
    Since 1991, when the United States Supreme Court decided in Gilmer 
v. Interstate/Johnson Lane Corp.\4\ That a registered representative 
could be compelled to arbitrate an age discrimination claim, the 
arbitration fora sponsored by other self-regulatory organizations 
(``SROs''), such as the National Association of Securities Dealers 
(``NASD'') and the New York Stock Exchange (``NYSE''), have 
administered arbitration claims asserting employment discrimination. 
Such claims have been compelled to arbitration pursuant to an 
associated person's agreement on Form U-4 to arbitrate any dispute that 
is required to be arbitrated under the rules of an SRO with which he/
she is registered and pursuant to specific SRO rules requiring 
arbitration of claims arising out of employment.\5\
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    \4\ 500 U.S. 20 (1991).
    \5\ See NYSE Rule 347 and NASD Rule 10201.
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    In response to controversy over the mandatory arbitration of 
employment discrimination disputes in the securities industry pursuant 
to Form U-4 and SRO rules, some SROs are amending their rules to 
eliminate mandatory arbitration of these disputes pursuant to SRO 
rules. The NASD amendment, which became effective January 1, 1999, no 
longer requires associated persons, solely by virtue of their 
association or registration with the NASD, to arbitrate claims of 
statutory employment discrimination.\6\ Discrimination claims may be 
compelled to arbitration before the NASD pursuant to a private 
arbitration agreement entered into between the parties either before or 
after the dispute arose. In addition, the NYSE amended its rules to 
remove mandatory arbitration of statutory employment discrimination 
claims from its rules.\7\ Under the NYSE amendment, also effective on 
January 1, 1999, such claims may be arbitrated only pursuant to a post-
dispute agreement to arbitrate.
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    \6\ Exchange Act Release No. 40109 (June 22, 1998) 63 FR 35299 
(June 29, 1998).
    \7\ Exchange Act Release No. 40858 (December 29, 1998) 64 FR 
1051 (January 7, 1999). The Commission also recently approved a 
proposal by the Boston Stock Exchange, Inc. amending it arbitration 
rules to remove mandatory arbitration of statutory employment 
discrimination claims absent a post-claim arbitration agreement. 
Exchange Act Release No. 40861 (December 29, 1998) 64 FR 1039 
(January 7. 1999).
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    CBOE rules, however, are silent with respect to employment related 
disputes. Prior to 1980, Exchange Rule 18.1 contained a provision 
requiring members and their employees to submit employment related 
disputes to arbitration upon the demand of any party. SR-CBOE-80-2 
deleted this provision.\8\ Today, all claims filed by members and 
associated persons are subject to the ``Exchange business'' criteria. 
Although CBOE rules do not define ``Exchange business,'' the resolution 
of claims alleging employment discrimination or sexual harassment 
clearly do not fall within the plain meaning or intent of CBOE's 
mandatory pre-dispute arbitration requirements.\9\ CBOE believes this 
interpretation is consistent with the decision of the U.S. Court of 
Appeals for the Seventh Circuit in Ferrand versus Lutheran Bhd.\10\ 
which, prior to the specific inclusion of employment disputes in the 
NASD's arbitral jurisdictional rules, held that a registered 
representative could not be required under NASD rules to arbitrate a 
claim arising under the Age Discrimination in Employment Act. CBOE 
believes that its interpretation that Exchange Rule 18.1 does not 
mandate arbitration of employment discrimination or sexual harassment 
claims is also consistent with the recent decision of the U.S. Court of 
Appeals for the Ninth Circuit in Duffield versus Robertson Stephens & 
Co.\11\ which held that ``employees may not be required, as a condition 
of employment, to waive their right to bring future Title VII claims in 
court.''
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    \8\ Exchange Act Release No. 16606 (February 25, 1980) 45 FR 
13856 (March 3, 1980).
    \9\ See letter from Alger B. Chapman, Chairman, CBOE, dated 
October 3, 1994, to Brandon Becker, Director, Division of Market 
Regulation, Commission. Mr. Chapman's letter responds to a request 
to comment on the issues underlying the General Accounting Office 
report entitled ``Employment Discrimination: How Registered 
Representative Fare in Discrimination Disputes'' (March 30, 1994) 
and Congressional concern over the mandatory arbitration of claims 
under the anti-discrimination laws.
    \10\ 993 F.2d 1253 (7th Cir. 1993). The Court distinguished 
Ferrant from Gilmer (which required arbitration of an age 
discrimination claim before the NYSE) because the NASD rules did not 
specifically require the arbitration of ``employment'' related 
disputes.
    \11\ 144 F.3d 1182, 1190 (9th Cir. 1998).
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    Although proposed Interpretation .03 to Exchange rules 18.1 
codifies the Exchange's current policy that the term ``Exchange 
business'' does not include employment discrimination, including sexual 
harassment, the interpretation does not exclude all employment related 
disputes. Certain employment related claims (such as those involving

[[Page 10035]]

compensation based upon Exchange transactions or breach of contract 
claims with a nexus to Exchange business) may be appropriate for 
arbitration at the Exchange. Furthermore, Exchange Rule 181.(c) 
provides a mechanism for parties to challenge the appropriateness of 
submitting a claim to arbitration.
    In deference to the federal policy favoring alternate dispute 
resolution and to accommodate those members and associated persons who 
may choose to resolve a discrimination claim through arbitration, 
proposed paragraph (b) of Interpretation .03 under Exchange Rule 18.1 
provides that the Exchange may make its arbitration facilities 
available for the resolution of such claims if the parties mutually 
agree to arbitrate the claim after the claim has arisen. As with all 
claims filed with the CBOE, a decision to allow a discrimination claim 
to proceed under Exchange rules would be made by the Director of 
Arbitration, which is subject to Board of Directors' review, and would 
be based upon a finding that a claim has at least an indirect nexus to 
Exchange business. For example, the Exchange may make its forum 
available for the resolution of a claim involving discrimination, upon 
the mutual request of the parties, if the claim involves an allegation 
that the conduct has an effect upon CBOE trading activities, if the 
primary business of the parties is trading or facilitating exchange 
transactions, or if the member and associated person are only members 
of the CBOE.\12\
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    \12\ The Exchange clarified that the examples provided must 
still satisfy the ``Exchange business'' requirement. As a result, 
even if members or associated persons are only members of CBOE, the 
claim still must have a nexus with Exchange business before the 
claim could proceed under the Exchange's arbitration program. 
Telephone conversation between Timothy Thompson, Director-Regulatory 
Affairs, CBOE, Nancy Nielsen, Assistant Corporate Secretary, CBOE, 
and Terri Evans, Attorney, Division of Market Regulation, 
Commission, on February 17, 1999.
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    CBOE believes that its policy allowing voluntary, post-dispute 
agreements to arbitrate is consistent with the EEOC's ``Policy 
Statement on Mandatory Binding Arbitration of Employment Discrimination 
Disputes as a Condition of Employment,'' \13\ which supports alternate 
dispute resolution programs that are entered into after a dispute has 
arisen. This policy also furthers the Exchange policy that allows the 
parties to an arbitration to mutually agree to alter the arbitration 
procedures set forth in Chapter XVIII of the Exchange's Constitution 
and Rules, upon the consent of the Director of Arbitration.
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    \13\ EEOC Notice 915.002, issued July 10, 1997.
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2. Statutory Basis
    The proposed rule change is consistent with section 6(b) of the 
Act,\14\ in general, and furthers the objectives of section 6(b)(4) of 
the Act \15\ 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 and 
persons associated with members.
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    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(4).
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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

    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

    The foregoing rule change constitutes a stated policy, practice, or 
interpretation with respect to the meaning, administration, or 
enforcement of an existing rule of the Exchange and, therefore, has 
become effective pursuant to section 19(b)(3)(A)(i) of the Act,\16\ and 
subparagraph (e)(1) of Rule 19b-4 \17\ thereunder. At any time within 
60 days of the filing of such proposed rule change, the Commission may 
summarily abrogate such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act.
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    \16\ 15 U.S.C. 78s(b)(3)(A)(i).
    \17\ 17 CFR 240.19b-4.
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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 proposed rule 
change is consistent with the Act.\18\ Persons making written 
submissions should file six copies thereof with 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 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 CBOE. All 
submissions should refer to File No. SR-CBOE-99-01 and should be 
submitted by March 22, 1999.

    \18\ In reviewing this proposal, the Commission has considered 
the proposed 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.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-4958 Filed 2-26-99; 8:45 am]
BILLING CODE 8010-01-M