[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]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.)
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\5\ Employment Discrimination: How Registered Representative
Fare in Discrimination Disputes (GAO/HEHS-94-17, March 30, 1994).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\6\ EEOC Notice No. 915.002, July 10, 1977.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\10\ EEOC Notice No. 915.002, July 10, 1997.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\14\ See footnote 8 above.
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------
\17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-412 Filed 1-7-99; 8:45 am]
BILLING CODE 8010-01-M
