[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
