[Federal Register Volume 59, Number 136 (Monday, July 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17315]
[[Page Unknown]]
[Federal Register: July 18, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34344; File No. SR-MSE-93-9]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Approving Proposed Rule Change Relating to Amendments to the
Exchange's Arbitration Rules
July 11, 1994.
I. Introduction
On April 26, 1993, the Chicago Stock Exchange, Inc., formally the
Midwest Stock Exchange, (``CHX'' or ``Exchange'') submitted to the
Securities and Exchange Commission (``SEC'' or ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend the Exchange's arbitration rules. On March 31, 1994, the Exchange
submitted to the Commission Amendment No. 1 to the proposed rule
change.\3\ On June 1, 1994, the Exchange submitted to the Commission
Amendment No. 2 to the proposed rule change.\4\
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1994).
\3\See letter from David T. Rusoff, Attorney, Foley & Lardner,
to Sandra Sciole, Special Counsel, SEC, dated March 30, 1994.
\4\See letter from David T. Rusoff, Attorney, Foley & Lardner,
to Sandra Sciole, Special Counsel, SEC, dated May 31, 1994.
Amendment No. 2 made certain changes to Interpretation and Policy
.01 and .02 to Rule 24.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 34141 (June 1, 1994), 59 FR 29454 (June 7,
1994). No comments were received on the proposal. This order approves
the proposed rule change as amended.
II. Description of the Proposal
The CHX is amending its arbitration rules as set forth in Rules 23
and 24 of Article VIII to bring them more closely in line with the
Uniform Code of Arbitration developed by the Securities Industry
Conference on Arbitration (``SICA``).\5\ The CHX is amending its
arbitration rules concerning, among other things, redesignation of the
section references in Rule 24, class action claims, the circumstances
under which the CHX will arbitrate a claim, simplified arbitration,
peremptory challenges, joinder and consolidation, filing amended
pleadings, monetary awards, and the fee schedule for arbitrating at the
CHX. The specific amendments are described more fully below.
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\5\SICA is comprised of a representative from each self-
regulatory organization (``SRO'') that administers an arbitration
program, a representative of the securities industry, and four
representatives of the public. The SROs that administer an
arbitration program are the New York Stock Exchange, American Stock
Exchange, Boston Stock Exchange, Cincinnati Stock Exchange, CHX,
Pacific Stock Exchange, Philadelphia Stock Exchange, the Chicago
Board Options Exchange, the National Association of Securities
Dealers, and the Municipal Securities Rulemaking Board.
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The CHX is adding a provision (CHX Rule 24, Section 1(c)) to its
arbitration rules providing that class actions will not be eligible for
submission to arbitration. However, an individual may pursue a claim in
arbitration if class certification is denied; the case is decertified;
the customer is excluded from the class; or the customer elects not to
participate in the putative or certified class action or has complied
with other court prescribed conditions for withdrawal. The Exchange is
amending Section 33 of Rule 24 (redesignated as Section 31) requiring
the addition of a provision to pre-dispute arbitration agreements
regarding the ineligibility of class actions for arbitration.\6\
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\6\Rule 24, Section 31, Paragraph 5 is amended to state that all
agreements shall include a statement that ``no person shall bring a
punitive or certified class action to arbitration, nor seek to
enforce any pre-dispute arbitration agreement against any person who
has initiated in court a putative class action; who is a member of a
putative class who has not opted out of the class with respect to
any claims encompassed by the putative class action until (i) the
class certification is denied; or (ii) the class is decertified; or
(iii) the customer is excluded from the class by the court. Such
forbearance to enforce an agreement to arbitrate shall not
constitute a waiver of any rights under this agreement except to the
extent stated herein.''
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Rule 24, Section 1 adds Interpretation and Policy .01 which
addresses an existing Exchange policy regarding the determination
whether to accept a claim for arbitration at the Exchange. The
Exchange's policy is to accept a claim for arbitration if the Exchange
is the Designated Examining Authority (``DEA'') of the Respondent
member or if the enforcement of the applicable rules has not been ceded
to another self-regulatory organization (``SRO'') pursuant to its Rule
17d-2 Agreement.\7\ In other cases, the Exchange may decline the use of
its arbitration facilities if the nexus between the dispute and the
Exchange is minimal.
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\7\Pursuant to Rule 17d-2 under the Act, any two or more SROs
may file with the Commission a plan for allocating among the SROs
the responsibility to receive regulatory reports from persons who
are members or participants of more than one of such SROs to examine
such persons for compliance, or to enforce compliance by such
persons, with specified provisions of the Act, the rules and
regulations thereunder, and the rules of such SROs, or to carry out
other specified regulatory functions with respect to such persons.
See 17 CFR 240.17d-2 (1994).
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The Exchange considers claims submitted to the arbitration
department on a case-by-case basis and examines the policy described
above in determining whether a claim will be accepted. Under the
Exchange's policy, the only discretion whether the Exchange will accept
a claim for arbitration occurs when the Exchange is not the DEA for the
Respondent member and the enforcement of a particular rule has not been
ceded to another SRO pursuant to Rule 17d-2. In this event, as stated
above, the Exchange may reject the claim for arbitration if the nexus
between the dispute and the Exchange is minimal.
The Exchange believes that the policy places fair limitations upon
the responsibility of the Exchange to make its arbitration facilities
available by requiring that the underlying dispute have some minimal
nexus (or contacts) to the Exchange.
Rule 24, Section 1 also adds interpretation and policy .02 which
extends jurisdiction over former members and member organizations for
controversies which had their genesis during the period in which the
former member was an Exchange member.\8\
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\8\Interpretation and Policy .02 to Rule 24, Section 1 states
that for purposes of this Rule and Rule 23 under Article VIII, the
terms ``member,'' ``member organization,'' ``associated person'' and
an ``employee of a member,'' shall be deemed to encompass those
persons and entities who were Exchange members or persons associated
with a member at the time the circumstances occurred which gave rise
to the controversy.
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Rule 24, Section 2(c) (Simplified Arbitration) amends the fee
requirements for simplified arbitrations (cases not exceeding a dollar
amount of $10,000).\9\
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\9\Rule 24, Section 2(c) is amended to state that the Claimant
shall pay a filing fee and remit a hearing deposit as specified in
Section 30 of this Rule upon filing the Submission Agreement. The
final disposition of the sum shall be determined by the arbitrator.
The CHX is also amending Section 2(d) to state that the costs to the
Claimant under either proceeding shall in no event exceed the total
amount specified in Section 30 of this Rule.
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Rule 24, Section 2(h) provides a mechanism for resolving pre-
hearing matters in a simplified proceeding. This amendment codifies the
applicability of the discovery procedures set forth in Section 14
(redesignated as Section 20) to simplified arbitrations.
Rule 24, Section 8(a)(2)(v) classifies individuals who are
registered under the Commodities Exchange Act or are members of a
registered futures association or any commodities exchange as being
from the securities industry for purposes of classification of
arbitrators.
Rule 24, Section 10 is amended to clarify the time limitations
applicable to a party wishing to utilize a peremptory challenge. Rule
24, Section 13(c)(5) is amended to state that the Director of
Arbitration may extend any time period in this section (whether such be
denominated as a Claim, Answer, Counterclaim, Cross-Claim, Reply, or
Third-Party pleading).
Rule 24, Section 13(d) is amended to clarify the rule with respect
to joinder and consolidation. It also authorizes the Director of
Arbitration to make preliminary determinations in cases where issues
concerning joinder and consolidation are in dispute. However, all
further determinations with respect to joinder and consolidation will
remain with the arbitration panel.\10\
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\10\In addition, the Exchange is amending Section 13(d) to state
that in arbitrations where there are multiple Claimants, Respondents
or Third party Respondents, the Director of Arbitration shall be
authorized to determine preliminarily whether such parties should
proceed in the same or separate arbitrations. Such determinations
will be considered subsequent to the filing of all responsive
pleadings. The Director of Arbitration shall be authorized to
determine preliminary whether claims filed separately are related
and shall be authorized to consolidate such claims for hearing and
award purposes.
Section 13(d)(1) is amended to state that all persons may join
in one action as Claimants if they assert any right to relief
jointly, severally, or arising out of the same transaction,
occurrence, or series of transactions or occurrences and if any
questions of law or fact common to all these Claimants will arise in
the action. All persons may be joined in one action as respondents
if there is asserted against them jointly or severally any right to
relief arising out of the same transaction, occurrence, or series of
transactions or occurrences and if any questions of law or fact
common to all respondents will arise in the action. A Claimant or
respondent need not assert rights to or defend against all the
relief demanded. Judgment may be given for one or more of the
claimants according to their respective rights to relief, and
against one or more respondents according to their respective
liabilities.
Rule 24, Section 14 is amended to state that the time and place
for the initial hearing shall be determined by the Director of
Arbitration and each hearing thereafter by the arbitrators. Notice
of the time and place for the initial hearing shall be given at
least eight business days prior to the date fixed for the hearing by
personal service, registered, or certified mail to each of the
parties unless the parties shall, by their mutual consent, waive the
notice provisions under this section. Notice for each hearing,
thereafter, shall be given as the arbitrators may determine.
Attendance at a hearing waives notice thereof.
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Rule 24, Section 19 (redesignated as Section 18) requires a party
requesting an adjournment to deposit a fee, not to exceed $1,000, upon
making the request. If granted, the arbitrators may waive the deposit
or, in their award, return the deposit.\11\
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\11\Section 18(b) is amended to state that a party requesting an
adjournment after arbitrators have been appointed shall, if an
adjournment is granted, deposit a fee, equal to the initial deposit
of forum fees for the first adjournment and twice the initial
deposit of forum fees, not to exceed $1,000, for a second or
subsequent adjournment requested by that party. The arbitrators may
waive the deposit of this fee or in their awards may direct the
return of the adjournment fee.
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Rule 24, Section 24 (redesignated as Section 22) clarifies that
arbitrators are empowered to take appropriate action, which can include
the assessment of fees or costs, preclusion of documents or witnesses,
and making disciplinary referrals in order to obtain compliance with
all rulings by the arbitrators.\12\
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\12\Section 22 to Rule 24 provides: ``the arbitrator(s) shall be
empowered to interpret and determine the applicability of all
provisions under this Rule and to take appropriate action to obtain
compliance with any ruling by the arbitrator(s). Such
interpretations and actions to obtain compliance shall be final and
binding upon the parties.''
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Rule 24, Section 28 (redesignated as Section 26) requires parties
filing amended pleadings to serve such different pleadings on all other
parties. This change relieves the Director of Arbitration from the
requirement to serve such pleadings.\13\
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\13\Amended Rule 24, Section 26 states, in part, that the party
filing a new or different pleading shall serve on all other parties,
a copy of the new or different pleading in accordance with the
provisions set forth in Section 13(b). The other parties may, within
ten business days from the receipt of service, file a response with
all other parties and the Director of Arbitration in accordance with
Section 13(b).
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Rule 24, Section 30 (redesignated as Section 28) sets forth the
requirement that all monetary awards be paid within 30 days of receipt
unless a motion to vacate has been filed with the court. Additionally,
the section mandates that interest accrue from the date of the award,
until paid, if the award is not paid within 30 days, or the motion to
vacate is unsuccessful, or as specified by the arbitrators. Interest
shall be assessed at the prevailing legal rate in the state where the
award is rendered or at a rate set by the arbitrator(s). This change
will encourage the prompt payment of awards.\14\
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\14\Rule 24, Section 28 is amended to include Paragraphs (f) and
(g). Rule 24, Section 28(f) states that the awards shall be made
publicly available, provided however, that the name of the customer
party to the arbitration will not be publicly available if he or she
so requests in writing.
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Rule 24, Section 32 (redesignated as Section 30) amends the current
fee schedule in place at the CHX and conforms its fee schedule to those
at the other SROs. The CHX is adopting the following Schedule of Fees:
Schedule of Fees--Public Customer Claimant
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Hearing deposit
Amount in dispute Filing Paper ---------------------
fee 1 Arb.* Arb.
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$1,000 or less.............. $15 $15 *$15 .........
$1,001-$2,500............... 25 25 *25 .........
$2,501-$5,000............... 50 75 *100 .........
$5,001-$10,000.............. 75 75 *200 .........
$10,001-$30,000............. 100 ......... 300 $400
$30,001-$50,000............. 120 ......... 300 400
$50,001-$100,000............ 150 ......... 300 500
$100,001-$500,000........... 200 ......... 300 750
$500,001-$5,000,000......... 250 ......... 300 1,000
Over $5,000,000............. 300 ......... 300 1,500
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*The 1 Arbitrator column also sets forth the forum fees for pre-hearing
conferences with a single arbitrator.
Industry Claimant*
------------------------------------------------------------------------
Hearing deposit
Amount in dispute Filing Paper ---------------------
fee 1 Arb.* 3 Arb.
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$1,000 or less.............. $500 $75 *$300 .........
$1,001-$2,500............... 500 75 *300 .........
$2,501-$5,000............... 500 75 *300 .........
$5,001-$10,000.............. 500 75 *300 .........
$10,001-$30,000............. 500 ......... 300 $600
$30,001-$50,000............. 500 ......... 300 600
$50,001-$100,000............ 500 ......... 300 600
$100,001-$500,000........... 500 ......... 300 750
$500,001-$5,000,000......... 500 ......... 300 1,000
Over $5,000,000............. 500 ......... 300 1,500
------------------------------------------------------------------------
*This is the fee schedule for claims submitted by members or member
organizations, against public customers, registered representatives or
non-members other than public customers, and for claims submitted by
registered representatives or non-members other than public customers
against members or member organizations or non-members. The one
arbitrator column also sets forth the forum fee for pre-hearing
conferences with a single arbitrator.
Member Controversies
------------------------------------------------------------------------
Filing Pre-
Amount in dispute fee hearing Hearing
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$10,000 or less........................ $100 $150 $200
$10,001 to $100,000.................... 200 300 750
$100,001 or more....................... 300 500 1,000
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The Exchange is amending Rule 23 to clarify that members must
arbitrate controversies unless the parties agree to bring a matter
before the Exchange's Floor Procedure Committee.\15\ The rule also
provides that the Floor Procedure Committee may appoint an arbitrator
if a member party fails to do so after due notice.\16\
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\15\The Committee on Floor Procedure has general supervision of
the conduct and dealings on the Floor of the Exchange and recommends
for adoption by the Executive Committee such rules and regulations
as may be necessary for the convenient and orderly transaction of
business of the Floor of the Exchange. The Committee has the power
to enforce such rules and regulations by recommending staff
investigations for violations thereof, in accordance with the
procedure provided in Article XII. See CHX Article IV, Rule 3.
\16\CHX Rule 23(a) is amended to state that any controversy
between parties who are members, member organizations or their
nominees or associated persons which arises out of the Exchange
business of such parties shall be submitted to arbitration, through
the Director of Arbitration, to an Arbitration Panel composed of
members of the Committee on Floor Procedure, unless non-members are
also parties to the controversy. If non-members are also parties to
such controversies, the arbitrator shall be appointed in accordance
with Section 8 of Rule 24 under this Article unless the non-members
consent to arbitration before an arbitration panel selected by
parties as provided in this Rule. However, controversies shall be
resolved by the Committee on Floor Procedure if the parties to such
controversy agree to be bound by the decision of that Committee or
if Exchange rules otherwise require resolution by the Committee on
Floor Procedure. The rules and procedures applicable to arbitrations
which are set forth in Rule 24 do not apply to controversies which
are to be resolved by the Committee on Floor Procedure.
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The Exchange believes that the 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 protect investors and the public
interest by improving the administration of an impartial forum for the
resolution of disputes relating to the securities industry.
III. Discussion
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, with Section 6(b)(5) of the Act.\17\ The Commission
believes the amendments to the CHX's arbitration rules are consistent
with the Section 6(b)(5) requirements that the rules of an exchange be
designed to promote just and equitable principles of trade, remove
impediments to and perfect the mechanism of a free and open market,
and, in general, protect investors and the public interest.
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\17\15 U.S.C. 78f (1988).
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The Commission believes that the Exchange's amendments relating to,
among other things, class actions, pre-dispute arbitration agreements,
simplified arbitration, classification of arbitrators, peremptory
challenges, pleadings, joinder and consolidation, monetary awards, and
arbitration fees should increase customer confidence in the securities
markets and promote the efficient resolution of disputes for both
investors and broker-dealers.
More specifically, amending Rule 24, Section 1(c) to provide that
class actions will not be eligible for submission to arbitration should
ensure that investors and broker-dealers are not put to the expense of
duplicative litigation by assuring that class action Claimants have
access to the courts. The amendment relating to simplified arbitration
proceedings which, among other things, codifies the applicability of
the discovery procedures to simplified arbitrations, should establish
clear procedures for discovery requests and document production. This
will assist in the fair resolution of arbitration controversies
involving small claims. The amendment to Rule 24, Section 8(a)(2)(v),
which classifies an individual who is registered under the Commodities
Exchange Act or are members of a registered futures association or any
commodities exchange as being from the securities industry for purposes
of classification of arbitrators, is reasonable given the similarity
between the futures and securities industry.
The Commission believes that amending Rule 24, Section 10 to
clarify the time limitations applicable to a party wishing to utilize a
peremptory challenge should provide parties with clear guidelines
regarding the time limitations applicable to peremptory challenges, and
as a result contribute to the prompt resolution of the parties'
disputes. In addition, amending Rule 24, Section 30 to require that all
monetary awards be paid within 30 days of receipt unless a motion to
vacate has been filed should encourage prompt payment of arbitration
awards and increase investor confidence in the arbitration process.
The Commission believes that it is appropriate to amend Section 22
of Rule 24 to affirm the arbitrators' authority to take appropriate
action to obtain compliance with any of their rulings and to provide
that such interpretations and actions to obtain compliance are final
and binding on the parties. The Commission believes that the amendment
should raise customer confidence in the arbitration process by assuring
that those individuals who utilize the CHX's arbitration forum comply
with the rulings of an arbitrator.
The Commission also finds that the amendments to Rule 24, Section
30, which lists the Exchange's arbitration fees is consistent with the
requirements of Section 6(b)(4) of the Act,\18\ in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among members of the Exchange and others using its facilities.
Specifically, the Commission finds that the amended or newly adopted
fees in Section 30 are reasonable and should help to reimburse the
Exchange for various costs incurred pursuant to the arbitration
process.
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\18\15 U.S.C. 78f(b)(4) (1988).
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Finally, the Commission believes that Interpretation and Policy .01
to Rule 24, Section 1, which adopts the CHX's policy for determining
whether the Exchange will accept a claim for arbitration, appropriately
defines the controversies that may be arbitrated at the Exchange. The
Commission believes that the adopted Interpretation and Policy
reasonably balances the Exchange's interest in efficiently allocating
its arbitration resources with investor's interests in obtaining access
to an open forum to arbitrate claims. For example, while the new
Interpretation and Policy provides that the CHX may decline the use of
its arbitration facilities if the nexus between the dispute and the
Exchange is minimal, the Exchange will accept a claim for arbitration
if the Exchange is the DEA for the Respondent member, if the
enforcement of the applicable rules has not been ceded to another SRO
pursuant to its Rule 17d-2 Agreement, or if the nexus between the
dispute and the Exchange is more than minimal.
It therefore is ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change is approved.
\19\15 U.S.C. 78S(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17315 Filed 7-15-94; 8:45 am]
BILLING CODE 8010-01-M
