Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Stock Exchange, Inc. Relating to Proposed Amendments to Its Arbitration Rules

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34141; File No. SR-MSE-93-9]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Chicago Stock Exchange, Inc. Relating to Proposed

Amendments to Its Arbitration Rules

June 1, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on April

26, 1993, the Chicago Stock Exchange, Inc. (``CHX'' or ``Exchange'')

(on the date that the proposal was filed, the CHX was named the

``Midwest Stock Exchange'' or ``MSE'') filed with the Securities and

Exchange Commission (``Commission'' or ``SEC'') the proposed rule

change as described in Items, I, II and III below, which Items have

been prepared by the self-regulatory organization. On March 31, 1994,

the Exchange submitted to the Commission Amendment No. 1 to the

proposed rule change.\1\ On June 1, 1994, the Exchange submitted to the

Commission Amendment No. 2 to the proposed rule change.\2\ The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

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\1\See letter from David T. Rusoff, Attorney, Foley & Lardner,

to Sandra Sciole, Special Counsel, SEC, dated March 30, 1994.

\2\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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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The CHX proposes to amend its arbitration rules as set out in Rule

24 of Article VIII in order to have them conform more closely with the

Uniform Code of Arbitration developed by the Securities Industry

Conference on Arbitration (``SICA'').\3\

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\3\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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In addition to the conforming changes to Rule 24, the Exchange also

proposes to make other changes to Rule 24 as well as changes to Rule

23, Article VIII (Arbitration of Member Disputes), as set forth in the

purpose section of this rule filing.\4\

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\4\The text of the proposed rule change was attached to the

filing as Exhibit A. Copies of the proposal are available at the

Commission as well as at the CHX.

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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 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

(1) Purpose

The purpose of the proposed rule change is to bring the Exchange's

arbitration rules more closely in line with SICA's Uniform Code of

Arbitration (the ``Uniform Code'' or ``Code''). To that end, the

Exchange is proposing several conforming changes to its arbitration

rules and is also proposing other changes which will facilitate the

administration of the CHX arbitration forum in general.

The Exchange is also redesignating most of the section references

to Rule 24 in order to conform its rule reference to SICA's Uniform

Code.

The CHX is proposing to add 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.\5\

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\5\Rule 24, Section 31, Paragraph 5 is proposed 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.\6\ 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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\6\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 on 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. This can be

demonstrated by the following example. Suppose a Respondent member firm

was a member of the New York Stock Exchange, Inc. (``NYSE``), National

Association of Securities Dealers, Inc. (``NASD''), and the CHX, and

the NYSE was the firm's DEA. Suppose that the dispute involved alleged

NASD sales practice violations covering 150 transactions. Suppose

further that out of those 150 transactions, only two were executed on

the CHX. In that event, the Exchange would most likely decline the use

of its arbitration facilities based on minimal contacts that the

dispute had with the Exchange.

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.\7\

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\7\Proposed 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).\8\ The proposed fee schedule for simplified

arbitrations and regular arbitrations is set out in Section 32

(redesignated as Section 30).

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\8\Rule 24, Section 2(c) is proposed 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 proposal would also amend 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 change 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) will classify individuals who are

registered under the Commodities Exchange Act or are members of a

registered futures association or any commodities exchange as being

from these 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 proposed to be 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 proposed to be 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.\9\

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\9\In addition, the Exchange proposes to amend Section 13(d) to

state that in arbitrations where there are multiple Claimants,

Respondents or Third party Respondents, the Director of Arbitrations

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 preliminarily whether claims filed

separately are related and shall be authorized to consolidate such

claims for hearing and award purposes.

Section 13(d)(1) is proposed 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 or 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 proposed to be 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.\10\

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\10\Section 18(b) is proposed to be 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.\11\

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\11\Proposed 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 pleading on all other

parties. This change relieves the Director of Arbitration from the

requirement to serve such pleading.\12\

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\12\Amended Rule 24, Section 26 is proposed to state, 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.\13\

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\13\Rule 24, Section 28 is proposed to be amended to include

Paragraphs (f) and (g). Rule 24, Section 28(f) is proposed to state

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 proposes to adopt the following Schedule of

Fees:\14\

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\14\With respect to the following schedule, italicizing

indicates new material.

Schedule of Fees--Public Customer Claimant

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Hearing deposit

Amount in dispute Filing Paper -------------------

fee 1 Arb.* 3 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*

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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

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*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

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Pre-

Amount in dispute Filing hearing Hearing

fee conference deposit

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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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Finally, CHX Rule 23 is being amended 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 Exchange 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) would be 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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(2) Statutory Basis

The Exchange believes that the proposed 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.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange believes that no burdens will be placed on competition

as a result of the proposed rule change.

C. Self-Regulatory Organization's Statement of Comments on the Proposed

Rule Change Received From Members, Participants, or Others

No comments were received on the proposed rule change.

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

Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period as (i) the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

(A) By order approve such proposed rule change, or

(B) Institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing. 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 submissions, 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 at the

principal office of the CHX. All submissions should refer to the file

number SR-MSE-93-9 and should be submitted by June 28, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-13734 Filed 6-6-94; 8:45 am]

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