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

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.

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\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.

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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.)

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\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.

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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.

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\5\ Employment Discrimination: How Registered Representative

Fare in Discrimination Disputes (GAO/HEHS-94-17, March 30, 1994).

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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\

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\6\ EEOC Notice No. 915.002, July 10, 1977.

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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\

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\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.

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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\

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\10\ EEOC Notice No. 915.002, July 10, 1997.

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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\

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\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.

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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\

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\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).

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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.

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\14\ See footnote 8 above.

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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 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).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\17\

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\17\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-412 Filed 1-7-99; 8:45 am]

BILLING CODE 8010-01-M