NASD Files for Exemption from California Arbitration Rule
Washington, DC—NASD announced today that its Dispute Resolution division, along with the New York Stock Exchange (NYSE), asked a federal court in California to exempt them from new California arbitration rules, because the two already operate under extensive federal oversight and the new rules would mean higher costs and fewer choices of arbitrators for investors.
Additionally, NASD announced it was taking steps to help investors deal with the delay in cases since the NASD and the NYSE dispute resolution divisions stopped appointing arbitrators in California on July 1, due to the new rules. NASD said it would provide venue changes for arbitration cases, use non-California arbitrators when appropriate, and waive its administrative fees for NASD-sponsored mediations.
The new California rules were designed to address conflicts of interest in private arbitration forums that are not part of a national regulatory system overseen on a uniform, national basis by the Securities and Exchange Commission (SEC), as are the forums administered by the NASD and the NYSE. The conflicts the new rules are designed to correct do not exist in the NASD and NYSE dispute resolution programs - which are not-for-profit and highly regulated.
“As a result of the new rules, arbitrators are not being appointed to hear new investor disputes in California until this matter is resolved; however, arbitrations already underway will proceed to conclusion unless a replacement arbitrator is required,” said Linda Fienberg, President of NASD Dispute Resolution. “If self-regulatory organizations (SROs) were required to implement the California rules, investors and other parties would be saddled with higher costs, a less efficient and streamlined process, and a much smaller arbitrator roster from which to select the panelists who will decide their cases.”
NASD, joined by the NYSE, filed the declaratory judgment action this morning in the U.S. District Court for the Northern District of California, seeking a determination from the court that SROs are not governed by the new California arbitrator disclosure rules. The complaint can be viewed in full at nasdadr.com/pdf-text/072202_ca_complaint.pdf.
The suit has three legal bases:
- the securities regulation area is part of a pervasive system of federal regulation and that state efforts to regulate SRO-administered arbitration are impermissible;
- California’s rules are preempted by the Federal Arbitration Act, as interpreted by the United States Supreme Court; and
- the California rules improperly expanded on the definition of neutral arbitrator as provided in California statutory law.
Fienberg said there are a number of steps that investors should take while the matter is pending in court. Investors who believe they have disputes with their brokers should not delay in filing their cases with an SRO forum. “There are statutes of limitations that govern the amount of time investors have between the time the issue at dispute occurred and the time their case is filed,” she said. NASD is still processing California cases as they are filed up to appointment of arbitrators.
Importantly, NASD has developed several options for California investors until this matter can be resolved. First, simplified arbitration cases, that is those under $25,000 that are decided by a single arbitrator without a hearing, are being decided by arbitrators from outside of California and are not subject to any delay. Second, the parties by agreement can choose to have their cases heard in neighboring states (e.g., Oregon, Washington, Nevada, and Arizona) either by California arbitrators or arbitrators from those states. NASD already has established hearing locations in Las Vegas, Phoenix, Portland, and Seattle, and will establish additional hearing locations in the surrounding states as needed. Parties will not be charged for any travel or related expenses of the arbitrators. Investors generally have to travel to one of the three NASD sites currently available in California (San Francisco, Los Angeles, and San Diego) to have their cases heard - so choosing a near by out of state locale should be a viable option for many.
Third, NASD is encouraging parties to mediate their cases. Mediation is a faster, less expensive alternative to arbitration. To encourage more parties to enter into mediation, NASD will waive its normal administrative fees in California for this process and will request its mediators to offer their services at a reduced rate during this interim period. NASD is considering other options for investors as well which it will announce shortly.
Fienberg emphasized that existing federal arbitration rules require NASD to collect and disclose extensive information about arbitrators so investors can make an educated assessment about the arbitrators during the selection process. This disclosure for potential arbitrators includes:
- employment information;
- securities accounts and the securities firms that hold the account and the investments in the accounts;
- any affiliation with the securities industry and full disclosure (regulatory actions, previous and pending arbitrations the firm may have) about their firm;
- names of relatives in the securities industries and their positions; and
- identity of any securities-related clients the arbitrator may have and their names, and much more.
NASD Dispute Resolution provides investors a fair, efficient, cost-effective forum to arbitrate disputes with their brokers or brokerage firms. The average resolution for disputes is 12 to 14 months from the filing of a claim. In claims that proceed through hearing to award, investors win in over 50 percent of the cases. About 70 percent of claims filed are settled before hearings are held, almost always with investors receiving some compensation.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business – from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web Site at www.nasd.com.