California Arbitration Jam Gets Worse

California’s arbitration tussle with the NASD and NYSE continues to worsen, and the fight may not end for several more months, which means more delays in the arbitration system will occur.

California’s arbitration tussle with the NASD and NYSE continues to worsen, and the fight may not end for several more months, which means more delays in the arbitration system will occur.

While SEC Chairman Harvey Pitt has stepped in and ordered the self-regulatory organizations to appoint arbitrators to oversee cases in California, the SROs are seeking dismissal from the new standards. A hearing on this is scheduled for Sept. 24.

In July, as reported in the September issue of Registered Rep., the state passed legislation requiring additional disclosures from neutral arbitrators in a variety of industries. The NASD and NYSE sued, saying they weren’t subject to the new disclosures.

So far, California legislative officials say they haven’t heard complaints from arbitrators in other industries. "The additional disclosures are not as burdensome as the NASD/NYSE is claiming," says Eugene Wong, chief counsel to the California Senate Judiciary Committee.

In a letter dated Sept. 5, 2002, to NYSE Chairman Richard Grasso and NASD Chairman Robert Glauber, Pitt, SEC chairman, told the self-regulatory organizations that they’d have to appoint arbitrators.

"However inappropriate you may believe the California legislation to be, there is absolutely no justification for requiring individuals either to go out of state to obtain a hearing they have an absolute right to have or otherwise forgo their rights in arbitration,'' Pitt wrote in the letter to NYSE Chairman Richard Grasso and NASD Chairman Robert Glauber.

The agencies, while complying with Pitt’s request, are nonetheless going ahead with their lawsuit. An SEC spokesman confirmed that this is the first time in the agency’s 68-year history that the SEC chairman had to order arbitrators to be appointed in a particular case.

For their part, the agencies have only said that they are complying with Pitt’s request, but believe that they should be exempted. The SROs have filed for a declaratory judgment. They seek dismissal of the case and a ruling that new disclosure standards are inapplicable to them based on the SEC oversight and federal preemption arguments.

A hearing on that request was scheduled for Sept. 24 in U.S. District Court, to be heard by Judge Sandra Armstrong. A decision is expected sometime in October.

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