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NASD, NYSE Sue California Over New Broker Arbitration Rules

NASD, NYSE Sue California Over New Broker Arbit Rules

On July 1, California established a state law requiring private arbitrators to disclose potential conflicts of interest before hearing disputes between brokers and investors.

That didn’t sit too well with the NASD and NYSE, the primary regulators of broker-dealers in the U.S. So the two organizations sued California, seeking an exemption from the state law requiring more stringent disclosures from securities-dispute arbitrators.

The NASD and NYSE claim California’s new standards may threaten national uniformity in how brokers and clients settle their differences.

According to the NASD and NYSE, the two organizations have developed, with SEC approval, a uniform set of procedures that apply in every securities arbitration they administer in the U.S. But California lawmakers say the new law was “designed to boost public confidence in private dispute resolutions,” according to office of state Senator Martha Escutia, who introduced the bill.

Investors “must have confidence that the persons ruling on their complaint are truly impartial and free from bias and possible conflicts,'' she said in a statement.

But the NASD and NYSE say that there's already “extensive federal oversight” in the arbitration process. The NASD says California’s standards are “unrealistic” and would be a ``logistical nightmare'' to implement. The law requires arbitrators to disclose and track fees such as memberships and arbitration awards paid by the brokerage firm named in a dispute, even if the arbitrator isn't affiliated with the firm.

Arbitrators would also have to collect and update information for five years on all the cases they've been involved in. As a result, the NASD and NYSE say they believe they’ll lose “quality” arbitrators and that the California law would bog down the system.

Approximately 1,000 cases are filed with the NASD in California each year. The NYSE and NASD say they are not appointing new arbitrators in California until the dispute is resolved.

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