(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

NASD Arbitrators Not Subject to California Ethics Code

Ethics standards for neutral arbitrators adopted by the state of California did not apply to arbitrations conducted in California by the National Association of Securities Dealers. According to a panel of the 9th U.S. Circuit Court of Appeals, the Exchange Act preempted the application of the state ethics standards to NASD arbitrations, as NASD rules approved by the SEC had preemptive force over conflicting state law.

The case arose from an employment termination dispute involving a brokerage firm. The firm's employment dispute resolution program required employees registered with the NASD to have their claims heard by an NASD-appointed arbitration panel. Before the NASD appointed the panel, the California Judicial Council adopted heightened disclosure and disqualification standards for neutral arbitrators.

In finding that the state rules were preempted, the appellate panel noted the enhanced SEC oversight of SRO rulemaking established in Exchange Act amendments passed in 1975. The ultimate approval of a proposed SRO rule now " reflects the Commission's determination that the proposed rule is consistent with the purposes of the Exchange Act," stated the court, as the expanded Commission oversight "requires that SRO rules promote the federal objectives of the Exchange Act."

The court held that SEC-approved rules adopted by SROs preempt state law when the two are in conflict "either directly or because the state law stands as an obstacle to the accomplishment of the objectives of Congress." Initially, the court found that there was a direct conflict between the state and NASD disqualification rules, as compliance with both would have been impossible. With regard to the disclosure rules, however, the court concluded that there was no direct conflict, as "it was not physically impossible for a party to simultaneously comply with the NASD code and the California ethics standards."

Such state standards could, however, frustrate congressional intent. The court agreed with the SEC's amicus brief in which the agency stated that state regulation of NASD arbitration procedures would create a patchwork of laws and could result in increased costs and could deter qualified individuals from serving as arbitrators.

Credit Suisse First Boston Corp. v. Grunwald (9thCir) is reported at ¶93,125 .