SEC Chairman Instructs NYSE and NASD on California Arbitrations

SEC Chairman Harvey L. Pitt has written to the CEOs of the NYSE and NASD requesting that they immediately either provide California investors with available arbitration panels in that state or take other steps to ensure that California investors have a forum for the convenient and expeditous resolution of disputes. The chairman’s letter was written against the backdrop of California legislation requiring arbitrators to comply with ethical standards adopted by the Judicial Council beginning July 1, 2002. The legislation requires the Judicial Council to adopt standards addressing the disclosure of conflicts of interest, including prior service as an arbitrator, disqualifications, the acceptance of gifts, and the establishment of future professional relationships. The California measure also specifies the grounds upon which a proposed neutral arbitrator may be disqualified and the procedure to do so. Under the legislation, courts must dismiss an arbitration award if the arbitrator failed to disclose, within the time required for disclosure, grounds for disqualification.

In his letter, Mr. Pitt emphasized that, however inappropriate the NYSE and NASD may believe the California legislation to be, there is no justification for requiring individuals either to leave the state in order to obtain a rightful hearing or to otherwise forego their arbitration rights. At the same time, the chairman reminded that the SEC has broad oversight of both the NYSE and NASD arbitration programs. Because of that federal oversight and the need for uniform procedures, he does not believe that the legitimate concerns of individual states should be allowed to threaten the consistent application of the national shareholder arbitration system as overseen by the SEC. But the paramount issue now being faced, continued Chairman Pitt, is not whether California has the right to provide protections for its citizens, but whether current arbitration procedures offer investors a fair, convenient and expeditious dispute resolution forum. Finally, concluding on a broader note, the SEC chairman promised to review, within 30 days, the disclosure requirements in the NYSE and NASD arbitration procedures in light of the recent California legislation.