SEC Chief Acts to End Snag Over Arbitration

California’s securities arbitration standoff--a two-month dispute that has more than 500 disgruntled investors waiting for a hearing--may be nearing an end as a result of action by Securities and Exchange Commission Chairman Harvey L. Pitt.

Pitt sent a letter Thursday to both the New York Stock Exchange and the National Assn. of Securities Dealers that said their unhappiness with a new law governing securities arbitration cases in California was insufficient justification for their refusal to schedule arbitration hearings.

Representatives of the NYSE and the NASD said Friday that they would work with the SEC to help California investors resolve their securities disputes. But they stopped short of saying they would do so by resuming the scheduling of arbitration hearings.

“We will, of course, comply with the chairman’s request,” NYSE spokesman Ray Pellecchia said. “We will work closely with the SEC to ensure that the best and most appropriate steps are taken to achieve that goal.”

Both the NYSE and the NASD, which operate national arbitration programs to resolve disputes between investors and their brokers, have refused to schedule new hearings since July 1, when the new California law went into effect.

About 500 cases have been put on hold as a result--450 filed with the NASD, by its count, and 50 with the NYSE, the exchange says.

The California law, aimed at averting conflicts of interest in settling securities disputes, bars arbitrators from taking gifts or speaking fees from the brokerages whose disputes they arbitrated.

Arbitrators also are barred from discussing employment with a party to a dispute while in the midst of an arbitration case.

“The goal of the new ethics standards is to promote public confidence in the private arbitration system by assuring parties in the system that their appointed arbitrator is going to be as fair and as impartial as a public judge,” said Gene Wong, chief counsel for the California Senate’s Judiciary Committee.

However, representatives of the NASD described new disclosure rules that are part of the law as time-consuming and costly. The agency and the NYSE also object to the law because they believe it could allow individuals and firms to draw out proceedings indefinitely, defeating the purpose of arbitration.

The NYSE and the NASD have jointly filed suit in San Francisco asking to be exempted from the California law. That case is set for its first hearing Sept. 24.

Prompted by California legislators who charged that the NYSE and the NASD were retaliating against the state by refusing to schedule hearings, Pitt demanded in his letter that they “immediately either provide investors with available arbitration panels in California, or take other steps to ensure that California investors have available to them convenient and expeditious resolution of disputes.”

Since the standoff started, the NASD has been referring California cases to arbitrators in Nevada and other states.

Smaller cases that can be handled through paper pleadings also have been able to proceed, simply by being sent out of state, NASD representatives said. In addition, the agency has encouraged parties to mediate cases and has waived its administrative fees.