NASD, NYSE Granted Exemption

A federal judge ruled Tuesday that the NASD and the New York Stock Exchange do not have to comply with a California investor-protection law that forces arbitrators in investor suits to disclose their finances in detail.

U.S. District Judge Jeremy Fogel in San Jose, ruling in an investor suit against Morgan Stanley, said the private judge to be assigned to the suit isn’t required to abide by California’s conflict-of-interest rules. The state regulations in this case are preempted by federal arbitration and securities legislation, Fogel said.

The ruling is a victory for the NASD, formerly the National Assn. of Securities Dealers, and the New York Stock Exchange. The NASD and NYSE say forcing them to abide by California’s rules would drive up costs and make it harder to attract people to serve as arbitrators.

“The comprehensive system of federal regulation of the securities industry is designed to provide uniform, national rules,” Fogel said. Subjecting the regulators to “a patchwork” of state laws “would lead to inconsistent disclosures and disqualifications across the states.”

The NASD and NYSE are appealing the dismissal of a separate suit they filed to gain an exemption from the California rules. That case was dismissed on procedural grounds that left unanswered the issue of federal preemption in such matters.

Tuesday’s ruling is the first in California to address the preemption issue in arbitration disputes.