California Loses in Disclosure Rule Case

A federal appeals court on Tuesday ruled against California in the state’s long-running battle to impose certain disclosure rules on brokerage industry arbitration panels.

The U.S. 9th Circuit Court of Appeals in San Francisco said arbitration-panel policies of the NASD, formerly the National Assn. of Securities Dealers, superceded rules California imposed in 2002.

In an ethics law that took effect that year, the state Legislature said people chosen to hear arbitration proceedings in California must provide extensive disclosure of their financial dealings and other potential conflicts of interest.

Arbitration hearings provide a way for people with grievances against companies or other entities to have their cases heard and decided by expert panels. In most disputes within the brokerage industry, customers are required to use arbitration.

The California law was aimed at giving investors and others more information about the individuals who sit on arbitration panels. The information could be used to challenge and disqualify proposed arbitrators.

The NASD, the brokerage industry’s self-regulatory agency, contended that California had no right to override NASD arbitration rules that had been approved by the Securities and Exchange Commission. The NASD stopped appointing arbitration panels in California in 2002, saying the state’s disclosure rules would make it harder to attract people to serve as arbitrators.

Since then, California investors who have sought NASD-supervised arbitration hearings have had to either travel out of state or waive their rights under the California disclosure law.

The appeals court sided with the NASD on Tuesday in a case involving a former Credit Suisse First Boston Inc. employee.

“Permitting each state to regulate NASD arbitration procedures would create a patchwork of laws that would interfere with Congress’ chosen approach of delegating nationwide, cooperative regulatory authority to the [SEC] and the NASD,” the court said.

“We’re pleased with the court’s ruling,” said Herb Perone, a spokesman for the NASD in Washington.

Another challenge to the state arbitration rules will be heard by the California Supreme Court on Tuesday.