California Can Not Require Higher Standards for NASD Arbitration

The California Supreme Court and a U.S. Court of Appeals have both determined that securities arbitration standards do not violate the California Constitution. The courts have instead decided that The Federal Arbitration Act preempts (is superior to) California’s ability to govern securities arbitration.

Rapidly growing arbitration is forcing consumers to, often unknowingly, forego their right to go to court. To protect its citizens from injustices in arbitration the California legislature passed legislation in 2001 ordering the California court system to create ethical standards for commercial arbitrators. Comprehensive standards were then created regarding arbitrators, including disclosure and conflict-of-interest checks.

The NASD’s Arbitration Code is not consistent with these new standards and the NASD refused to make adjustments to comply with the California requirements. It instead sued members of the California court system in federal court seeking a ruling that California could not set standards regarding securities arbitration. In November 2002, the US Court dismissed the lawsuit holding the US Constitution barred the suit in federal court.
The NASD appealed.

Meanwhile, the California Supreme Court ruled that federal arbitration law preempts the standards set by California court system “at least in the context of self-regulatory bodies like NASD.” The federal court then came to the same conclusion.

These decisions mean that California and other states have no power to protect their residents from arbitration standards of the NASD they believe are substandard. The NASD is the National Association of Securities Dealers, Inc., an association owned and operated by members of the securities industry with oversight by the SEC.

Virtually all claims by investors against investment firms must be filed in securities arbitration. Since 1990, the law firm of Shepherd Smith and Edwards has represented investors nationwide in more than 1,000 claims against investment firms. You may contact our law firm to arrange a free confidential consultation with one of our attorneys.