Preemption of the California Ethical Standards in Securities Arbitration: Jevne v. Superior Court
Vol. 7
November 2007
Page
Introduction
Arbitration provisions are virtually standard in modern agreements between stockbrokers and customers.[1] Securities brokers favor arbitration because it is generally more efficient than litigation.[2] Therefore, most securities brokers require customers to agree to mandatory binding arbitration before they open an account.[3]
Securities brokers must become members of at least one Self Regulatory Organization (“SRO”).[4] An SRO is a nongovernmental organization that has the power to create and enforce regulations and standards within the securities industry.[5] The National Association of Securities Dealers (“NASD”) and the New York Stock Exchange (“NYSE”) are examples of prominent SROs.[6] Almost every American securities firm is a member of the NASD.[7] The overwhelming majority of brokerage firms registered with the NASD require new customers to agree to mandatory NASD administered arbitration of any dispute.[8] Accordingly, NASD rules generally govern securities arbitration proceedings.[9]
In California, however, another set of rules governs that more stringently regulates ethics.[10] On July 1, 2002, the California Judicial Council adopted ethical standards applicable to persons acting as neutral arbitrators in contractual agreements.[11] The Judicial Council intended the California Ethical Standards to govern the conduct of arbitrators in all arbitration proceedings in the state.[12] Thus, in California, arbitrators faced the problem of adhering to both the California ethical standards and the NASD standards.[13]
This Note examines the conflict that arises in securities arbitration between the NASD rules governing neutral arbitrators and the newly enacted California Ethical Standards.[14] Specifically, this Note argues that the California Supreme Court erred in holding that NASD regulations preempt the California Ethical Standards.[15] This Note concludes that preempting the California Standards is contrary to public policy and preemption law.[16]
Part I of this Note explores the background of the California Ethical Standards and the conflict between the California Standards and the NASD rules.[17] Part II discusses the California Supreme Court's decision in Jevne v. Superior Court and reviews the similar Ninth Circuit decision in Credit Suisse v. Grunwald.[18] Part III argues against preemption and suggests that as a matter of public policy, heightened ethical standards should be available to parties in securities arbitration.[19] Alternatively, Part III argues that even if NASD regulations preempt some of the California Standards, the NASD regulations should not preempt all of them.[20] Finally, Part III addresses the counterarguments advanced by the Jevne court and concludes that the court erred in its holding.[21]
I. Background
Both state and federal law include rules that govern arbitrators' conduct.[22] Arbitration is generally faster and less expensive than litigation.[23] State arbitration law, however, generally offers more protection to arbitration participants than does federal law.[24]
A. The California Judicial Council
California law protects arbitration participants.[25] The California Constitution empowers the Judicial Council to adopt rules for court administration, practice, and procedure that are not inconsistent with statutes.[26] The Judicial Council ensures the impartial and effective administration of justice.[27] Thus, the California Judicial Council is primarily responsible for making judgments that pertain to the administration of the California court system.[28]
Although the Judicial Council has broad authority to make policy determinations, a rule enacted by the California Judicial Council may not conflict with a statute.[29] A directive of the Judicial Council, however, may extend beyond a related statute, provided that it is still consistent with the statutory purpose.[30] Therefore, the Judicial Council may expand the scope of the protection afforded by a statute.[31]
B. The California Ethical Standards for Neutral Arbitrators
California Code of Civil Procedure section 1281.85 is protective legislation that promotes ethical conduct in arbitration.[32] Section 1281.85 mandates persons serving as neutral arbitrators to comply with any ethical standards the Judicial Council enacts.[33] The California Legislature enacted section 1281.85 to protect consumers in private arbitration proceedings.[34] In furtherance of section 1281.85, the California Judicial Council enacted the Ethics Standards for Neutral Arbitrators.[35] Accordingly, the Judicial Council established the California Standards under section 1281.85 as minimum conduct requirements designed to promote fairness in private arbitration proceedings.[36]
The California Judicial Council enacted the Ethical Standards in response to the growing concern that mandatory binding arbitration agreements might result in unfairness.[37] Inequitable binding arbitration agreements frequently arise in circumstances where the parties have unequal bargaining power.[38] Parties with weaker bargaining positions often must submit to binding arbitration and relinquish their constitutional right to a trial by jury.[39] This potential for unfairness especially prevails in securities arbitration, where disputes typically involve an individual customer and a large financial institution.[40]
In addition to this potential unfairness, arbitration lacks many of the due process protections afforded to litigating parties.[41] For example, no due process right to judicial review of an arbitration award exists because a private arbitrator's ruling does not constitute state action.[42] As such, courts refuse to weigh the merits of a grievance submitted to arbitration.[43] Courts will vacate arbitration awards only in very egregious circumstances.[44] Thus, the legislature found it especially important that arbitration proceedings contain internal safeguards, because binding arbitration implicates fundamental due process rights.[45] The California Judicial Council enacted the Ethical Standards to respond to these concerns.[46]
The Judicial Council established the California Standards intending to guide arbitrators' conduct and inform and protect arbitration participants.[47] Moreover, the Judicial Council specified that the overriding purpose of the Standards is to promote public confidence in arbitration.[48] Additionally, the Judicial Council cautioned that the Ethical Standards are not a ceiling on the standards governing the conduct of neutral arbitrators.[49] Therefore, more restrictive rules may govern arbitrators' conduct.[50] At a minimum, however, arbitrators must comply with the rules enumerated in the California Standards.[51]
Effective July 1, 2002, the California Standards apply to persons appointed as neutral arbitrators.[52] The Standards regulate both arbitration agreements subject to the California Arbitration Act and all arbitration agreements executed in California.[53] Neutral arbitrators must act in a manner that upholds the reliability and fairness of the arbitration process.[54] In addition, they must maintain impartiality towards all participants in the arbitration at all times.[55] Arbitrators must disclose any information that constitutes a conflict of interest, including all prior dealings with the parties.[56] Failure to comply with the disclosure requirements may result in disqualification of an arbitrator from the arbitration process.[57]
The NASD rules differ from these California Standards in several respects.[58] First, the NASD rules require less disclosure.[59] California Standard 7 includes a comprehensive list of disclosure requirements for arbitrators.[60] Disclosure requirements under the California Standards are specific and very extensive.[61] In contrast, the NASD disclosure requirements are relatively brief and provide less protection to participants.[62] Essentially, parties in NASD arbitrations must only disclose certain relationships that might result in a bias or a financial interest in the outcome of arbitration.[63]
Second, the California Standards provide for much easier disqualification of arbitrators.[64] Specifically, California Standard 10 automatically disqualifies an arbitrator if a party serves a timely disqualification notice in any of the circumstances described in the Standards.[65] Under the NASD Code, however, the Director of Arbitration ultimately decides whether to disqualify an arbitrator.[66] Thus, the California Standards offer heightened protection to participants in securities arbitration in the form of more comprehensive disclosure and disqualification standards.[67]
C. The Securities and Exchange Act of 1934
The California Standards and the NASD, however, are not the only source of protection for investors.[68] In addition to state created regulations, federal securities law substantially protects investors.[69] Currently, the Securities and Exchange Act of 1934 (“the 1934 Act”) is the primary federal regulatory mechanism of securities markets and transactions.[70] Congress enacted the 1934 Act in order to extend federal regulation to securities transactions.[71] Essentially, the 1934 Act regulates securities in secondary markets.[72] Secondary markets facilitate the sale and exchange of stock between shareholders rather than the issuance of stock by a corporation.[73] To enforce the 1934 Act, Congress created the Securities and Exchange Commission (“SEC”).[74] The SEC is an independent federal agency that regulates all aspects of securities markets.[75] Therefore, because the NASD is the primary private regulator of the securities industry, the SEC oversees the NASD.[76]
D. The National Association of Securities Dealers
The NASD is the leading private sector provider of financial regulatory services.[77] Neither state nor federal government resources subsidize the NASD.[78] Rather, private resources fund the NASD.[79] The NASD also operates the largest dispute resolution forum in the world.[80] All NASD members have access to this forum.[81] The NASD Uniform Rules of Arbitration apply to parties who opt to use this forum.[82] The SEC, however, must approve all NASD arbitration and mediation procedures and regulations.[83]
Parties seeking to arbitrate securities disputes need not always arbitrate pursuant to NASD rules.[84] The NASD makes available other forums, such as the Judicial Arbitration and Mediation Service (JAMS) and the American Arbitration Association (AAA).[85] NASD rules do not apply to these forums.[86] Most parties, however, opt to use the NASD dispute resolution forum because it is typically more convenient.[87] Therefore, NASD rules significantly impact securities dispute resolution.[88]
E. The Conflict Between the California Standards and the NASD Rules
In California, however, the California Standards cast doubt on the applicability of the NASD rules.[89] After the Judicial Council adopted the California Ethical Standards, the NASD refused to continue appointing arbitrators in California.[90] Instead, the NASD adopted a waiver requirement for California.[91] The NASD waiver rule required California investors to forgo applying the California Standards in order to participate in arbitration.[92]
In determining whether to approve the NASD's waiver rule, the SEC asked law professor Michael Perino to prepare a report.[93] Perino's report discussed whether the current disclosure requirements in NASD arbitrations should reflect the California Standards.[94] Perino ultimately concluded that nondisclosure does not represent a significant problem in NASD or NYSE arbitrations.[95] Perino stated that having self regulatory organizations adopt the California Standards would likely yield very few benefits for investors.[96] Furthermore, Perino's report concluded that adopting the California Standards may result in significant costs and may lower investor confidence in the fairness of SRO arbitration.[97] In accordance with the suggestions advanced in Perino's report, the SEC approved the NASD waiver program.[98] Thus, the NASD received federal approval for its waiver requirement.[99]
II. Jevne v. Superior Court
After the SEC approved the NASD waiver program, the issue of the impact of the 1934 Act on the California Standards arose.[100] The California Supreme Court decided Jevne v. Superior Court shortly after the Ninth Circuit decided Credit Suisse v. Grunwald.[101] In Credit Suisse, the Ninth Circuit held that the 1934 Act preempted the California Standards as applied to the NASD rules.[102] The Ninth Circuit also stated that NASD regulations, like federal statutes, have preemptive force over conflicting state law.[103] The California Supreme Court followed a similar approach in Jevne v. Superior Court.[104]
A. Facts and Procedure
Jevne arose out of a dispute between Jevne, an investor, and JB Oxford & Co., a securities broker/dealer registered with the NASD.[105] When Jevne opened an account with Oxford, Oxford required Jevne to sign an account opening statement.[106] The statement specified that the parties would resolve all disputes by arbitration in accordance with NASD rules.[107] Jevne sued Oxford after an unauthorized withdrawal of $1,026,535 from his account.[108] Oxford successfully moved to compel arbitration pursuant to the provision in the account opening statement.[109]
After Jevne's arbitration proceedings commenced, the NASD requested that Jevne waive application of the California Standards.[110] Jevne refused and asked the trial court to set aside the order compelling arbitration.[111] The court denied the motion, and Jevne petitioned the California Court of Appeal for a writ of mandate.[112] The appellate court denied Jevne's petitions because the SEC approved the NASD's waiver requirement, and the California Supreme Court granted review.[113]
B. Issue, Holding, and Rationale
On appeal, the California Supreme Court addressed two primary issues relating to California Code of Civil Procedure section 1281.85.[114] First, the court considered whether section 1281.85 authorizes the Judicial Council to adopt ethical standards for arbitration organizations like the NASD.[115] Second, the court considered whether the 1934 Act preempts section 1281.85 and the California Standards.[116] The court mentioned, but failed to decide the issue of whether the parties to an arbitration agreement may waive application of the California Standards.[117]
The California Supreme Court held that section 1281.85 authorized the Judicial Council to adopt ethical standards for arbitrators appointed by SROs.[118] The court further held, however, that the 1934 Act preempted section 1281.85 and the California Standards.[119] Finally, the court decided that the parties must arbitrate the dispute even though more than a year had lapsed.[120]
In determining that section 1281.85 authorized the Judicial Council to adopt ethical standards for self-regulatory organizations, the court made several points.[121] The court noted that the California Standards effectively expanded the statutory definition of “neutral arbitrator” to include third party organizations like the NASD.[122] The court considered legislative history to determine whether the California legislature intended “neutral arbitrator” to include third party organizations.[123] The court concluded that the legislature intended the statutory definition of “neutral arbitrator” to guarantee impartiality.[124] The legislature did not intend to exclude arbitrators selected by a third party organization.[125] Thus, the legislature did not intend to exclude third party arbitrators from the California Standards.[126] Accordingly, the court concluded that section 1281.85 authorizes the Judicial Council to adopt ethical standards for neutral arbitrators appointed by third party arbitration organizations.[127]
Next, the court turned to the issue of preemption.[128] The United States Supreme Court recognizes three types of preemption.[129] First, federal law preempts state law to the extent that state law expressly conflicts with federal law.[130] Second, federal law preempts state law where state law regulates conduct in a field that Congress intended federal law to govern exclusively.[131] Finally, federal law preempts state law where it is impossible to simultaneously comply with both state and federal requirements (“conflict preemption”).[132]
The 1934 Act does not contain an express preemption provision.[133] Moreover, Congress did not intend to preempt all matters involving arbitration.[134] Therefore, the court concluded that only conflict preemption applied to this case.[135]
The court then determined that the NASD regulations had preemptive force only if the SEC intended and had the authority to preempt the California Standards.[136] The court held that the SEC had both the power and the intent to preempt the California Standards.[137] In 1975, Congress granted the SEC broad authority to oversee and regulate SRO rules regarding customer disputes.[138] This authority includes the power to require the adoption of any rules the SEC deems necessary to adequately protect parties' rights in arbitration proceedings.[139] As a result, the SEC must approve any NASD rule before it goes into effect.[140] The court therefore concluded that NASD rules are consistent with the purposes of the 1934 Act because the SEC now reviews all NASD rules.[141] Thus, the court found that the same conflict preemption principles applied to NASD rules as federal statutes.[142]
The court stated that California Standards 7, 8, and 10 conflict with the requirements in the NASD Code.[143] California Standard 7 includes a comprehensive list of disclosure requirements for a person nominated or appointed as an arbitrator.[144] Similarly, California Standard 8 lists additional disclosure requirements for arbitrators participating in consumer arbitration.[145] In contrast, the NASD Code's disclosure requirements are relatively minimal.[146]
Additionally, California Standard 10 automatically disqualifies an arbitrator if a party serves a timely notice of disqualification.[147] Under the NASD Code, however, the Director of Arbitration ultimately decides whether to disqualify an arbitrator.[148] Thus, California Standards 7, 8, and 10 conflict with the NASD code.[149]
The court determined that the California Standards would adversely affect NASD arbitrations because provisions of the California Standards conflicted with NASD disclosure and disqualification rules.[150] Specifically, the court found that if the California Standards' disqualification provisions applied to NASD arbitrations, the NASD Director could easily disqualify any arbitrator.[151] Under the California Standards, arbitrators must disclose any party's affiliation with the arbitration provider.[152] NASD arbitrations always include one party that is an NASD member.[153] Therefore, if the California Standards apply to NASD arbitration proceedings, every arbitrator must make this disclosure.[154]
In response to this disclosure, under California Standard 10, a party may serve a disqualification notice.[155] If notice is proper and timely, the California Standards disqualify the arbitrator.[156] Therefore, if the California Standards apply to NASD arbitrations, the customer may disqualify any arbitrator based on the required disclosure of the broker/dealer's NASD membership.[157] For that reason, the court held that the NASD disqualification provision conflicted with the California Standards.[158] Accordingly, the court found that the NASD rules preempted these provisions of the California Standards.[159]
When presented with a preempted state statute, courts may sever the provisions of the statute that conflict with federal law.[160] The Jevne court, however, declined to sever the California Standards that conflicted with the NASD code.[161] Instead, the court held that the NASD rules preempted the California Standards in their entirety.[162]
The court reasoned that severance of an invalid provision was proper only if it was grammatically, functionally, and volitionally separable.[163] The court conceded that it could grammatically separate the three preempted provisions.[164] However, the court did not functionally separate the preempted standards because disqualification and disclosure were the California Standards' primary enforcement mechanisms.[165] Finally, the preempted standards were not volitionally separable because section 1281.85 required the California Standards to include disclosure and disqualification provisions.[166] Thus, the court preempted the California standards in their entirety.[167]
III. Analysis
The California Supreme Court erred in holding that the NASD rules preempt the California Standards.[168] Alternatively, even if three of the NASD rules do preempt the California Standards, the NASD does not preempt the California Standards in their entirety.[169] As a matter of public policy, heightened ethical requirements should be available to parties in securities arbitration.[170]
A. The Court Erred in Holding that the NASD Rules Preempt the California Standards
Federal law preempts state law to the extent that they conflict.[171] The Supreme Court has held this “conflict preemption” to apply in very limited situations.[172] Federal law preempts state law only when the state law could prevent or impair accomplishment of the purposes and objectives of the federal law.[173]
1. Because the NASD Rules Do Not Conflict with the California Standards, the NASD Rules Should Not Preempt the California Standards
Under this test for conflict preemption, the NASD rules should not preempt the California Standards.[174] By enacting the 1934 Act, Congress intended to protect investors in securities transactions.[175] The California Standards do not impair these objectives.[176] The Judicial Council intended the California Ethical Standards to direct the conduct of arbitrators, protect arbitration participants from bias, and promote confidence in arbitration.[177] Accordingly, the California Standards actually advance the objectives of the 1934 Act by also protecting parties in securities arbitration.[178] By enacting the California Standards, the Judicial Council addressed the problem that mandatory binding arbitration agreements sometimes resulted in unfairness.[179] Congress addressed this same problem when it passed the 1934 Act.[180] Therefore, the California Standards do not frustrate congressional purpose, and the 1934 Act should not preempt the California Standards.[181]
2. NASD Rules Do Not Have the Force of Federal Statutes
Additionally, NASD rules should not preempt SEC rules because the NASD is a private corporation.[182] Its rules do not have the force of statutes and therefore should not preempt the California Standards.[183] The fact that the SEC approved the NASD arbitration rules does not give the rules the preemptive force of a federal statute.[184]
The NASD regulations are not expressions of congressional intent.[185] The mere fact that the federal government regulates the NASD does not convert NASD rules into federal statutes.[186] Congress did not write the NASD rules or hold hearings regarding the NASD rules.[187] Thus, the NASD rules do not amount to an exercise of the legislative power of Congress.[188]
Furthermore, the NASD, a private corporation, composed the entire NASD Arbitration Code.[189] The NASD is a private for-profit corporation and is therefore not a state actor subject to constitutional constraints.[190] In this respect, it is no different than any other private corporation in the securities market.[191] It would be absurd to say that every rule that every securities corporation makes could potentially preempt state law.[192] Therefore, SRO rules do not have the force of federal statutes.
Moreover, SRO arbitration rules are private contract terms.[193] The Supreme Court has never held that private contract terms invoke preemption of state law.[194] To the contrary, case law suggests that private contract terms never preempt state law.[195] The Second Circuit Court of Appeals held that when parties incorporate SRO regulations into private arbitration agreements, such regulations are essentially private contract terms.[196] Accordingly, the customer must agree to SRO rules before the rules apply to disputes between a broker and customer.[197] If the customer does not agree, the rules do not apply.[198] On the other hand, the customer cannot choose to accept or decline a federal statute.[199] Thus, NASD rules should not receive the force of a federal statute, and the NASD regulations must not preempt the California Standards.[200]
One could argue that the NASD rules carry the force of federal law because the SEC approves the NASD rules.[201] SRO regulations preempt conflicting state law to the extent necessary to advance the goals of the 1934 Act.[202] One could argue that all SRO arbitration rules further the aims of the 1934 Act because the SEC now approves all SRO arbitration rules.[203]
Congress' 1975 amendments to the 1934 Act granted the SEC broad authority to approve any SRO arbitration rule necessary to protect statutory rights.[204] Opponents would argue that because the SEC approves all NASD rules, all NASD rules must advance the goals of the 1934 Act.[205] Under this view, NASD rules would be synonymous with SEC rules.[206] Accordingly, SRO rules manifest Congress' intent.[207] Therefore, opponents argue that NASD rules should preempt state law, because the SEC, a federal agency, approves the NASD rules.[208]
This argument fails, however, because an SRO rule can never preempt state law, even if it advances 1934 Act goals.[209] The fact that the SEC must approve SRO arbitration rules does not mean that SRO rules constitute federal regulations.[210] If this were the case, the requirement that SRO regulations must further the aims of the 1934 Act would be essentially worthless.[211] If SEC approval automatically converted SRO rules into federal statutes, courts would not have to determine whether SRO rules further the objectives of the 1934 Act.[212] If they were federal statutes, then SRO rules could stand on their own regardless of whether they furthered another statute's objectives.[213] Thus, the NASD rules are not federal statutes.[214] The NASD rules should not preempt the California Standards because SEC approval does not bestow NASD rules with the status of federal statutes.[215]
B. Even if the 1934 Act Preempts Several Specific Provisions in the California Standards, the 1934 Act Does Not Preempt the Entire California Standards
Even if the NASD rules preempt California Standards 7, 8, and 10, the NASD rules should not preempt the remainder of the California Standards.[216] Courts recognize a strong presumption against preemption.[217] Accordingly, federal law preempts state law only to the extent that they conflict.[218] The remaining fifteen California Standards do not conflict with federal law.[219] The test for severability in California is whether the preempted provisions are functionally, grammatically, and volitionally separable from the rest of the enactment.[220]
A conflicting part is grammatically separable if it is distinct and the court can remove it without affecting the wording of the other provisions.[221] Standards 7, 8, and 10 concern only disclosure and disqualification of arbitrators.[222] The court can remove these standards without affecting the wording of the remainder of the California Standards.[223] Therefore, the conflicting California Standards are grammatically separable.[224]
A conflicting part is functionally separable if it is not necessary to the provision's operation and purpose.[225] Standards 7, 8, and 10 are the California Standards' primary enforcement mechanisms.[226] Those standards are not necessary, however, because SRO disqualification and disclosure procedures effectively regulate arbitration proceedings.[227] Accordingly, SRO rules could replace the preempted California disqualification and disclosure provisions.[228] Thus, the conflicting California Standards are functionally separable.[229]
A conflicting part is volitionally separable if it is not of critical importance to the provision's enactment.[230] Standards 7, 8, and 10 are not critical to the California Standards' enactment.[231] The legislature enacted California Code of Civil Procedure section 1281.85 to protect investors.[232] All SEC rules must also protect investors.[233] SRO rules can provide disclosure and disqualification rules for neutral arbitrators in California.[234] By replacing the preempted California Standards' disclosure and disqualification rules, SRO rules could meet section 1281.85's requirements.[235] Thus, the conflicting California Standards are volitionally separable.[236] NASD rules should not preempt all the California Standards because of the strong presumption against preemption, and because the court may sever the preempted standards.[237]
C. As a Policy Matter, Heightened Ethical Standards Should Be Available to Parties Subject to NASD Administered Arbitration Agreements
In addition to the strong presumption against preemption, public policy suggests that NASD rules do not preempt the California Standards.[238] The NASD handles ninety percent of all securities disputes submitted to arbitration.[239] Some analysts, however, have historically regarded the NASD as an expensive and unfriendly venue for investors.[240] The NASD is often considered as a hostile venue, because it is particularly vulnerable to industry bias.[241]
1. The California Standards Further State and Federal Policy Favoring Fair and Effective Arbitration
Because of the potential for bias, the California Standards further the state and federal policies favoring arbitration.[242] The California Standards advance this policy because they provide additional protection to investors in the form of heightened disclosure and disqualification requirements.[243] The California Standards make arbitration fairer because they allow much easier disqualification of arbitrators than the NASD rules.[244] Accordingly, parties may easily disqualify biased arbitrators under the California Standards.[245] Furthermore, heightened disclosure requirements expose possible conflicts of interest that may affect the outcome of arbitration proceedings.[246] Disclosure requirements lessen the likelihood that the parties will select a biased arbitrator.[247] Thus, such requirements increase fairness in arbitration proceedings.[248]
One could argue that the California Standards do not advance the state or federal policies favoring efficient arbitration.[249] Rather, the California Standards could arguably actually hinder this policy.[250] Specifically, one could argue that the California Standards' disclosure requirements place extreme and unnecessary burdens on arbitrators already facing rigorous NASD disclosure rules.[251] Among other things, arbitrators must disclose certain relationships, current and prior arbitration experience, and financial interests.[252] This requires arbitrators to keep extensive records and exposes them to potential liability.[253] For these reasons, the California Standards result in a much smaller arbitrator roster from which to select panelists.[254] Accordingly, the California Standards qualify less arbitrators, placing an unreasonable burden on existing arbitrators.[255] Therefore, one could argue that the California Standards actually impede state and federal policy endorsing efficient arbitration by unnecessarily burdening arbitrators.[256]
This argument fails because the California Standards' disclosure requirements do not impede efficient arbitration.[257] Rather, the California Standards make information available to parties that allows them to secure truly fair and unbiased decision makers.[258] A party's satisfaction with arbitration proceedings is greater if they believe an impartial arbitrator decided their case.[259] Accordingly, investors are more likely to submit to binding arbitration if they are confident that the outcome of arbitration is fair and unbiased.[260]
Furthermore, if parties perceive arbitration as a fair process, they are less likely to pursue litigation.[261] If parties resolve their disputes through arbitration instead of litigation, courts face a lesser burden.[262] Therefore, the California Standards advance both state and federal policy favoring efficient arbitration.[263]
In addition, disclosure requirements under the California Standards are not excessive.[264] California Standard 7 requires arbitrators to disclose significant personal and professional relationships and financial interests with a party or party's counsel.[265] The NASD code also requires most of these disclosures.[266] The California Standards, however, provide for automatic disqualification of parties who make such disclosures.[267] Accordingly, the California Standards' disclosure requirements do not place excessive burdens on arbitrators.[268] The disclosure requirements under the California Standards are not substantially greater than the disclosures required by the NASD rules.[269] Thus, the California Standards further state and federal policy favoring fair and efficient arbitration.[270]
2. A Significant Risk of Bias Exists by the NASD in Favor of Securities Brokers
The extra protection of the California Standards also protects investors from an even greater potential for bias.[271] The NASD potentially favors securities brokers because the NASD depends on the securities industry for financial support.[272] Member firms fund the NASD.[273] Further, member firms appear before the NASD in arbitration proceedings.[274] As a result, the same institutions that the NASD disciplines and regulates also support the NASD.[275] Parties to securities arbitration need extra protection because of this conflict of interest.[276] The California Standards offer this heightened protection in the form of disclosure and disqualification requirements.[277] Thus, the NASD rules should not preempt the California Standards, because the Standards afford this needed protection.[278]
3. The Additional Protection Afforded by the California Standards Is Especially Important Because of the Extremely Limited Scope of Judicial Review of an Arbitration Award
The heightened protection afforded by the California Standards is especially important because courts firmly limit judicial review of arbitration awards.[279] Parties generally cannot change the outcome of arbitration proceedings.[280] The Federal Arbitration Act limits judicial intervention to specific circumstances and excludes any judicial review on the merits.[281] If the arbitrator's decision relates to construction of the contract, courts will not overrule the arbitrator because they interpret the contract differently.[282] Additionally, courts must confirm arbitration awards even in the face of erroneous misinterpretations of law.[283] Courts are extremely deferential towards the judgment of arbitrators and intervene in only the most egregious circumstances.[284] It is therefore extremely important for arbitration proceedings to be fair because it is difficult to overturn an arbitration award.[285]
The California Standards help accomplish this goal by providing heightened disclosure requirements for neutral arbitrators.[286] These heightened disclosure requirements are especially important because they expose potential conflicts of interest that may affect the outcome of arbitration proceedings.[287] Exposing all conflicts is the only way to ensure against biased arbitration awards.[288] Accordingly, the additional protection afforded by the California Standards is especially important because of the extremely limited scope of judicial review of an arbitration award.[289]
Conclusion
In Jevne v. Superior Court, the California Supreme Court erred in holding that the NASD rules preempt the California Standards.[290] The NASD rules should not preempt the California Standards because the NASD does not conflict with the California Standards.[291] Even if the 1934 Act preempts several specific provisions in the California Standards, the 1934 Act should not preempt the California Standards in their entirety.[292] As a policy matter, parties subject to NASD administered arbitration agreements should have access to heightened ethical standards.[293] Thus, the NASD rules should not preempt the California Standards.[294]
* Marissa C. Marion graduated from the University of California, Davis, School of Law in 2007. She was a member of the U.C. Davis Law Review, and was Senior Articles Editor of the U.C. Davis Business Law Journal. Marissa currently works at Cooley Godward Kronish.
[1] See Kenneth R. Davis, The Arbitration Claws: Unconscionability in the Securities Industry, 78 B.U. L. Rev. 255, 317 (1998) (stating that mandatory arbitration clauses appear in overwhelming majority of managed accounts); Therese Maynard, Securities Arbitration: A Decade After McMahon: McMahon: The Next Ten Years, 62 Brook. L. Rev. 1533, 1558 (1996) (discussing important public policy concerns arising from widespread use of arbitration as primary dispute resolution forum).
[2] Arbitration is generally quicker and less expensive than litigation. See Mark J. Astarita, Hearing Hearing: Just What Happens at an Arbitration, SEC Law (1998), available at http://www.seclaw.com/docs/298.htm (last visited Mar. 1, 2007) (asserting that arbitration is most efficient form of dispute resolution); NASD, Start an Arbitration or Mediation, Sept. 7, 2005, available at http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=521&ssSourceNodeId=12 (last visited Mar. 1, 2007) (discussing substantial monetary advantages of arbitration over litigation). But see Mark J. Astarita, Settling the Matter, SEC Law (2005), available at http://www.seclaw.com/docs/896.htm (discussing increase in settlements between brokers and customers resulting from rising arbitration costs).
[3] Maynard, supra note 1, at 1557.
[4] Securities Exchange Act of 1934, 15 U.S.C. § 78o(b)(8) (2005) (stating that securities broker/dealers must be member of securities association); see also 15 U.S.C. § 78o-3 (defining registered securities organizations); Davis, supra note 1, at 291 (stating that brokers must become members of at least one SRO).
[5] Jevne v. Superior Court, 111 P.3d 954, 957 (Cal. 2005); Self-Regulatory Organization, http://www.investopedia.com/terms/s/sro.asp (last visited Feb. 5, 2006); Self-Regulatory Organization Definition,
http://www.investorwords.com/4465/Self_Regulatory_Organization.html (last visited Mar. 1, 2007); Jevne, 111 P.3d at 957.
[6]See NASD BrokerCheck,
http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_005882&ssSourceNodeId=5 (last visited Mar. 1, 2007) (making information on securities professionals and SRO organizations available to investors).
[7] Donald R. McNeil, NASD Arbitration of Securities Disputes (2004), http://library.findlaw.com/2004/Jan/7/133242.html; see Davis, supra note 1, at 317; see also National Association of Securities Dealers: Rules and Regulations, http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=6 (last visited Jan. 30, 2005) (discussing NASD's role in American markets as primary private-sector regulator of securities).
[8] See Davis, supra note 1, at 317; McNeil, supra note 7.
[9] See Davis, supra note 1, at 317; McNeil, supra note 7.
[10] See generally Ethics Standards for Neutral Arbitrators in Contractual Arbitrations § 1(a) (2002), available at
http://www.courtinfo.ca.gov/rules/documents/pdfFiles/ethics_standards_neutral_arbitrators.pdf [hereinafter Cal. Ethics Standards] (providing rules governing neutral arbitrators' conduct).
[11] Jevne v. Superior Court, 111 P.3d 954, 957 (Cal. 2005).
[12] See Cal. Ethics Standards, supra note 10, § 1(a) (stating that Standards guide conduct of arbitrators in California); see also Cal. Civ. Proc. Code § 1281.85 (West 2003) (authorizing California Judicial Council to establish ethics standards applicable to all neutral arbitrators in California).
[13] Because the California Standards direct the conduct of arbitrators in California, arbitrators faced both the guidance of the California Standards and the NASD Code. See Jevne, 111 P.3d at 957; Cal. Ethics Standards, supra note 10, § 1(a); NASD Rule 10300, available at http://nasd.complinet.com/nasd/display/display.html?rbid=1189&element_id=1159000927 (last visited Jan. 30, 2006).
[14] See infra Part III.
[15] See infra Part III.
[16] See infra Part III.
[17] See infra Part I.
[18] See infra Part II; see generally Credit Suisse v. Grunwald, 400 F.3d 1119, 1121 (9th Cir. 2005) (holding that the 1934 Act preempts California Standards for SRO-administered arbitration); Jevne, 111 P.3d at 958 (holding that NASD regulations preempt California Ethical Standards in securities arbitration).
[19] See infra Part III (arguing that there is significant risk of bias by NASD in favor of securities brokers).
[20] See infra Part III.
[21] See infra Part III.
[22] See generally Federal Arbitration Act, 9 U.S.C. §§ 1-14 (1954) (establishing federal procedural arbitration rules); Southland Corp. v. Keating, 465 U.S. 1, 12 (1984) (discussing strong federal policy favoring arbitration); Cal. Ethics Standards, supra note 10 (establishing rules for arbitrators' conduct in state arbitration proceedings).
[23] Ann E. Krasuski, Mandatory Arbitration Agreements Do Not Belong in Nursing Home Contracts with Residents, 8 DePaul J. Health Care L. 263, 293 (2004) (stating that arbitration is less expensive than litigation and provides faster resolution of disputes); Thomas B. Metzloff, The Unrealized Potential of Malpractice Arbitration, 31 Wake Forest L. Rev. 203, 208 (1996) (arguing that arbitration is cheaper and faster than litigation); Elizabeth Rolph et al., Arbitration Agreements in Health Care: Myths and Reality, 60 Law & Contemp. Probs. 153, 155 (1996) (discussing reasons courts prefer arbitration as vehicle for resolving disputes).
[24] See infra Part I.B (discussing California Standards' heightened disclosure and disqualification requirements).
[25] See generally Cal. Ethics Standards, supra note 10 (establishing rules for arbitrators' conduct in state arbitration proceedings).
[26] Cal. Const. art. VI, § 6.
[27] Id. (stating that role of Judicial Council is to “ensure the consistent, independent, impartial, and accessible administration of justice.”).
[28] See Judicial Council: About, History and Role, 2005, http://www.courtinfo.ca.gov/courtadmin/jc/about.htm (discussing Judicial Council's objective of advancing consistent and impartial administration of justice).
[29] People v. Hall, 883 P.2d 974, 975 (Cal. 1994) (finding rule adopted by California Judicial Council invalid because rule conflicted with statute); Judicial Council: About, History and Role, 2005, supra note 28.
[30] Trans-Action Commercial Investors, Ltd. v. Firmaterr, Inc., 60 Cal. App. 4th 352, 363-64 (1997); see also Hall, 883 P.2d at 980-81 (noting that Judicial Council has limited authority and may not adopt rules that conflict with statutory intent); In re Robin M., 579 P.2d 1, 5-6 (Cal. 1978) (invalidating rule established by Judicial Council because it conflicted with legislative intent); Cal. Court Reporters Ass'n v. Judicial Council of Cal., 39 Cal. App. 4th 15, 25-26 (1995).
[31] Firmaterr, 60 Cal. App. 4th at 364 (“A rule of court may go beyond the provisions of a related statute so long as it reasonably furthers the statutory purpose”).
[32] See Cal. Civ. Proc. Code § 1281.85 (West 2003); Jevne v. Superior Court, 111 P.3d 954, 958 (Cal. 2005); Ovitz v. Schulman, 133 Cal. App. 4th 830, 853 (2005) (stating that California Standards do not conflict with FAA's purpose).
[33] Cal. Civ. Proc. Code § 1281.85 (West 2003); Jevne, 111 P.3d at 958.
[34] The California Legislature's purpose in enacting section 1281.85 was to provide “minimum ethical standards and remedies for the arbitrator's failure to comply with disclosure requirements.” Assembly Comm. on Judiciary, Analysis of Sen. Bill No. 475, 2001-2002 Sess., at 1 (2001).
[35] See § 1281.85; Jevne, 111 P.3d at 957.
[36] Lynn Holton, Public Information Officer, Judicial Council Approves Ethics Standards for Arbitrators, Apr. 19, 2002, http://www.courtinfo.ca.gov/presscenter/newsreleases/NR34-02.HTM.
[37] Cal. Ethics Standards, supra note 10, § 1 cmt. (stating that California Standards guide arbitrator's conduct and inform and protect participants in arbitration); see Russell D. Feingold, Mandatory Arbitration: What Process is Due?, 39 Harv. J. on Legis. 281, 284 (2002) (discussing inherent unfairness in binding arbitration agreements between parties with unequal bargaining power).
[38] See Feingold, supra note 37, at 284.
[39] Id. at 288.
[40] See generally Maynard, supra note 1 (discussing inherent problems in binding arbitration in customer-broker disputes and urging reform).
[41] Feingold, supra note 37, at 288 (discussing inherent unfairness in binding arbitration agreements between parties with unequal bargaining power).
[42] Rifkind & Sterling v. Rifkind, Inc., 28 Cal. App. 4th 1282, 1292-93 (1994) (holding that no constitutional authority supports due process right to judicial review of arbitration award).
[43] United Steelworkers of Am. v. Enterprise Wheel and Car Co., 363 U.S. 593, 599 (1960) (disallowing judicial review of arbitrator's awards on merits for preservation of finality of arbitration award); Advest, Inc. v. McCarthy, 914 F.2d 6, 6 (1st Cir. 1990); French v. Merrill Lynch, 784 F.2d 902, 906 (9th Cir. 1985).
[44] United Steelworkers of Am. v. Am. Mfg. Co., 363 U.S. 564, 568 (1960) (stating that courts may only determine whether party seeking arbitration is making claim governed by contract, not whether moving party is right or wrong).
[45] Feingold, supra note 37, at 284-89.
[46] See generally Cal. Ethics Standards, supra note 10 (stating that Judicial Council enacted California Standards to protect participants in arbitration and promote public confidence in arbitration).
[47] Id.
[48] Id.
[49] Id. § 1 cmt.
[50] Id.
[51] See Cal. Civ. Proc. Code § 1281.85 (West 2003) (stating minimum conduct requirements designed to promote fairness in private arbitration proceedings); see also Cal. Ethics Standards, supra note 10.
[52] Id.
[53] Id.
[54] Id. § 5.
[55] Id.
[56] Id. § 7.
[57] Id. § 10.
[58] See Jevne v. Superior Court, 111 P.3d 954, 967 (Cal. 2005) (discussing differences between California Standards and NASD rules).
[59] Id. (explaining differences in disclosure requirements between California Standards and NASD rules).
[60] Id.; Cal. Ethics Standards, supra note 10, § 7 (listing matters that person nominated as arbitrators must disclose).
[61] See Cal. Ethics Standards, supra note 10, § 7. Required disclosures include family and professional relationships, membership in certain organizations, significant relationships with attorneys in the proceedings, and prior service as an arbitrator.
[62] Jevne, 111 P.3d at 967 (discussing difference in disclosure requirements between California Standards and NASD Code); see also Cal. Ethics Standards, supra note 10, § 7; NASD Rule 10312, available at http://nasd.complinet.com/nasd/display/display.html?rbid=1189&record_id=1159001495 (last visited Jan. 30, 2005) (stating NASD disclosure requirements).
[63] Jevne, 111 P.3d at 967; NASD Rule 10312, supra note 62.
[64] See Cal. Ethics Standards, supra note 10, § 7; NASD Rule 10308, available at http://nasd.complinet.com/nasd/display/display.html?rbid=1189&element_id=1159001089 (last visited Mar. 1, 2007); NASD Rule 10312, supra note 62.
[65] Jevne, 111 P.3d at 969; Cal. Ethics Standards, supra note 10, § 7.
[66] Jevne, 111 P.3d at 969-70; NASD Rule 10308, supra note 64.
[67] See Jevne, 111 P.3d at 967 (discussing differences between California Standards and NASD Code); Cal. Ethics Standards, supra note 10, §§ 1, 7; NASD Rule 10308, supra note 64; NASD Rule 10312, supra note 62.
[68] See Securities and Exchange Act of 1934, 15 U.S.C. § 78(b) (2000) (regulating securities transactions between shareholders).
[69] See id.
[70] Id. See generally People's Sec. Co. v. S.E.C., 289 F.2d 268, 270 (5th Cir. 1961) (discussing importance of the 1934 Act as primary regulatory mechanism of federal securities markets).
[71] See 15 U.S.C. § 78(b) (2000) (stating that federal government has sufficiently compelling interest in national securities market to require widespread regulation of markets).
[72] See Id. (noting that the 1934 Act applies to secondary markets or transactions between customers, rather than transactions between corporations and shareholders); see also Desiderio v. Nat'l Ass'n of Sec. Dealers, Inc., 191 F.3d 198, 201 (2d Cir. 1999) (“The NASD regulates the over-the-counter securities market, which includes securities firms and registered representatives who buy and sell over-the-counter-securities.”); People's Sec. Co., 289 F.2d at 270 (stating that purpose of the 1934 Act is to regulate securities subsequent to their initial issue).
[73] People's Sec. Co., 289 F.2d at 270. Primary markets facilitate the issuance of securities by a corporation for sale to customers. Id.
[74] See 15 U.S.C. § 78(d).
[75] See id.
[76] 15 U.S.C. §§ 78(d), 78(s) (stating that SEC oversees and regulates SRO rules relating to customer disputes); Shearson/American Express v. McMahon, 482 U.S. 220, 233-44 (1987); Jevne v. Superior Court, 111 P.3d 954, 966 (Cal. 2005) (discussing SEC's authority to regulate SROs); see also NASD – About NASD, http://www.nasd.com/AboutNASD/index.htm (discussing NASD's role in American markets as primary private-sector regulator of securities) (last visited Nov. 2, 2005).
[77] See National Association of Securities Dealers, supra note 76.
[78] Desiderio, 191 F.3d at 206 (discussing NASD's role as private actor rather than agent of state).
[79] Id.
[80] Arbitration & Mediation: NASD Dispute Resolution, http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=12 (last visited Feb. 5, 2006). The NASD oversees approximately 8000 arbitrations and 1000 mediations per year. Id.
[81] NASD Rule 10300, supra note 13 (providing access to NASD arbitration forum for NASD members).
[82] Id.
[83] Jevne v. Superior Court, 111 P.3d 954, 958 (Cal. 2005); see Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 234 (1987) (stating that SEC approves NASD arbitration procedures).
[84] See generally Brief for Attorney General Bill Lockyer as Amicus Curiae Supporting Petitioner, Jevne v. Superior Court, 111 P.3d 954 (Cal. 2005) (No. S121532) (discussing alternative forums available to parties).
[85] Id.; see also NASD Regulation, Inc., NASD Regulation's Office of Dispute Resolution Participates in SICA's Pilot Program; Offers Parties a Non-SRO Forum for Dispute Resolution, Jan. 24, 2000, http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_011326 (last visted Mar. 1, 2007) (stating that parties may choose other arbitration forums for securities disputes).
[86] See NASD Rule 10204, available at http://nasd.complinet.com/nasd/display/display.html?rbid=1189&record_id=1159001049&highlight=code+of+arbitration+procedure (last visited Jan. 30, 2006) (stating that NASD Uniform Arbitration Code only applies in NASD administered arbitrations); NASD Regulation, Inc., supra note 85.
[87] See Press Release, National Association of Securities Dealers: Arbitration Task Force Issues 70 Recommendations in Largest Revamping of Securities Arbitration Since Its Start More than a Century Ago, Jan. 22, 1996, http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_010550 (last visited Mar. 1, 2007) (stating that NASD provides forum for eighty-five percent of all arbitration claims brought in securities industry).
[88] See generally National Association of Securities Dealers, supra note 76 (discussing NASD's role in American markets as primary private-sector regulator of securities).
[89] See Jevne, 111 P.3d at 958 (holding that NASD rules preempt California Standards in securities arbitration).
[90] See Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice as Amici Curiae Supporting Petitioner at 6, Jevne v. Superior Court, 111 P.3d 954 (Cal. 2005) (No. S121532); NASD Rule IM 10100-(f), http://nasd.complinet.com/nasd/display/display.html?rbid=1189&record_id=1159001593&highlight=im+10100 (requiring that California investors waive California Standards before NASD arbitration could proceed in California).
[91] NASD Rule IM 10100-(f), supra note 90 (requiring that investors waive California Standards in arbitrations administered in California).
[92] Id.; see also Jevne, 111 P.3d at 959 (discussing waiver requirement).
[93] Jevne, 111 P.3d at 959 n.2.
[94] See id. (discussing Perino's report); Report to the SEC Regarding Arbitrator Conflict Disclosure Requirements in NASD and NYSD Securities Arbitrations, Nov. 12, 2002, http://www.sec.gov/news/press/2002-161.htm (last visited Mar. 1, 2007) [hereinafter Report to the SEC].
[95] Report to the SEC, supra note 94.
[96] Id.
[97] Id.
[98] Self Regulatory Organizations, Exchange Act Release No. 34-46562, 67 Fed. Reg. 62085-01 (Oct. 3, 2002) (establishing formal SEC approval of NASD waiver program).
[99] NASD Rule IM 10100-(f), supra note 90; see also Jevne v. Superior Court, 111 P.3d 954, 959 (Cal. 2005) (discussing NASD waiver program as approved by SEC).
[100] See generally Credit Suisse v. Grunwald, 400 F.3d 1119, 1121 (9th Cir. 2005) (holding that the 1934 Act preempts California Standards for SRO-administered arbitration); Jevne, 111 P.3d at 958 (holding that NASD regulations preempt California Standards).
[101] See Credit Suisse, 400 F.3d at 1121; Jevne, 111 P.3d at 958.
[102] Credit Suisse, 400 F.3d at 1121.
[103] Id.
[104] Jevne, 111 P.3d at 958, 960 (stating that Ninth Circuit's decision in Credit Suisse coincides with California Supreme Court's decision in Jevne).
[105] Id. at 958.
[106] Id.
[107] Id.
[108] Id.
[109] Id.
[110] Id. at 959.
[111] Id.
[112] Id.
[113] Id. at 960.
[114] Id. at 958.
[115] Id.
[116] Id.
[117] Id.
[118] Id.
[119] Id.
[120] Id.
[121] Id. at 960-64.
[122] Id. at 961-62.
[123] Id. at 960-64 (2005) (discussing legislative history of § 1281.85); see also Cal. Const. art. VI, § 6; People v. Hall, 883 P.2d 974, 980 (Cal. 1994); In Re Robin M., 579 P.2d 1, 5-6 (Cal. 1978).
[124] Jevne, 111 P.3d at 960-64.
[125] Id.
[126] Id. at 962.
[127] Id. at 963 (discussing holding that the 1934 Act preempts California Standards).
[128] Id.
[129] Id. at 963-64 (discussing three types of preemption).
[130] Crosby v. Nat'l Foreign Trade Council, 530 U.S. 363, 372 (2000); Savage v. Jones, 225 U.S. 501, 533 (1912); Jevne v. Superior Court, 111 P.3d 954, 964 (Cal. 2005).
[131] Jevne, 111 P.3d at 963. This is “field preemption”. See United States v. Locke, 529 U.S. 89, 108 (2000); Charleston & Western Carolina Ry. Co. v. Varnville Furniture Co., 237 U.S. 597, 604 (1915).
[132] Jevne, 111 P.3d at 963. See Crosby, 530 U.S. at 372; Hines v. Davidowitz, 312 U.S. 52, 66-67 (1941).
[133] See Securities and Exchange Act of 1934, 15 U.S.C. § 78o(b) (2000) (regulating securities transactions between shareholders); Jevne, 111 P.3d at 964.
[134] Jevne, 111 P.3d at 964.
[135] Id.
[136] Id. at 966-67.
[137] Id.
[138] Id. at 966.
[139] Id.
[140] Id. at 966.
[141] Id.
[142] Id.
[143] Id. at 967.
[144] Id.; Cal. Ethics Standards, supra note 10, § 7.
[145] Jevne, 111 P.3d at 966; Cal. Ethics Standards, supra note 10, §8..
[146] The NASD disclosure requirements only address circumstances that might preclude the arbitrator from rendering an impartial decision. Id. at 967. These circumstances include a financial interest in the outcome of the arbitration and relationships that might affect impartiality. Id. (discussing difference in disclosure requirements between California Standards and NASD Code); see also Cal. Ethics Standards, supra note 10, § 7 (specifying disclosure requirements under California Standards); NASD Rule 10312, supra note 62 (listing disclosures required by potential neutral arbitrators).
[147] Jevne, 111 P.3d at 967; Cal. Ethics Standards, supra note 10, § 7.
[148] Jevne, 111 P.3d at 968; NASD Rule 10308, supra note 64.
[149] Jevne, 111 P.3d at 968 (holding that NASD Code preempts three of California Standards).
[150] Id. at 954-61.
[151] Id. at 959.
[152] Id. at 960; Cal. Ethics Standards, supra note 10, § 8(b)(1)(A).
[153] In an NASD administered arbitration the securities broker is always an NASD member because only NASD members have access to the NASD dispute resolution forum. See NASD Rule 10300, supra note 13.
[154] Jevne, 111 P.3d at 970 (“These different systems of arbitrator disqualification are fundamentally irreconcilable. Standard 10 could require disqualification of an arbitrator who could not be disqualified under the NASD rules.”); see also Mayo v. Dean Witter Reynolds, Inc., 258 F. Supp. 2d 1097, 1107 (N.D. Cal. 2003) (“Application of the California standards thus would greatly reduce, if not eliminate in practice, the role of the Director of Arbitration in the disqualification process.”).
[155] Jevne, 111 P.3d at 971; Cal. Ethics Standards, supra note 10, § 10 (stating that party may serve disqualification notice based on any disclosure made by arbitrator).
[156] Cal. Ethics Standards, supra note 10, § 10.
[157] Jevne, 111 P.3d at 971.
[158] Id.
[159] Id. at 971-72.
[160] See, e.g., Hotel Employees & Rest. Employees Int'l Union v. Davis, 981 P.2d 990, 1009 (Cal. 1999) (stating courts may sever valid parts of state statute that conflict with California Constitution from invalid parts); see also Jevne, 111 P.3d at 971-72 (discussing severability of invalid provisions of preempted state law).
[161] Jevne, 111 P.3d at 971-72.
[162] Id. at 972.
[163] Id. at 971 (quoting Hotel Employees, 91 P.2d at 1009).
[164] Id. at 971 (holding that court could remove preempted California Standards without affecting wording of other standards).
[165] Id. at 972 (stating that preempted California Standards are not functionally separable because they enforce remainder of standards).
[166] Id.
[167] Id.
[168] See generally Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 26-27 (arguing against preemption of California Standards); Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing that NASD rules should not preempt California Standards).
[169] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 26-27; infra Part III.B.
[170] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 35-36 (arguing that public policy requires that NASD rules do not preempt California Standards); infra Part III.C.
[171] Crosby v. Nat'l Foreign Trade Council, 530 U.S. 363 (2000); (“[E]ven if Congress has not occupied the field, state law is naturally preempted to the extent of any conflict with a federal statute.”); California v. ARC America Corp., 490 U.S. 93, 100-01 (1989); Hines v. Davidowitz, 312 U.S. 52, 66-67 (1941).
[172] Maryland v. Louisiana, 451 U.S. 725, 747 (1981) (stating that federal law preempts state law when it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress”); Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963).
[173] Maryland, 451 U.S. at 747; Paul, 373 U.S. at 142-43.
[174] See Brief for Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 34-43 (arguing against preemption of California Standards).
[175] Lank v. N.Y. Stock Exch., 548 F.2d 61, 64 (2d Cir. 1977); James D. Cox, Securities Regulation 654-55 (2d ed. 1997); Kevin C. Bartels, “Click Here to Buy the Next Microsoft”: The Penny Stock Rules, Online Microcap Fraud, and the Unwary Investor, 75 Ind. L.J. 353, 353-54 (2000) (stating that Congress created the 1934 Act to prevent fraud); Marco Ferri, Securities Regulations as a Limitation on Access to Foreign Securities for the Individual United States Investor, 11 Fla. J. Int'l L. 473, 473 (1997) (stating that Congress enacted the 1934 Act to protect investors).
[176] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 14-15.
[177] Cal. Ethics Standards, supra note 10, § 1 cmt.
[178] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 14-15 (arguing that the 1934 Act does not preempt California Standards because California Standards do not frustrate Congress' purpose in enacting the 1934 Act).
[179] Cal. Ethics Standards, supra note 10, § 1 cmt (stating that purpose of California Standards is guiding arbitrator's conduct and informing and protecting participants in arbitration); Feingold, supra note 37, at 284 (discussing inherent unfairness in binding arbitration agreements between parties with unequal bargaining power).
[180] See Lank, 548 F.2d at 64; Cox, supra note 175, at 654-55; Ferri, supra note 175, at 473.
[181] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 34-43 (discussing benefits of added protection of California Standards for parties in NASD administered securities arbitration).
[182] See Desiderio v. NASD, Inc., 191 F.3d 198, 206 (2d Cir. 1999).
[183] Id.
[184] Petrie v. Pac. Stock Exch., 982 F. Supp. 1390 (N.D. Cal. 1997); see Cremin v. Merrill Lynch Pierce Fenner & Smith, 957 F. Supp. 1460, 1466 (N.D. Ill. 1997).
[185] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 20-21 (arguing that NASD rules are not official expressions of Congressional intent).
[186] Desiderio, 191 F.3d at 206 (stating that just because NASD is subject to extensive state regulation does not convert that entity's actions into state action).
[187] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 20 (arguing that SEC approval of NASD rules does not convert rules into expressions of congressional intent).
[188] See Desiderio, 191 F.3d at 206; Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 7.
[189] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 20; National Association of Securities Dealers, About NASD, Nov. 2, 2005, supra note 76 (stating NASD is private corporation).
[190] See Desiderio, 191 F.3d at 206 (“The NASD is a private actor, not a state actor. It is a private corporation that receives no federal or state funding. Its creation was not mandated by statute, nor does the government appoint its members or serve on any NASD board or committee.”).
[191] Id. See generally Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing that NASD rules should not preempt California Standards).
[192] See Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 6.
[193] See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Georgiadis, 903 F.2d 109, 113 (2d Cir. 1990); see generally Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing that SRO rules incorporated into private arbitration agreements are private contract terms and have no preemptive effect).
[194] See Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 6 (“Neither JB Oxford nor Interveners cite any authority for the proposition that private contract terms can trigger Supremacy Clause preemption of state law and the Attorney General knows of no such authority”).
[195] See Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 212 (1985) (holding that labor code provision does not give substantive portions of private agreements force of federal law); United States v. Morgan, 230 F.3d 1067, 1073-74 (8th Cir. 2000) (Bye, J., concurring); Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 6-7; David E. Engdahl, The Spending Power, 44 Duke L.J. 1, 71 (1994) (stating that private contract terms are not among laws of United States made in pursuance of Constitution to which Supremacy Clause applies).
[196] See Georgiadis, 903 F.2d 109 at 113.
[197] Id.
[198] Id.
[199] Id.
[200] Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 6-8 (arguing that SRO arbitration rules are private contract terms and should not receive force of federal statutes).
[201] See Brief for NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc. as Amici Curiae Supporting Interveners at 2-8, Jevne v. Superior Court, 111 P.3d 954 (Cal. 2005) (No. S121532) (arguing that NASD rules preempt California Standards); Jevne, 111 P.3d at 965-66.
[202] See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 127 (1973); Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 16 (discussing U.S. Supreme Court's holding in Ware); see also Jevne, 111 P.3d at 965-67 (discussing Ware).
[203] See Amicus Brief for NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc., supra note 201, at 4-6 (arguing that SEC has already determined that SRO rules coincide with aims of the 1934 act); see also Jevne, 111 P.3d at 965-67.
[204] Jevne, 111 P.3d at 966 (discussing 1975 amendments to the 1934 Act). See generally Amicus Brief for NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc., supra note 201 (arguing that NASD preempts California Standards).
[205] See Jevne, 111 P.3d at 965-67; Amicus Brief for NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc., supra note 201, at 4-6.
[206] See Amicus Brief for NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc., supra note 201, at 4-6.
[207] Jevne, 111 P.3d at 965-68; see id.
[208] Jevne, 111 P.3d at 965-67; Amicus Brief for NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc., supra note 201, at 4-6.
[209] Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 137-38 (1973); Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 19 (arguing against preemption of California standards).
[210] Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 7 (arguing that SEC approval does not convert NASD rules into federal statutes).
[211] See id. at 19 (arguing that Ware is controlling law and SRO rules must advance purposes of the 1934 Act before they preempt state law).
[212] Id. at 19.
[213] See id.
[214] Id.
[215] Id. (arguing against preemption of California Standards).
[216] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 27.
[217] See N.Y. Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 654 (1995) (stating that courts must address preemption issues with “starting presumption that Congress did not intend to supplant state law”); Pac. Gas & Elec. Co. v. State Energy Res., Conservation & Dev. Comm'n, 461 U.S. 190, 203-04 (1983) (describing three instances in which federal law may preempt state law); Peatros v. Bank of Am., 990 P.2d 539, 542 (Cal. 2002) (stating that preemption is fundamental question of congressional intent, and courts must start with presumption that there is no intent). See generally Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing against preemption of California Standards).
[218] See English v. Gen. Elec. Co., 496 U.S. 72, 2279 (1990); Nordyke v. King, 44 P.3d 133, 138 (Cal. 2002) (“Partial preemption does not invalidate the Ordinance as a whole.”); Peatros, 990 P.2d at 542 (stating that federal law preempts state law to extent that they conflict with each other and no further); see also Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 27 (arguing that NASD regulations should not preempt California Standards in their entirety).
[219] Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 27.
[220] Jevne v. Superior Court, 111 P.3d 954, 965-67 (Cal. 2005).
[221] Id.; Hotel Employees & Rest. Employees Int'l Union v. Davis, 981 P.2d 990, 1009 (Cal. 1999); Calfarm Ins. Co. v. Deukmejian, 771 P.2d 1247, 1256 (Cal. 1989).
[222] See Jevne, 111 P.3d at 971-72 (stating that Standards 7, 8, and 10 are grammatically separable); Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 26 (arguing that NASD should not preempt California Standards in their entirety).
[223] See Jevne, 111 P.3d at 971-72; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 26; Cal. Ethics Standards, supra note 10, §§ 7-8, 10.
[224] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 27.
[225] Jevne, 111 P.3d at 971-72; Hotel Employees, 981 P.2d at 1009; Calfarm, 771 P.2d at 1256.
[226] Jevne, 111 P.3d at 972 (stating that because preempted California Standards are enforcement mechanisms for remainder of standards, they are not functionally separable).
[227] See generally Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90 (arguing against preemption of California Standards in their entirety).
[228] Id.
[229] See id. at 27.
[230] Jevne, 111 P.3d at 971-72; Hotel Employees, 981 P.2d at 1009; Calfarm, 771 P.2d at 1256.
[231] See generally Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90 (arguing against preemption of California Standards in their entirety).
[232] See Assembly Comm. on Judiciary, Analysis of Sen. Bill No. 475, 2001-2002 Sess., at 1 (2001).
[233] See Lank v. N.Y. Stock Exch., 548 F.2d 61, 64 (2d Cir. 1977); Cox, supra note 175, at 654-44; Ferri, supra note 175, at 473.
[234] See NASD Rule 10312, supra note 62 (stating disclosure requirements under NASD rules); NASD Rule 10313, available at http://nasd.complinet.com/nasd/display/display.html?rbid=1189&record_id=1159001495 (last visited Jan. 30, 2005) (stating circumstances under which parties may disqualify arbitrators).
[235] See generally Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing against preemption of California Standards); see also NASD Rule 10312, supra note 62; NASD Rule 10313, supra note 234.
[236] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 27.
[237] See id.; see also English v. Gen. Elec. Co., 496 U.S. 72, 2279 (1990); Nordyke v. King, 44 P.3d 133, 138 (Cal. 2002) (holding that federal law did not preempt municipal firearm ordinance); Peatros v. Bank of Am., 990 P.2d 539, 542 (Cal. 2002) (holding that federal law did not preempt state employment statute).
[238] See generally Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90 (arguing that NASD rules do not preempt California Standards).
[239] Ben White, NASD Sees Arbitration Problems: Letter Rebukes Firms for Document Delays, Wash. Post, Nov. 7, 2003, at E1.
[240] Id.; see also Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 35 (arguing against preemption of California Standards because of industry bias affecting NASD).
[241] White, supra note 239, at E1; see also Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 35-36 (arguing that NASD arbitration process is inherently unfair because of method of selecting arbitration panels).
[242] See Federal Arbitration Act, 9 U.S.C. §§ 1-14 (1954); Southland Corp. v. Keating, 465 U.S. 1, 2 (1984) (holding in enacting Federal Arbitration Act, “Congress declared a national policy favoring arbitration”); Ovitz v. Schulman, 133 Cal. App. 4th 830, 852-854 (2005) (stating that California Standards do not conflict with FAA's purpose). See generally Scott R. Swier, United States Supreme Court: The Tenuous Tale of the Terrible Termites: The Federal Arbitration Act and the Court's Decision to Interpret Section Two in the Broadest Possible Manner, 41 S.D. L. Rev. 131 (1996) (discussing Supreme Court's holding in Allied-Bruce Terminex Co. v. Dobson that courts should interpret interstate commerce language of Federal Arbitration Act in broadest possible manner).
[243] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31 (stating that California Standards provide additional disclosure requirements, thus increasing investor confidence in arbitration proceedings).
[244] See Ovitz, 133 Cal. App. 4th at 853; Cal. Ethics Standards, supra note 10, § 7; NASD Rule 10308, supra note 64.
[245] See Ovitz, 133 Cal. App. 4th at 853; Cal. Ethics Standards, supra note 10, § 7; NASD Rule 10308, supra note 64.
[246] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; see also infra Part I.B (discussing ways California Standards offer additional protection to investors).
[247] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[248] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[249] See Jevne v. Superior Court, 111 P.3d 954, 969 (Cal. 2005); Self-Regulatory Organizations, Exchange Act Release No. 34-46562, 67 Fed. Reg. 62,085 (Oct. 3, 2002) (stating that heightened disclosure requirements under California Standards place unnecessary burden arbitration proceedings). See generally Brief for Securities and Exchange Commission as Amicus Curiae Supporting Respondents, Mayo v. Dean Witter Reynolds, Inc., 258 F. Supp. 2d 1097 (N.D. Cal. 2003) (No. C-01-20336JF) (arguing that NASD rules preempt California Standards because independent SEC approval is more efficient).
[250] See Jevne, 111 P.3d at 969 (stating that California Standards hinder efficiency); Self-Regulatory Organizations, 67 Fed. Reg. at 62,085.
[251] See Jevne, 111 P.3d at 969; Self-Regulatory Organizations, 67 Fed. Reg. at 62,085 (discussing impact of California Standards' disclosure requirements on efficiency of arbitration proceedings in California).
[252] See Cal. Ethics Standards, supra note 10, § 7.
[253] See Jevne, 111 P.3d at 969; Self-Regulatory Organizations, 67 Fed. Reg. at 62,085.
[254] See Jevne, 111 P.3d at 969 (stating that California Standards hinder efficiency); Self-Regulatory Organizations, 67 Fed. Reg. at 62,085.
[255] See Jevne, 111 P.3d at 969.
[256] See id. (arguing that NASD rules preempt California Standards); Self-Regulatory Organizations, 67 Fed. Reg. at 62,085.
[257] Volt Info. Scis., Inc. v. Bd. of Trs. Of Leland Stanford Jr. Univ., 489 U.S. 468, 476 n.5 (1989) (stating that California Standards generally foster federal policy favoring arbitration); Ovitz v. Schulman, 133 Cal. App. 4th 830, 853 (2005); Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[258] See Ovitz 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; Cal. Ethics Standards, supra note 10, § 7 (stating disclosure requirements for arbitrators under California Standards).
[259] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; Robert J. Lewton, Are Mandatory, Binding Arbitration Requirements a Viable Solution for Employers Seeking to Avoid Litigating Statutory Arbitration Claims?, 59 Alb. L. Rev. 991, 1033-34 (1996); R. Gaull Silberman et al., Alternative Dispute Resolution of Employment Discrimination, 54 La. L. Rev. 1553, 1554 (1994).
[260] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; Lewton, supra note 259, at 1033-34; Silberman, supra note 259, at 1554.
[261] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; Lewton, supra note 259, at 1033-34; Silberman, supra note 259, at 1554.
[262] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; Lewton, supra note 259, at 1033-34; Silberman, supra note 259, at 1554.
[263] See Ovitz, 133 Cal. App. 4th at 849 (holding that FAA does not preempt California Standards); Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31. See generally Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing against preemption of California Standards).
[264] See Volt Info. Scis., Inc. v. Bd. of Trs. Of Leland Stanford Jr. Univ., 489 U.S. 468, 476 n.5 (1989) (stating that California Standards further federal policy favoring arbitration); Ovitz, 133 Cal. App. 4th at 853 (stating that California disclosure requirements do not reflect hostility to arbitration); Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; Cal. Ethics Standards, supra note 10, § 7.
[265] Cal. Ethics Standards, supra note 10, § 7; see also California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[266] NASD Rule 10312, supra note 62 (stating disclosure requirements under NASD rules); see also Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[267] Jevne, 111 P.3d at 969; Ovitz, 133 Cal. App. 4th at 853; Cal. Ethics Standards, supra note 10, § 7.
[268] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[269] NASD Rule 10312, supra note 62 (stating disclosure requirements under NASD rules); see also id.
[270] See Volt Info. Scis., Inc. v. Bd. of Trs. Of Leland Stanford Jr. Univ., 489 U.S. 468, 476 n.5 (stating that California Standards further federal policy favoring arbitration); Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[271] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 35-36.
[272] See id. at 34-42; Paul Joseph Foley, The National Association of Securities Dealers' Arbitration of Investor Claims Against its Brokers; Taming the Fox that Guards the Henhouse, 7 N.C. Banking Inst. 239, 241-42 (2003).
[273] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 34; Foley, supra note 273, at 242; NASD – About NASD, supra note 76 (discussing NASD's role in American markets as primary private-sector regulator of securities).
[274] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 34; Foley, supra note 272 at 242; NASD – About NASD, supra note 76.
[275] Foley, supra note 272, at 242.
[276] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 34 (arguing that investors using NASD arbitration forums are especially in need of additional protections afforded by California Ethical Standards).
[277] Id.
[278] Id.
[279] See Federal Arbitration Act, 9 U.S.C. §§ 1-14 (1954); Advest, Inc. v. McCarthy, 914 F.2d 6, 6 (1st Cir. 1990) (stating that judicial review of arbitration awards is limited to circumstances where arbitration has been tainted in certain specific ways).
[280] Advest, 914 F.2d at 6.
[281] 9 U.S.C. §§ 1-14; see id.
[282] United Steelworkers of Am. v. Enterprise Wheel & Car Co., 363 U.S. 593, 599 (1960) (upholding arbitration agreement under collective bargaining agreement).
[283] French v. Merrill Lynch, 784 F.2d 902, 906 (9th Cir. 1985) (upholding arbitrator's judgment because it was not completely irrational or in manifest disregard of law); see also Am. Postal Workers Union v. U.S. Postal Serv., 682 F.2d 1280, 1285 (9th Cir. 1982) (holding that courts must confirm arbitration awards even in case of clear error of law).
[284] See U.S. Postal Serv., 682 F.2d at 1285.
[285] See French, 784 F.2d at 906; U.S. Postal Serv., 682 F.2d at 1285.
[286] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31 (stating that California Standards provide additional disclosure requirements and promote increased fairness in arbitration proceedings). See generally Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing against preemption of California Standards).
[287] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[288] Id.; see also infra Part III.C.1 (discussing risk of bias in NASD administered arbitrations).
[289] See U.S. Postal Serv., 682 F.2d at 1285.
[290] See supra Part III (arguing that California Supreme Court erred in holding that NASD regulations preempt California Standards).
[291] Supra Part III.
[292] Supra Part III.
[293] Supra Part III.
[294] See supra Part III.
Citation
7 U.C. Davis Bus. L.J. 401 (2007)
Vol. 7
November 2007
Page
Introduction
Arbitration provisions are virtually standard in modern agreements between stockbrokers and customers.[1] Securities brokers favor arbitration because it is generally more efficient than litigation.[2] Therefore, most securities brokers require customers to agree to mandatory binding arbitration before they open an account.[3]
Securities brokers must become members of at least one Self Regulatory Organization (“SRO”).[4] An SRO is a nongovernmental organization that has the power to create and enforce regulations and standards within the securities industry.[5] The National Association of Securities Dealers (“NASD”) and the New York Stock Exchange (“NYSE”) are examples of prominent SROs.[6] Almost every American securities firm is a member of the NASD.[7] The overwhelming majority of brokerage firms registered with the NASD require new customers to agree to mandatory NASD administered arbitration of any dispute.[8] Accordingly, NASD rules generally govern securities arbitration proceedings.[9]
In California, however, another set of rules governs that more stringently regulates ethics.[10] On July 1, 2002, the California Judicial Council adopted ethical standards applicable to persons acting as neutral arbitrators in contractual agreements.[11] The Judicial Council intended the California Ethical Standards to govern the conduct of arbitrators in all arbitration proceedings in the state.[12] Thus, in California, arbitrators faced the problem of adhering to both the California ethical standards and the NASD standards.[13]
This Note examines the conflict that arises in securities arbitration between the NASD rules governing neutral arbitrators and the newly enacted California Ethical Standards.[14] Specifically, this Note argues that the California Supreme Court erred in holding that NASD regulations preempt the California Ethical Standards.[15] This Note concludes that preempting the California Standards is contrary to public policy and preemption law.[16]
Part I of this Note explores the background of the California Ethical Standards and the conflict between the California Standards and the NASD rules.[17] Part II discusses the California Supreme Court's decision in Jevne v. Superior Court and reviews the similar Ninth Circuit decision in Credit Suisse v. Grunwald.[18] Part III argues against preemption and suggests that as a matter of public policy, heightened ethical standards should be available to parties in securities arbitration.[19] Alternatively, Part III argues that even if NASD regulations preempt some of the California Standards, the NASD regulations should not preempt all of them.[20] Finally, Part III addresses the counterarguments advanced by the Jevne court and concludes that the court erred in its holding.[21]
I. Background
Both state and federal law include rules that govern arbitrators' conduct.[22] Arbitration is generally faster and less expensive than litigation.[23] State arbitration law, however, generally offers more protection to arbitration participants than does federal law.[24]
A. The California Judicial Council
California law protects arbitration participants.[25] The California Constitution empowers the Judicial Council to adopt rules for court administration, practice, and procedure that are not inconsistent with statutes.[26] The Judicial Council ensures the impartial and effective administration of justice.[27] Thus, the California Judicial Council is primarily responsible for making judgments that pertain to the administration of the California court system.[28]
Although the Judicial Council has broad authority to make policy determinations, a rule enacted by the California Judicial Council may not conflict with a statute.[29] A directive of the Judicial Council, however, may extend beyond a related statute, provided that it is still consistent with the statutory purpose.[30] Therefore, the Judicial Council may expand the scope of the protection afforded by a statute.[31]
B. The California Ethical Standards for Neutral Arbitrators
California Code of Civil Procedure section 1281.85 is protective legislation that promotes ethical conduct in arbitration.[32] Section 1281.85 mandates persons serving as neutral arbitrators to comply with any ethical standards the Judicial Council enacts.[33] The California Legislature enacted section 1281.85 to protect consumers in private arbitration proceedings.[34] In furtherance of section 1281.85, the California Judicial Council enacted the Ethics Standards for Neutral Arbitrators.[35] Accordingly, the Judicial Council established the California Standards under section 1281.85 as minimum conduct requirements designed to promote fairness in private arbitration proceedings.[36]
The California Judicial Council enacted the Ethical Standards in response to the growing concern that mandatory binding arbitration agreements might result in unfairness.[37] Inequitable binding arbitration agreements frequently arise in circumstances where the parties have unequal bargaining power.[38] Parties with weaker bargaining positions often must submit to binding arbitration and relinquish their constitutional right to a trial by jury.[39] This potential for unfairness especially prevails in securities arbitration, where disputes typically involve an individual customer and a large financial institution.[40]
In addition to this potential unfairness, arbitration lacks many of the due process protections afforded to litigating parties.[41] For example, no due process right to judicial review of an arbitration award exists because a private arbitrator's ruling does not constitute state action.[42] As such, courts refuse to weigh the merits of a grievance submitted to arbitration.[43] Courts will vacate arbitration awards only in very egregious circumstances.[44] Thus, the legislature found it especially important that arbitration proceedings contain internal safeguards, because binding arbitration implicates fundamental due process rights.[45] The California Judicial Council enacted the Ethical Standards to respond to these concerns.[46]
The Judicial Council established the California Standards intending to guide arbitrators' conduct and inform and protect arbitration participants.[47] Moreover, the Judicial Council specified that the overriding purpose of the Standards is to promote public confidence in arbitration.[48] Additionally, the Judicial Council cautioned that the Ethical Standards are not a ceiling on the standards governing the conduct of neutral arbitrators.[49] Therefore, more restrictive rules may govern arbitrators' conduct.[50] At a minimum, however, arbitrators must comply with the rules enumerated in the California Standards.[51]
Effective July 1, 2002, the California Standards apply to persons appointed as neutral arbitrators.[52] The Standards regulate both arbitration agreements subject to the California Arbitration Act and all arbitration agreements executed in California.[53] Neutral arbitrators must act in a manner that upholds the reliability and fairness of the arbitration process.[54] In addition, they must maintain impartiality towards all participants in the arbitration at all times.[55] Arbitrators must disclose any information that constitutes a conflict of interest, including all prior dealings with the parties.[56] Failure to comply with the disclosure requirements may result in disqualification of an arbitrator from the arbitration process.[57]
The NASD rules differ from these California Standards in several respects.[58] First, the NASD rules require less disclosure.[59] California Standard 7 includes a comprehensive list of disclosure requirements for arbitrators.[60] Disclosure requirements under the California Standards are specific and very extensive.[61] In contrast, the NASD disclosure requirements are relatively brief and provide less protection to participants.[62] Essentially, parties in NASD arbitrations must only disclose certain relationships that might result in a bias or a financial interest in the outcome of arbitration.[63]
Second, the California Standards provide for much easier disqualification of arbitrators.[64] Specifically, California Standard 10 automatically disqualifies an arbitrator if a party serves a timely disqualification notice in any of the circumstances described in the Standards.[65] Under the NASD Code, however, the Director of Arbitration ultimately decides whether to disqualify an arbitrator.[66] Thus, the California Standards offer heightened protection to participants in securities arbitration in the form of more comprehensive disclosure and disqualification standards.[67]
C. The Securities and Exchange Act of 1934
The California Standards and the NASD, however, are not the only source of protection for investors.[68] In addition to state created regulations, federal securities law substantially protects investors.[69] Currently, the Securities and Exchange Act of 1934 (“the 1934 Act”) is the primary federal regulatory mechanism of securities markets and transactions.[70] Congress enacted the 1934 Act in order to extend federal regulation to securities transactions.[71] Essentially, the 1934 Act regulates securities in secondary markets.[72] Secondary markets facilitate the sale and exchange of stock between shareholders rather than the issuance of stock by a corporation.[73] To enforce the 1934 Act, Congress created the Securities and Exchange Commission (“SEC”).[74] The SEC is an independent federal agency that regulates all aspects of securities markets.[75] Therefore, because the NASD is the primary private regulator of the securities industry, the SEC oversees the NASD.[76]
D. The National Association of Securities Dealers
The NASD is the leading private sector provider of financial regulatory services.[77] Neither state nor federal government resources subsidize the NASD.[78] Rather, private resources fund the NASD.[79] The NASD also operates the largest dispute resolution forum in the world.[80] All NASD members have access to this forum.[81] The NASD Uniform Rules of Arbitration apply to parties who opt to use this forum.[82] The SEC, however, must approve all NASD arbitration and mediation procedures and regulations.[83]
Parties seeking to arbitrate securities disputes need not always arbitrate pursuant to NASD rules.[84] The NASD makes available other forums, such as the Judicial Arbitration and Mediation Service (JAMS) and the American Arbitration Association (AAA).[85] NASD rules do not apply to these forums.[86] Most parties, however, opt to use the NASD dispute resolution forum because it is typically more convenient.[87] Therefore, NASD rules significantly impact securities dispute resolution.[88]
E. The Conflict Between the California Standards and the NASD Rules
In California, however, the California Standards cast doubt on the applicability of the NASD rules.[89] After the Judicial Council adopted the California Ethical Standards, the NASD refused to continue appointing arbitrators in California.[90] Instead, the NASD adopted a waiver requirement for California.[91] The NASD waiver rule required California investors to forgo applying the California Standards in order to participate in arbitration.[92]
In determining whether to approve the NASD's waiver rule, the SEC asked law professor Michael Perino to prepare a report.[93] Perino's report discussed whether the current disclosure requirements in NASD arbitrations should reflect the California Standards.[94] Perino ultimately concluded that nondisclosure does not represent a significant problem in NASD or NYSE arbitrations.[95] Perino stated that having self regulatory organizations adopt the California Standards would likely yield very few benefits for investors.[96] Furthermore, Perino's report concluded that adopting the California Standards may result in significant costs and may lower investor confidence in the fairness of SRO arbitration.[97] In accordance with the suggestions advanced in Perino's report, the SEC approved the NASD waiver program.[98] Thus, the NASD received federal approval for its waiver requirement.[99]
II. Jevne v. Superior Court
After the SEC approved the NASD waiver program, the issue of the impact of the 1934 Act on the California Standards arose.[100] The California Supreme Court decided Jevne v. Superior Court shortly after the Ninth Circuit decided Credit Suisse v. Grunwald.[101] In Credit Suisse, the Ninth Circuit held that the 1934 Act preempted the California Standards as applied to the NASD rules.[102] The Ninth Circuit also stated that NASD regulations, like federal statutes, have preemptive force over conflicting state law.[103] The California Supreme Court followed a similar approach in Jevne v. Superior Court.[104]
A. Facts and Procedure
Jevne arose out of a dispute between Jevne, an investor, and JB Oxford & Co., a securities broker/dealer registered with the NASD.[105] When Jevne opened an account with Oxford, Oxford required Jevne to sign an account opening statement.[106] The statement specified that the parties would resolve all disputes by arbitration in accordance with NASD rules.[107] Jevne sued Oxford after an unauthorized withdrawal of $1,026,535 from his account.[108] Oxford successfully moved to compel arbitration pursuant to the provision in the account opening statement.[109]
After Jevne's arbitration proceedings commenced, the NASD requested that Jevne waive application of the California Standards.[110] Jevne refused and asked the trial court to set aside the order compelling arbitration.[111] The court denied the motion, and Jevne petitioned the California Court of Appeal for a writ of mandate.[112] The appellate court denied Jevne's petitions because the SEC approved the NASD's waiver requirement, and the California Supreme Court granted review.[113]
B. Issue, Holding, and Rationale
On appeal, the California Supreme Court addressed two primary issues relating to California Code of Civil Procedure section 1281.85.[114] First, the court considered whether section 1281.85 authorizes the Judicial Council to adopt ethical standards for arbitration organizations like the NASD.[115] Second, the court considered whether the 1934 Act preempts section 1281.85 and the California Standards.[116] The court mentioned, but failed to decide the issue of whether the parties to an arbitration agreement may waive application of the California Standards.[117]
The California Supreme Court held that section 1281.85 authorized the Judicial Council to adopt ethical standards for arbitrators appointed by SROs.[118] The court further held, however, that the 1934 Act preempted section 1281.85 and the California Standards.[119] Finally, the court decided that the parties must arbitrate the dispute even though more than a year had lapsed.[120]
In determining that section 1281.85 authorized the Judicial Council to adopt ethical standards for self-regulatory organizations, the court made several points.[121] The court noted that the California Standards effectively expanded the statutory definition of “neutral arbitrator” to include third party organizations like the NASD.[122] The court considered legislative history to determine whether the California legislature intended “neutral arbitrator” to include third party organizations.[123] The court concluded that the legislature intended the statutory definition of “neutral arbitrator” to guarantee impartiality.[124] The legislature did not intend to exclude arbitrators selected by a third party organization.[125] Thus, the legislature did not intend to exclude third party arbitrators from the California Standards.[126] Accordingly, the court concluded that section 1281.85 authorizes the Judicial Council to adopt ethical standards for neutral arbitrators appointed by third party arbitration organizations.[127]
Next, the court turned to the issue of preemption.[128] The United States Supreme Court recognizes three types of preemption.[129] First, federal law preempts state law to the extent that state law expressly conflicts with federal law.[130] Second, federal law preempts state law where state law regulates conduct in a field that Congress intended federal law to govern exclusively.[131] Finally, federal law preempts state law where it is impossible to simultaneously comply with both state and federal requirements (“conflict preemption”).[132]
The 1934 Act does not contain an express preemption provision.[133] Moreover, Congress did not intend to preempt all matters involving arbitration.[134] Therefore, the court concluded that only conflict preemption applied to this case.[135]
The court then determined that the NASD regulations had preemptive force only if the SEC intended and had the authority to preempt the California Standards.[136] The court held that the SEC had both the power and the intent to preempt the California Standards.[137] In 1975, Congress granted the SEC broad authority to oversee and regulate SRO rules regarding customer disputes.[138] This authority includes the power to require the adoption of any rules the SEC deems necessary to adequately protect parties' rights in arbitration proceedings.[139] As a result, the SEC must approve any NASD rule before it goes into effect.[140] The court therefore concluded that NASD rules are consistent with the purposes of the 1934 Act because the SEC now reviews all NASD rules.[141] Thus, the court found that the same conflict preemption principles applied to NASD rules as federal statutes.[142]
The court stated that California Standards 7, 8, and 10 conflict with the requirements in the NASD Code.[143] California Standard 7 includes a comprehensive list of disclosure requirements for a person nominated or appointed as an arbitrator.[144] Similarly, California Standard 8 lists additional disclosure requirements for arbitrators participating in consumer arbitration.[145] In contrast, the NASD Code's disclosure requirements are relatively minimal.[146]
Additionally, California Standard 10 automatically disqualifies an arbitrator if a party serves a timely notice of disqualification.[147] Under the NASD Code, however, the Director of Arbitration ultimately decides whether to disqualify an arbitrator.[148] Thus, California Standards 7, 8, and 10 conflict with the NASD code.[149]
The court determined that the California Standards would adversely affect NASD arbitrations because provisions of the California Standards conflicted with NASD disclosure and disqualification rules.[150] Specifically, the court found that if the California Standards' disqualification provisions applied to NASD arbitrations, the NASD Director could easily disqualify any arbitrator.[151] Under the California Standards, arbitrators must disclose any party's affiliation with the arbitration provider.[152] NASD arbitrations always include one party that is an NASD member.[153] Therefore, if the California Standards apply to NASD arbitration proceedings, every arbitrator must make this disclosure.[154]
In response to this disclosure, under California Standard 10, a party may serve a disqualification notice.[155] If notice is proper and timely, the California Standards disqualify the arbitrator.[156] Therefore, if the California Standards apply to NASD arbitrations, the customer may disqualify any arbitrator based on the required disclosure of the broker/dealer's NASD membership.[157] For that reason, the court held that the NASD disqualification provision conflicted with the California Standards.[158] Accordingly, the court found that the NASD rules preempted these provisions of the California Standards.[159]
When presented with a preempted state statute, courts may sever the provisions of the statute that conflict with federal law.[160] The Jevne court, however, declined to sever the California Standards that conflicted with the NASD code.[161] Instead, the court held that the NASD rules preempted the California Standards in their entirety.[162]
The court reasoned that severance of an invalid provision was proper only if it was grammatically, functionally, and volitionally separable.[163] The court conceded that it could grammatically separate the three preempted provisions.[164] However, the court did not functionally separate the preempted standards because disqualification and disclosure were the California Standards' primary enforcement mechanisms.[165] Finally, the preempted standards were not volitionally separable because section 1281.85 required the California Standards to include disclosure and disqualification provisions.[166] Thus, the court preempted the California standards in their entirety.[167]
III. Analysis
The California Supreme Court erred in holding that the NASD rules preempt the California Standards.[168] Alternatively, even if three of the NASD rules do preempt the California Standards, the NASD does not preempt the California Standards in their entirety.[169] As a matter of public policy, heightened ethical requirements should be available to parties in securities arbitration.[170]
A. The Court Erred in Holding that the NASD Rules Preempt the California Standards
Federal law preempts state law to the extent that they conflict.[171] The Supreme Court has held this “conflict preemption” to apply in very limited situations.[172] Federal law preempts state law only when the state law could prevent or impair accomplishment of the purposes and objectives of the federal law.[173]
1. Because the NASD Rules Do Not Conflict with the California Standards, the NASD Rules Should Not Preempt the California Standards
Under this test for conflict preemption, the NASD rules should not preempt the California Standards.[174] By enacting the 1934 Act, Congress intended to protect investors in securities transactions.[175] The California Standards do not impair these objectives.[176] The Judicial Council intended the California Ethical Standards to direct the conduct of arbitrators, protect arbitration participants from bias, and promote confidence in arbitration.[177] Accordingly, the California Standards actually advance the objectives of the 1934 Act by also protecting parties in securities arbitration.[178] By enacting the California Standards, the Judicial Council addressed the problem that mandatory binding arbitration agreements sometimes resulted in unfairness.[179] Congress addressed this same problem when it passed the 1934 Act.[180] Therefore, the California Standards do not frustrate congressional purpose, and the 1934 Act should not preempt the California Standards.[181]
2. NASD Rules Do Not Have the Force of Federal Statutes
Additionally, NASD rules should not preempt SEC rules because the NASD is a private corporation.[182] Its rules do not have the force of statutes and therefore should not preempt the California Standards.[183] The fact that the SEC approved the NASD arbitration rules does not give the rules the preemptive force of a federal statute.[184]
The NASD regulations are not expressions of congressional intent.[185] The mere fact that the federal government regulates the NASD does not convert NASD rules into federal statutes.[186] Congress did not write the NASD rules or hold hearings regarding the NASD rules.[187] Thus, the NASD rules do not amount to an exercise of the legislative power of Congress.[188]
Furthermore, the NASD, a private corporation, composed the entire NASD Arbitration Code.[189] The NASD is a private for-profit corporation and is therefore not a state actor subject to constitutional constraints.[190] In this respect, it is no different than any other private corporation in the securities market.[191] It would be absurd to say that every rule that every securities corporation makes could potentially preempt state law.[192] Therefore, SRO rules do not have the force of federal statutes.
Moreover, SRO arbitration rules are private contract terms.[193] The Supreme Court has never held that private contract terms invoke preemption of state law.[194] To the contrary, case law suggests that private contract terms never preempt state law.[195] The Second Circuit Court of Appeals held that when parties incorporate SRO regulations into private arbitration agreements, such regulations are essentially private contract terms.[196] Accordingly, the customer must agree to SRO rules before the rules apply to disputes between a broker and customer.[197] If the customer does not agree, the rules do not apply.[198] On the other hand, the customer cannot choose to accept or decline a federal statute.[199] Thus, NASD rules should not receive the force of a federal statute, and the NASD regulations must not preempt the California Standards.[200]
One could argue that the NASD rules carry the force of federal law because the SEC approves the NASD rules.[201] SRO regulations preempt conflicting state law to the extent necessary to advance the goals of the 1934 Act.[202] One could argue that all SRO arbitration rules further the aims of the 1934 Act because the SEC now approves all SRO arbitration rules.[203]
Congress' 1975 amendments to the 1934 Act granted the SEC broad authority to approve any SRO arbitration rule necessary to protect statutory rights.[204] Opponents would argue that because the SEC approves all NASD rules, all NASD rules must advance the goals of the 1934 Act.[205] Under this view, NASD rules would be synonymous with SEC rules.[206] Accordingly, SRO rules manifest Congress' intent.[207] Therefore, opponents argue that NASD rules should preempt state law, because the SEC, a federal agency, approves the NASD rules.[208]
This argument fails, however, because an SRO rule can never preempt state law, even if it advances 1934 Act goals.[209] The fact that the SEC must approve SRO arbitration rules does not mean that SRO rules constitute federal regulations.[210] If this were the case, the requirement that SRO regulations must further the aims of the 1934 Act would be essentially worthless.[211] If SEC approval automatically converted SRO rules into federal statutes, courts would not have to determine whether SRO rules further the objectives of the 1934 Act.[212] If they were federal statutes, then SRO rules could stand on their own regardless of whether they furthered another statute's objectives.[213] Thus, the NASD rules are not federal statutes.[214] The NASD rules should not preempt the California Standards because SEC approval does not bestow NASD rules with the status of federal statutes.[215]
B. Even if the 1934 Act Preempts Several Specific Provisions in the California Standards, the 1934 Act Does Not Preempt the Entire California Standards
Even if the NASD rules preempt California Standards 7, 8, and 10, the NASD rules should not preempt the remainder of the California Standards.[216] Courts recognize a strong presumption against preemption.[217] Accordingly, federal law preempts state law only to the extent that they conflict.[218] The remaining fifteen California Standards do not conflict with federal law.[219] The test for severability in California is whether the preempted provisions are functionally, grammatically, and volitionally separable from the rest of the enactment.[220]
A conflicting part is grammatically separable if it is distinct and the court can remove it without affecting the wording of the other provisions.[221] Standards 7, 8, and 10 concern only disclosure and disqualification of arbitrators.[222] The court can remove these standards without affecting the wording of the remainder of the California Standards.[223] Therefore, the conflicting California Standards are grammatically separable.[224]
A conflicting part is functionally separable if it is not necessary to the provision's operation and purpose.[225] Standards 7, 8, and 10 are the California Standards' primary enforcement mechanisms.[226] Those standards are not necessary, however, because SRO disqualification and disclosure procedures effectively regulate arbitration proceedings.[227] Accordingly, SRO rules could replace the preempted California disqualification and disclosure provisions.[228] Thus, the conflicting California Standards are functionally separable.[229]
A conflicting part is volitionally separable if it is not of critical importance to the provision's enactment.[230] Standards 7, 8, and 10 are not critical to the California Standards' enactment.[231] The legislature enacted California Code of Civil Procedure section 1281.85 to protect investors.[232] All SEC rules must also protect investors.[233] SRO rules can provide disclosure and disqualification rules for neutral arbitrators in California.[234] By replacing the preempted California Standards' disclosure and disqualification rules, SRO rules could meet section 1281.85's requirements.[235] Thus, the conflicting California Standards are volitionally separable.[236] NASD rules should not preempt all the California Standards because of the strong presumption against preemption, and because the court may sever the preempted standards.[237]
C. As a Policy Matter, Heightened Ethical Standards Should Be Available to Parties Subject to NASD Administered Arbitration Agreements
In addition to the strong presumption against preemption, public policy suggests that NASD rules do not preempt the California Standards.[238] The NASD handles ninety percent of all securities disputes submitted to arbitration.[239] Some analysts, however, have historically regarded the NASD as an expensive and unfriendly venue for investors.[240] The NASD is often considered as a hostile venue, because it is particularly vulnerable to industry bias.[241]
1. The California Standards Further State and Federal Policy Favoring Fair and Effective Arbitration
Because of the potential for bias, the California Standards further the state and federal policies favoring arbitration.[242] The California Standards advance this policy because they provide additional protection to investors in the form of heightened disclosure and disqualification requirements.[243] The California Standards make arbitration fairer because they allow much easier disqualification of arbitrators than the NASD rules.[244] Accordingly, parties may easily disqualify biased arbitrators under the California Standards.[245] Furthermore, heightened disclosure requirements expose possible conflicts of interest that may affect the outcome of arbitration proceedings.[246] Disclosure requirements lessen the likelihood that the parties will select a biased arbitrator.[247] Thus, such requirements increase fairness in arbitration proceedings.[248]
One could argue that the California Standards do not advance the state or federal policies favoring efficient arbitration.[249] Rather, the California Standards could arguably actually hinder this policy.[250] Specifically, one could argue that the California Standards' disclosure requirements place extreme and unnecessary burdens on arbitrators already facing rigorous NASD disclosure rules.[251] Among other things, arbitrators must disclose certain relationships, current and prior arbitration experience, and financial interests.[252] This requires arbitrators to keep extensive records and exposes them to potential liability.[253] For these reasons, the California Standards result in a much smaller arbitrator roster from which to select panelists.[254] Accordingly, the California Standards qualify less arbitrators, placing an unreasonable burden on existing arbitrators.[255] Therefore, one could argue that the California Standards actually impede state and federal policy endorsing efficient arbitration by unnecessarily burdening arbitrators.[256]
This argument fails because the California Standards' disclosure requirements do not impede efficient arbitration.[257] Rather, the California Standards make information available to parties that allows them to secure truly fair and unbiased decision makers.[258] A party's satisfaction with arbitration proceedings is greater if they believe an impartial arbitrator decided their case.[259] Accordingly, investors are more likely to submit to binding arbitration if they are confident that the outcome of arbitration is fair and unbiased.[260]
Furthermore, if parties perceive arbitration as a fair process, they are less likely to pursue litigation.[261] If parties resolve their disputes through arbitration instead of litigation, courts face a lesser burden.[262] Therefore, the California Standards advance both state and federal policy favoring efficient arbitration.[263]
In addition, disclosure requirements under the California Standards are not excessive.[264] California Standard 7 requires arbitrators to disclose significant personal and professional relationships and financial interests with a party or party's counsel.[265] The NASD code also requires most of these disclosures.[266] The California Standards, however, provide for automatic disqualification of parties who make such disclosures.[267] Accordingly, the California Standards' disclosure requirements do not place excessive burdens on arbitrators.[268] The disclosure requirements under the California Standards are not substantially greater than the disclosures required by the NASD rules.[269] Thus, the California Standards further state and federal policy favoring fair and efficient arbitration.[270]
2. A Significant Risk of Bias Exists by the NASD in Favor of Securities Brokers
The extra protection of the California Standards also protects investors from an even greater potential for bias.[271] The NASD potentially favors securities brokers because the NASD depends on the securities industry for financial support.[272] Member firms fund the NASD.[273] Further, member firms appear before the NASD in arbitration proceedings.[274] As a result, the same institutions that the NASD disciplines and regulates also support the NASD.[275] Parties to securities arbitration need extra protection because of this conflict of interest.[276] The California Standards offer this heightened protection in the form of disclosure and disqualification requirements.[277] Thus, the NASD rules should not preempt the California Standards, because the Standards afford this needed protection.[278]
3. The Additional Protection Afforded by the California Standards Is Especially Important Because of the Extremely Limited Scope of Judicial Review of an Arbitration Award
The heightened protection afforded by the California Standards is especially important because courts firmly limit judicial review of arbitration awards.[279] Parties generally cannot change the outcome of arbitration proceedings.[280] The Federal Arbitration Act limits judicial intervention to specific circumstances and excludes any judicial review on the merits.[281] If the arbitrator's decision relates to construction of the contract, courts will not overrule the arbitrator because they interpret the contract differently.[282] Additionally, courts must confirm arbitration awards even in the face of erroneous misinterpretations of law.[283] Courts are extremely deferential towards the judgment of arbitrators and intervene in only the most egregious circumstances.[284] It is therefore extremely important for arbitration proceedings to be fair because it is difficult to overturn an arbitration award.[285]
The California Standards help accomplish this goal by providing heightened disclosure requirements for neutral arbitrators.[286] These heightened disclosure requirements are especially important because they expose potential conflicts of interest that may affect the outcome of arbitration proceedings.[287] Exposing all conflicts is the only way to ensure against biased arbitration awards.[288] Accordingly, the additional protection afforded by the California Standards is especially important because of the extremely limited scope of judicial review of an arbitration award.[289]
Conclusion
In Jevne v. Superior Court, the California Supreme Court erred in holding that the NASD rules preempt the California Standards.[290] The NASD rules should not preempt the California Standards because the NASD does not conflict with the California Standards.[291] Even if the 1934 Act preempts several specific provisions in the California Standards, the 1934 Act should not preempt the California Standards in their entirety.[292] As a policy matter, parties subject to NASD administered arbitration agreements should have access to heightened ethical standards.[293] Thus, the NASD rules should not preempt the California Standards.[294]
* Marissa C. Marion graduated from the University of California, Davis, School of Law in 2007. She was a member of the U.C. Davis Law Review, and was Senior Articles Editor of the U.C. Davis Business Law Journal. Marissa currently works at Cooley Godward Kronish.
[1] See Kenneth R. Davis, The Arbitration Claws: Unconscionability in the Securities Industry, 78 B.U. L. Rev. 255, 317 (1998) (stating that mandatory arbitration clauses appear in overwhelming majority of managed accounts); Therese Maynard, Securities Arbitration: A Decade After McMahon: McMahon: The Next Ten Years, 62 Brook. L. Rev. 1533, 1558 (1996) (discussing important public policy concerns arising from widespread use of arbitration as primary dispute resolution forum).
[2] Arbitration is generally quicker and less expensive than litigation. See Mark J. Astarita, Hearing Hearing: Just What Happens at an Arbitration, SEC Law (1998), available at http://www.seclaw.com/docs/298.htm (last visited Mar. 1, 2007) (asserting that arbitration is most efficient form of dispute resolution); NASD, Start an Arbitration or Mediation, Sept. 7, 2005, available at http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=521&ssSourceNodeId=12 (last visited Mar. 1, 2007) (discussing substantial monetary advantages of arbitration over litigation). But see Mark J. Astarita, Settling the Matter, SEC Law (2005), available at http://www.seclaw.com/docs/896.htm (discussing increase in settlements between brokers and customers resulting from rising arbitration costs).
[3] Maynard, supra note 1, at 1557.
[4] Securities Exchange Act of 1934, 15 U.S.C. § 78o(b)(8) (2005) (stating that securities broker/dealers must be member of securities association); see also 15 U.S.C. § 78o-3 (defining registered securities organizations); Davis, supra note 1, at 291 (stating that brokers must become members of at least one SRO).
[5] Jevne v. Superior Court, 111 P.3d 954, 957 (Cal. 2005); Self-Regulatory Organization, http://www.investopedia.com/terms/s/sro.asp (last visited Feb. 5, 2006); Self-Regulatory Organization Definition,
http://www.investorwords.com/4465/Self_Regulatory_Organization.html (last visited Mar. 1, 2007); Jevne, 111 P.3d at 957.
[6]See NASD BrokerCheck,
http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_005882&ssSourceNodeId=5 (last visited Mar. 1, 2007) (making information on securities professionals and SRO organizations available to investors).
[7] Donald R. McNeil, NASD Arbitration of Securities Disputes (2004), http://library.findlaw.com/2004/Jan/7/133242.html; see Davis, supra note 1, at 317; see also National Association of Securities Dealers: Rules and Regulations, http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=6 (last visited Jan. 30, 2005) (discussing NASD's role in American markets as primary private-sector regulator of securities).
[8] See Davis, supra note 1, at 317; McNeil, supra note 7.
[9] See Davis, supra note 1, at 317; McNeil, supra note 7.
[10] See generally Ethics Standards for Neutral Arbitrators in Contractual Arbitrations § 1(a) (2002), available at
http://www.courtinfo.ca.gov/rules/documents/pdfFiles/ethics_standards_neutral_arbitrators.pdf [hereinafter Cal. Ethics Standards] (providing rules governing neutral arbitrators' conduct).
[11] Jevne v. Superior Court, 111 P.3d 954, 957 (Cal. 2005).
[12] See Cal. Ethics Standards, supra note 10, § 1(a) (stating that Standards guide conduct of arbitrators in California); see also Cal. Civ. Proc. Code § 1281.85 (West 2003) (authorizing California Judicial Council to establish ethics standards applicable to all neutral arbitrators in California).
[13] Because the California Standards direct the conduct of arbitrators in California, arbitrators faced both the guidance of the California Standards and the NASD Code. See Jevne, 111 P.3d at 957; Cal. Ethics Standards, supra note 10, § 1(a); NASD Rule 10300, available at http://nasd.complinet.com/nasd/display/display.html?rbid=1189&element_id=1159000927 (last visited Jan. 30, 2006).
[14] See infra Part III.
[15] See infra Part III.
[16] See infra Part III.
[17] See infra Part I.
[18] See infra Part II; see generally Credit Suisse v. Grunwald, 400 F.3d 1119, 1121 (9th Cir. 2005) (holding that the 1934 Act preempts California Standards for SRO-administered arbitration); Jevne, 111 P.3d at 958 (holding that NASD regulations preempt California Ethical Standards in securities arbitration).
[19] See infra Part III (arguing that there is significant risk of bias by NASD in favor of securities brokers).
[20] See infra Part III.
[21] See infra Part III.
[22] See generally Federal Arbitration Act, 9 U.S.C. §§ 1-14 (1954) (establishing federal procedural arbitration rules); Southland Corp. v. Keating, 465 U.S. 1, 12 (1984) (discussing strong federal policy favoring arbitration); Cal. Ethics Standards, supra note 10 (establishing rules for arbitrators' conduct in state arbitration proceedings).
[23] Ann E. Krasuski, Mandatory Arbitration Agreements Do Not Belong in Nursing Home Contracts with Residents, 8 DePaul J. Health Care L. 263, 293 (2004) (stating that arbitration is less expensive than litigation and provides faster resolution of disputes); Thomas B. Metzloff, The Unrealized Potential of Malpractice Arbitration, 31 Wake Forest L. Rev. 203, 208 (1996) (arguing that arbitration is cheaper and faster than litigation); Elizabeth Rolph et al., Arbitration Agreements in Health Care: Myths and Reality, 60 Law & Contemp. Probs. 153, 155 (1996) (discussing reasons courts prefer arbitration as vehicle for resolving disputes).
[24] See infra Part I.B (discussing California Standards' heightened disclosure and disqualification requirements).
[25] See generally Cal. Ethics Standards, supra note 10 (establishing rules for arbitrators' conduct in state arbitration proceedings).
[26] Cal. Const. art. VI, § 6.
[27] Id. (stating that role of Judicial Council is to “ensure the consistent, independent, impartial, and accessible administration of justice.”).
[28] See Judicial Council: About, History and Role, 2005, http://www.courtinfo.ca.gov/courtadmin/jc/about.htm (discussing Judicial Council's objective of advancing consistent and impartial administration of justice).
[29] People v. Hall, 883 P.2d 974, 975 (Cal. 1994) (finding rule adopted by California Judicial Council invalid because rule conflicted with statute); Judicial Council: About, History and Role, 2005, supra note 28.
[30] Trans-Action Commercial Investors, Ltd. v. Firmaterr, Inc., 60 Cal. App. 4th 352, 363-64 (1997); see also Hall, 883 P.2d at 980-81 (noting that Judicial Council has limited authority and may not adopt rules that conflict with statutory intent); In re Robin M., 579 P.2d 1, 5-6 (Cal. 1978) (invalidating rule established by Judicial Council because it conflicted with legislative intent); Cal. Court Reporters Ass'n v. Judicial Council of Cal., 39 Cal. App. 4th 15, 25-26 (1995).
[31] Firmaterr, 60 Cal. App. 4th at 364 (“A rule of court may go beyond the provisions of a related statute so long as it reasonably furthers the statutory purpose”).
[32] See Cal. Civ. Proc. Code § 1281.85 (West 2003); Jevne v. Superior Court, 111 P.3d 954, 958 (Cal. 2005); Ovitz v. Schulman, 133 Cal. App. 4th 830, 853 (2005) (stating that California Standards do not conflict with FAA's purpose).
[33] Cal. Civ. Proc. Code § 1281.85 (West 2003); Jevne, 111 P.3d at 958.
[34] The California Legislature's purpose in enacting section 1281.85 was to provide “minimum ethical standards and remedies for the arbitrator's failure to comply with disclosure requirements.” Assembly Comm. on Judiciary, Analysis of Sen. Bill No. 475, 2001-2002 Sess., at 1 (2001).
[35] See § 1281.85; Jevne, 111 P.3d at 957.
[36] Lynn Holton, Public Information Officer, Judicial Council Approves Ethics Standards for Arbitrators, Apr. 19, 2002, http://www.courtinfo.ca.gov/presscenter/newsreleases/NR34-02.HTM.
[37] Cal. Ethics Standards, supra note 10, § 1 cmt. (stating that California Standards guide arbitrator's conduct and inform and protect participants in arbitration); see Russell D. Feingold, Mandatory Arbitration: What Process is Due?, 39 Harv. J. on Legis. 281, 284 (2002) (discussing inherent unfairness in binding arbitration agreements between parties with unequal bargaining power).
[38] See Feingold, supra note 37, at 284.
[39] Id. at 288.
[40] See generally Maynard, supra note 1 (discussing inherent problems in binding arbitration in customer-broker disputes and urging reform).
[41] Feingold, supra note 37, at 288 (discussing inherent unfairness in binding arbitration agreements between parties with unequal bargaining power).
[42] Rifkind & Sterling v. Rifkind, Inc., 28 Cal. App. 4th 1282, 1292-93 (1994) (holding that no constitutional authority supports due process right to judicial review of arbitration award).
[43] United Steelworkers of Am. v. Enterprise Wheel and Car Co., 363 U.S. 593, 599 (1960) (disallowing judicial review of arbitrator's awards on merits for preservation of finality of arbitration award); Advest, Inc. v. McCarthy, 914 F.2d 6, 6 (1st Cir. 1990); French v. Merrill Lynch, 784 F.2d 902, 906 (9th Cir. 1985).
[44] United Steelworkers of Am. v. Am. Mfg. Co., 363 U.S. 564, 568 (1960) (stating that courts may only determine whether party seeking arbitration is making claim governed by contract, not whether moving party is right or wrong).
[45] Feingold, supra note 37, at 284-89.
[46] See generally Cal. Ethics Standards, supra note 10 (stating that Judicial Council enacted California Standards to protect participants in arbitration and promote public confidence in arbitration).
[47] Id.
[48] Id.
[49] Id. § 1 cmt.
[50] Id.
[51] See Cal. Civ. Proc. Code § 1281.85 (West 2003) (stating minimum conduct requirements designed to promote fairness in private arbitration proceedings); see also Cal. Ethics Standards, supra note 10.
[52] Id.
[53] Id.
[54] Id. § 5.
[55] Id.
[56] Id. § 7.
[57] Id. § 10.
[58] See Jevne v. Superior Court, 111 P.3d 954, 967 (Cal. 2005) (discussing differences between California Standards and NASD rules).
[59] Id. (explaining differences in disclosure requirements between California Standards and NASD rules).
[60] Id.; Cal. Ethics Standards, supra note 10, § 7 (listing matters that person nominated as arbitrators must disclose).
[61] See Cal. Ethics Standards, supra note 10, § 7. Required disclosures include family and professional relationships, membership in certain organizations, significant relationships with attorneys in the proceedings, and prior service as an arbitrator.
[62] Jevne, 111 P.3d at 967 (discussing difference in disclosure requirements between California Standards and NASD Code); see also Cal. Ethics Standards, supra note 10, § 7; NASD Rule 10312, available at http://nasd.complinet.com/nasd/display/display.html?rbid=1189&record_id=1159001495 (last visited Jan. 30, 2005) (stating NASD disclosure requirements).
[63] Jevne, 111 P.3d at 967; NASD Rule 10312, supra note 62.
[64] See Cal. Ethics Standards, supra note 10, § 7; NASD Rule 10308, available at http://nasd.complinet.com/nasd/display/display.html?rbid=1189&element_id=1159001089 (last visited Mar. 1, 2007); NASD Rule 10312, supra note 62.
[65] Jevne, 111 P.3d at 969; Cal. Ethics Standards, supra note 10, § 7.
[66] Jevne, 111 P.3d at 969-70; NASD Rule 10308, supra note 64.
[67] See Jevne, 111 P.3d at 967 (discussing differences between California Standards and NASD Code); Cal. Ethics Standards, supra note 10, §§ 1, 7; NASD Rule 10308, supra note 64; NASD Rule 10312, supra note 62.
[68] See Securities and Exchange Act of 1934, 15 U.S.C. § 78(b) (2000) (regulating securities transactions between shareholders).
[69] See id.
[70] Id. See generally People's Sec. Co. v. S.E.C., 289 F.2d 268, 270 (5th Cir. 1961) (discussing importance of the 1934 Act as primary regulatory mechanism of federal securities markets).
[71] See 15 U.S.C. § 78(b) (2000) (stating that federal government has sufficiently compelling interest in national securities market to require widespread regulation of markets).
[72] See Id. (noting that the 1934 Act applies to secondary markets or transactions between customers, rather than transactions between corporations and shareholders); see also Desiderio v. Nat'l Ass'n of Sec. Dealers, Inc., 191 F.3d 198, 201 (2d Cir. 1999) (“The NASD regulates the over-the-counter securities market, which includes securities firms and registered representatives who buy and sell over-the-counter-securities.”); People's Sec. Co., 289 F.2d at 270 (stating that purpose of the 1934 Act is to regulate securities subsequent to their initial issue).
[73] People's Sec. Co., 289 F.2d at 270. Primary markets facilitate the issuance of securities by a corporation for sale to customers. Id.
[74] See 15 U.S.C. § 78(d).
[75] See id.
[76] 15 U.S.C. §§ 78(d), 78(s) (stating that SEC oversees and regulates SRO rules relating to customer disputes); Shearson/American Express v. McMahon, 482 U.S. 220, 233-44 (1987); Jevne v. Superior Court, 111 P.3d 954, 966 (Cal. 2005) (discussing SEC's authority to regulate SROs); see also NASD – About NASD, http://www.nasd.com/AboutNASD/index.htm (discussing NASD's role in American markets as primary private-sector regulator of securities) (last visited Nov. 2, 2005).
[77] See National Association of Securities Dealers, supra note 76.
[78] Desiderio, 191 F.3d at 206 (discussing NASD's role as private actor rather than agent of state).
[79] Id.
[80] Arbitration & Mediation: NASD Dispute Resolution, http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=12 (last visited Feb. 5, 2006). The NASD oversees approximately 8000 arbitrations and 1000 mediations per year. Id.
[81] NASD Rule 10300, supra note 13 (providing access to NASD arbitration forum for NASD members).
[82] Id.
[83] Jevne v. Superior Court, 111 P.3d 954, 958 (Cal. 2005); see Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 234 (1987) (stating that SEC approves NASD arbitration procedures).
[84] See generally Brief for Attorney General Bill Lockyer as Amicus Curiae Supporting Petitioner, Jevne v. Superior Court, 111 P.3d 954 (Cal. 2005) (No. S121532) (discussing alternative forums available to parties).
[85] Id.; see also NASD Regulation, Inc., NASD Regulation's Office of Dispute Resolution Participates in SICA's Pilot Program; Offers Parties a Non-SRO Forum for Dispute Resolution, Jan. 24, 2000, http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_011326 (last visted Mar. 1, 2007) (stating that parties may choose other arbitration forums for securities disputes).
[86] See NASD Rule 10204, available at http://nasd.complinet.com/nasd/display/display.html?rbid=1189&record_id=1159001049&highlight=code+of+arbitration+procedure (last visited Jan. 30, 2006) (stating that NASD Uniform Arbitration Code only applies in NASD administered arbitrations); NASD Regulation, Inc., supra note 85.
[87] See Press Release, National Association of Securities Dealers: Arbitration Task Force Issues 70 Recommendations in Largest Revamping of Securities Arbitration Since Its Start More than a Century Ago, Jan. 22, 1996, http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_010550 (last visited Mar. 1, 2007) (stating that NASD provides forum for eighty-five percent of all arbitration claims brought in securities industry).
[88] See generally National Association of Securities Dealers, supra note 76 (discussing NASD's role in American markets as primary private-sector regulator of securities).
[89] See Jevne, 111 P.3d at 958 (holding that NASD rules preempt California Standards in securities arbitration).
[90] See Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice as Amici Curiae Supporting Petitioner at 6, Jevne v. Superior Court, 111 P.3d 954 (Cal. 2005) (No. S121532); NASD Rule IM 10100-(f), http://nasd.complinet.com/nasd/display/display.html?rbid=1189&record_id=1159001593&highlight=im+10100 (requiring that California investors waive California Standards before NASD arbitration could proceed in California).
[91] NASD Rule IM 10100-(f), supra note 90 (requiring that investors waive California Standards in arbitrations administered in California).
[92] Id.; see also Jevne, 111 P.3d at 959 (discussing waiver requirement).
[93] Jevne, 111 P.3d at 959 n.2.
[94] See id. (discussing Perino's report); Report to the SEC Regarding Arbitrator Conflict Disclosure Requirements in NASD and NYSD Securities Arbitrations, Nov. 12, 2002, http://www.sec.gov/news/press/2002-161.htm (last visited Mar. 1, 2007) [hereinafter Report to the SEC].
[95] Report to the SEC, supra note 94.
[96] Id.
[97] Id.
[98] Self Regulatory Organizations, Exchange Act Release No. 34-46562, 67 Fed. Reg. 62085-01 (Oct. 3, 2002) (establishing formal SEC approval of NASD waiver program).
[99] NASD Rule IM 10100-(f), supra note 90; see also Jevne v. Superior Court, 111 P.3d 954, 959 (Cal. 2005) (discussing NASD waiver program as approved by SEC).
[100] See generally Credit Suisse v. Grunwald, 400 F.3d 1119, 1121 (9th Cir. 2005) (holding that the 1934 Act preempts California Standards for SRO-administered arbitration); Jevne, 111 P.3d at 958 (holding that NASD regulations preempt California Standards).
[101] See Credit Suisse, 400 F.3d at 1121; Jevne, 111 P.3d at 958.
[102] Credit Suisse, 400 F.3d at 1121.
[103] Id.
[104] Jevne, 111 P.3d at 958, 960 (stating that Ninth Circuit's decision in Credit Suisse coincides with California Supreme Court's decision in Jevne).
[105] Id. at 958.
[106] Id.
[107] Id.
[108] Id.
[109] Id.
[110] Id. at 959.
[111] Id.
[112] Id.
[113] Id. at 960.
[114] Id. at 958.
[115] Id.
[116] Id.
[117] Id.
[118] Id.
[119] Id.
[120] Id.
[121] Id. at 960-64.
[122] Id. at 961-62.
[123] Id. at 960-64 (2005) (discussing legislative history of § 1281.85); see also Cal. Const. art. VI, § 6; People v. Hall, 883 P.2d 974, 980 (Cal. 1994); In Re Robin M., 579 P.2d 1, 5-6 (Cal. 1978).
[124] Jevne, 111 P.3d at 960-64.
[125] Id.
[126] Id. at 962.
[127] Id. at 963 (discussing holding that the 1934 Act preempts California Standards).
[128] Id.
[129] Id. at 963-64 (discussing three types of preemption).
[130] Crosby v. Nat'l Foreign Trade Council, 530 U.S. 363, 372 (2000); Savage v. Jones, 225 U.S. 501, 533 (1912); Jevne v. Superior Court, 111 P.3d 954, 964 (Cal. 2005).
[131] Jevne, 111 P.3d at 963. This is “field preemption”. See United States v. Locke, 529 U.S. 89, 108 (2000); Charleston & Western Carolina Ry. Co. v. Varnville Furniture Co., 237 U.S. 597, 604 (1915).
[132] Jevne, 111 P.3d at 963. See Crosby, 530 U.S. at 372; Hines v. Davidowitz, 312 U.S. 52, 66-67 (1941).
[133] See Securities and Exchange Act of 1934, 15 U.S.C. § 78o(b) (2000) (regulating securities transactions between shareholders); Jevne, 111 P.3d at 964.
[134] Jevne, 111 P.3d at 964.
[135] Id.
[136] Id. at 966-67.
[137] Id.
[138] Id. at 966.
[139] Id.
[140] Id. at 966.
[141] Id.
[142] Id.
[143] Id. at 967.
[144] Id.; Cal. Ethics Standards, supra note 10, § 7.
[145] Jevne, 111 P.3d at 966; Cal. Ethics Standards, supra note 10, §8..
[146] The NASD disclosure requirements only address circumstances that might preclude the arbitrator from rendering an impartial decision. Id. at 967. These circumstances include a financial interest in the outcome of the arbitration and relationships that might affect impartiality. Id. (discussing difference in disclosure requirements between California Standards and NASD Code); see also Cal. Ethics Standards, supra note 10, § 7 (specifying disclosure requirements under California Standards); NASD Rule 10312, supra note 62 (listing disclosures required by potential neutral arbitrators).
[147] Jevne, 111 P.3d at 967; Cal. Ethics Standards, supra note 10, § 7.
[148] Jevne, 111 P.3d at 968; NASD Rule 10308, supra note 64.
[149] Jevne, 111 P.3d at 968 (holding that NASD Code preempts three of California Standards).
[150] Id. at 954-61.
[151] Id. at 959.
[152] Id. at 960; Cal. Ethics Standards, supra note 10, § 8(b)(1)(A).
[153] In an NASD administered arbitration the securities broker is always an NASD member because only NASD members have access to the NASD dispute resolution forum. See NASD Rule 10300, supra note 13.
[154] Jevne, 111 P.3d at 970 (“These different systems of arbitrator disqualification are fundamentally irreconcilable. Standard 10 could require disqualification of an arbitrator who could not be disqualified under the NASD rules.”); see also Mayo v. Dean Witter Reynolds, Inc., 258 F. Supp. 2d 1097, 1107 (N.D. Cal. 2003) (“Application of the California standards thus would greatly reduce, if not eliminate in practice, the role of the Director of Arbitration in the disqualification process.”).
[155] Jevne, 111 P.3d at 971; Cal. Ethics Standards, supra note 10, § 10 (stating that party may serve disqualification notice based on any disclosure made by arbitrator).
[156] Cal. Ethics Standards, supra note 10, § 10.
[157] Jevne, 111 P.3d at 971.
[158] Id.
[159] Id. at 971-72.
[160] See, e.g., Hotel Employees & Rest. Employees Int'l Union v. Davis, 981 P.2d 990, 1009 (Cal. 1999) (stating courts may sever valid parts of state statute that conflict with California Constitution from invalid parts); see also Jevne, 111 P.3d at 971-72 (discussing severability of invalid provisions of preempted state law).
[161] Jevne, 111 P.3d at 971-72.
[162] Id. at 972.
[163] Id. at 971 (quoting Hotel Employees, 91 P.2d at 1009).
[164] Id. at 971 (holding that court could remove preempted California Standards without affecting wording of other standards).
[165] Id. at 972 (stating that preempted California Standards are not functionally separable because they enforce remainder of standards).
[166] Id.
[167] Id.
[168] See generally Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 26-27 (arguing against preemption of California Standards); Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing that NASD rules should not preempt California Standards).
[169] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 26-27; infra Part III.B.
[170] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 35-36 (arguing that public policy requires that NASD rules do not preempt California Standards); infra Part III.C.
[171] Crosby v. Nat'l Foreign Trade Council, 530 U.S. 363 (2000); (“[E]ven if Congress has not occupied the field, state law is naturally preempted to the extent of any conflict with a federal statute.”); California v. ARC America Corp., 490 U.S. 93, 100-01 (1989); Hines v. Davidowitz, 312 U.S. 52, 66-67 (1941).
[172] Maryland v. Louisiana, 451 U.S. 725, 747 (1981) (stating that federal law preempts state law when it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress”); Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963).
[173] Maryland, 451 U.S. at 747; Paul, 373 U.S. at 142-43.
[174] See Brief for Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 34-43 (arguing against preemption of California Standards).
[175] Lank v. N.Y. Stock Exch., 548 F.2d 61, 64 (2d Cir. 1977); James D. Cox, Securities Regulation 654-55 (2d ed. 1997); Kevin C. Bartels, “Click Here to Buy the Next Microsoft”: The Penny Stock Rules, Online Microcap Fraud, and the Unwary Investor, 75 Ind. L.J. 353, 353-54 (2000) (stating that Congress created the 1934 Act to prevent fraud); Marco Ferri, Securities Regulations as a Limitation on Access to Foreign Securities for the Individual United States Investor, 11 Fla. J. Int'l L. 473, 473 (1997) (stating that Congress enacted the 1934 Act to protect investors).
[176] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 14-15.
[177] Cal. Ethics Standards, supra note 10, § 1 cmt.
[178] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 14-15 (arguing that the 1934 Act does not preempt California Standards because California Standards do not frustrate Congress' purpose in enacting the 1934 Act).
[179] Cal. Ethics Standards, supra note 10, § 1 cmt (stating that purpose of California Standards is guiding arbitrator's conduct and informing and protecting participants in arbitration); Feingold, supra note 37, at 284 (discussing inherent unfairness in binding arbitration agreements between parties with unequal bargaining power).
[180] See Lank, 548 F.2d at 64; Cox, supra note 175, at 654-55; Ferri, supra note 175, at 473.
[181] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 34-43 (discussing benefits of added protection of California Standards for parties in NASD administered securities arbitration).
[182] See Desiderio v. NASD, Inc., 191 F.3d 198, 206 (2d Cir. 1999).
[183] Id.
[184] Petrie v. Pac. Stock Exch., 982 F. Supp. 1390 (N.D. Cal. 1997); see Cremin v. Merrill Lynch Pierce Fenner & Smith, 957 F. Supp. 1460, 1466 (N.D. Ill. 1997).
[185] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 20-21 (arguing that NASD rules are not official expressions of Congressional intent).
[186] Desiderio, 191 F.3d at 206 (stating that just because NASD is subject to extensive state regulation does not convert that entity's actions into state action).
[187] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 20 (arguing that SEC approval of NASD rules does not convert rules into expressions of congressional intent).
[188] See Desiderio, 191 F.3d at 206; Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 7.
[189] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 20; National Association of Securities Dealers, About NASD, Nov. 2, 2005, supra note 76 (stating NASD is private corporation).
[190] See Desiderio, 191 F.3d at 206 (“The NASD is a private actor, not a state actor. It is a private corporation that receives no federal or state funding. Its creation was not mandated by statute, nor does the government appoint its members or serve on any NASD board or committee.”).
[191] Id. See generally Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing that NASD rules should not preempt California Standards).
[192] See Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 6.
[193] See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Georgiadis, 903 F.2d 109, 113 (2d Cir. 1990); see generally Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing that SRO rules incorporated into private arbitration agreements are private contract terms and have no preemptive effect).
[194] See Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 6 (“Neither JB Oxford nor Interveners cite any authority for the proposition that private contract terms can trigger Supremacy Clause preemption of state law and the Attorney General knows of no such authority”).
[195] See Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 212 (1985) (holding that labor code provision does not give substantive portions of private agreements force of federal law); United States v. Morgan, 230 F.3d 1067, 1073-74 (8th Cir. 2000) (Bye, J., concurring); Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 6-7; David E. Engdahl, The Spending Power, 44 Duke L.J. 1, 71 (1994) (stating that private contract terms are not among laws of United States made in pursuance of Constitution to which Supremacy Clause applies).
[196] See Georgiadis, 903 F.2d 109 at 113.
[197] Id.
[198] Id.
[199] Id.
[200] Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 6-8 (arguing that SRO arbitration rules are private contract terms and should not receive force of federal statutes).
[201] See Brief for NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc. as Amici Curiae Supporting Interveners at 2-8, Jevne v. Superior Court, 111 P.3d 954 (Cal. 2005) (No. S121532) (arguing that NASD rules preempt California Standards); Jevne, 111 P.3d at 965-66.
[202] See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 127 (1973); Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 16 (discussing U.S. Supreme Court's holding in Ware); see also Jevne, 111 P.3d at 965-67 (discussing Ware).
[203] See Amicus Brief for NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc., supra note 201, at 4-6 (arguing that SEC has already determined that SRO rules coincide with aims of the 1934 act); see also Jevne, 111 P.3d at 965-67.
[204] Jevne, 111 P.3d at 966 (discussing 1975 amendments to the 1934 Act). See generally Amicus Brief for NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc., supra note 201 (arguing that NASD preempts California Standards).
[205] See Jevne, 111 P.3d at 965-67; Amicus Brief for NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc., supra note 201, at 4-6.
[206] See Amicus Brief for NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc., supra note 201, at 4-6.
[207] Jevne, 111 P.3d at 965-68; see id.
[208] Jevne, 111 P.3d at 965-67; Amicus Brief for NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc., supra note 201, at 4-6.
[209] Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 137-38 (1973); Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 19 (arguing against preemption of California standards).
[210] Amicus Brief for Attorney General Bill Lockyer, supra note 84, at 7 (arguing that SEC approval does not convert NASD rules into federal statutes).
[211] See id. at 19 (arguing that Ware is controlling law and SRO rules must advance purposes of the 1934 Act before they preempt state law).
[212] Id. at 19.
[213] See id.
[214] Id.
[215] Id. (arguing against preemption of California Standards).
[216] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 27.
[217] See N.Y. Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 654 (1995) (stating that courts must address preemption issues with “starting presumption that Congress did not intend to supplant state law”); Pac. Gas & Elec. Co. v. State Energy Res., Conservation & Dev. Comm'n, 461 U.S. 190, 203-04 (1983) (describing three instances in which federal law may preempt state law); Peatros v. Bank of Am., 990 P.2d 539, 542 (Cal. 2002) (stating that preemption is fundamental question of congressional intent, and courts must start with presumption that there is no intent). See generally Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing against preemption of California Standards).
[218] See English v. Gen. Elec. Co., 496 U.S. 72, 2279 (1990); Nordyke v. King, 44 P.3d 133, 138 (Cal. 2002) (“Partial preemption does not invalidate the Ordinance as a whole.”); Peatros, 990 P.2d at 542 (stating that federal law preempts state law to extent that they conflict with each other and no further); see also Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 27 (arguing that NASD regulations should not preempt California Standards in their entirety).
[219] Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 27.
[220] Jevne v. Superior Court, 111 P.3d 954, 965-67 (Cal. 2005).
[221] Id.; Hotel Employees & Rest. Employees Int'l Union v. Davis, 981 P.2d 990, 1009 (Cal. 1999); Calfarm Ins. Co. v. Deukmejian, 771 P.2d 1247, 1256 (Cal. 1989).
[222] See Jevne, 111 P.3d at 971-72 (stating that Standards 7, 8, and 10 are grammatically separable); Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 26 (arguing that NASD should not preempt California Standards in their entirety).
[223] See Jevne, 111 P.3d at 971-72; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 26; Cal. Ethics Standards, supra note 10, §§ 7-8, 10.
[224] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 27.
[225] Jevne, 111 P.3d at 971-72; Hotel Employees, 981 P.2d at 1009; Calfarm, 771 P.2d at 1256.
[226] Jevne, 111 P.3d at 972 (stating that because preempted California Standards are enforcement mechanisms for remainder of standards, they are not functionally separable).
[227] See generally Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90 (arguing against preemption of California Standards in their entirety).
[228] Id.
[229] See id. at 27.
[230] Jevne, 111 P.3d at 971-72; Hotel Employees, 981 P.2d at 1009; Calfarm, 771 P.2d at 1256.
[231] See generally Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90 (arguing against preemption of California Standards in their entirety).
[232] See Assembly Comm. on Judiciary, Analysis of Sen. Bill No. 475, 2001-2002 Sess., at 1 (2001).
[233] See Lank v. N.Y. Stock Exch., 548 F.2d 61, 64 (2d Cir. 1977); Cox, supra note 175, at 654-44; Ferri, supra note 175, at 473.
[234] See NASD Rule 10312, supra note 62 (stating disclosure requirements under NASD rules); NASD Rule 10313, available at http://nasd.complinet.com/nasd/display/display.html?rbid=1189&record_id=1159001495 (last visited Jan. 30, 2005) (stating circumstances under which parties may disqualify arbitrators).
[235] See generally Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing against preemption of California Standards); see also NASD Rule 10312, supra note 62; NASD Rule 10313, supra note 234.
[236] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 27.
[237] See id.; see also English v. Gen. Elec. Co., 496 U.S. 72, 2279 (1990); Nordyke v. King, 44 P.3d 133, 138 (Cal. 2002) (holding that federal law did not preempt municipal firearm ordinance); Peatros v. Bank of Am., 990 P.2d 539, 542 (Cal. 2002) (holding that federal law did not preempt state employment statute).
[238] See generally Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90 (arguing that NASD rules do not preempt California Standards).
[239] Ben White, NASD Sees Arbitration Problems: Letter Rebukes Firms for Document Delays, Wash. Post, Nov. 7, 2003, at E1.
[240] Id.; see also Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 35 (arguing against preemption of California Standards because of industry bias affecting NASD).
[241] White, supra note 239, at E1; see also Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 35-36 (arguing that NASD arbitration process is inherently unfair because of method of selecting arbitration panels).
[242] See Federal Arbitration Act, 9 U.S.C. §§ 1-14 (1954); Southland Corp. v. Keating, 465 U.S. 1, 2 (1984) (holding in enacting Federal Arbitration Act, “Congress declared a national policy favoring arbitration”); Ovitz v. Schulman, 133 Cal. App. 4th 830, 852-854 (2005) (stating that California Standards do not conflict with FAA's purpose). See generally Scott R. Swier, United States Supreme Court: The Tenuous Tale of the Terrible Termites: The Federal Arbitration Act and the Court's Decision to Interpret Section Two in the Broadest Possible Manner, 41 S.D. L. Rev. 131 (1996) (discussing Supreme Court's holding in Allied-Bruce Terminex Co. v. Dobson that courts should interpret interstate commerce language of Federal Arbitration Act in broadest possible manner).
[243] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31 (stating that California Standards provide additional disclosure requirements, thus increasing investor confidence in arbitration proceedings).
[244] See Ovitz, 133 Cal. App. 4th at 853; Cal. Ethics Standards, supra note 10, § 7; NASD Rule 10308, supra note 64.
[245] See Ovitz, 133 Cal. App. 4th at 853; Cal. Ethics Standards, supra note 10, § 7; NASD Rule 10308, supra note 64.
[246] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; see also infra Part I.B (discussing ways California Standards offer additional protection to investors).
[247] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[248] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[249] See Jevne v. Superior Court, 111 P.3d 954, 969 (Cal. 2005); Self-Regulatory Organizations, Exchange Act Release No. 34-46562, 67 Fed. Reg. 62,085 (Oct. 3, 2002) (stating that heightened disclosure requirements under California Standards place unnecessary burden arbitration proceedings). See generally Brief for Securities and Exchange Commission as Amicus Curiae Supporting Respondents, Mayo v. Dean Witter Reynolds, Inc., 258 F. Supp. 2d 1097 (N.D. Cal. 2003) (No. C-01-20336JF) (arguing that NASD rules preempt California Standards because independent SEC approval is more efficient).
[250] See Jevne, 111 P.3d at 969 (stating that California Standards hinder efficiency); Self-Regulatory Organizations, 67 Fed. Reg. at 62,085.
[251] See Jevne, 111 P.3d at 969; Self-Regulatory Organizations, 67 Fed. Reg. at 62,085 (discussing impact of California Standards' disclosure requirements on efficiency of arbitration proceedings in California).
[252] See Cal. Ethics Standards, supra note 10, § 7.
[253] See Jevne, 111 P.3d at 969; Self-Regulatory Organizations, 67 Fed. Reg. at 62,085.
[254] See Jevne, 111 P.3d at 969 (stating that California Standards hinder efficiency); Self-Regulatory Organizations, 67 Fed. Reg. at 62,085.
[255] See Jevne, 111 P.3d at 969.
[256] See id. (arguing that NASD rules preempt California Standards); Self-Regulatory Organizations, 67 Fed. Reg. at 62,085.
[257] Volt Info. Scis., Inc. v. Bd. of Trs. Of Leland Stanford Jr. Univ., 489 U.S. 468, 476 n.5 (1989) (stating that California Standards generally foster federal policy favoring arbitration); Ovitz v. Schulman, 133 Cal. App. 4th 830, 853 (2005); Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[258] See Ovitz 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; Cal. Ethics Standards, supra note 10, § 7 (stating disclosure requirements for arbitrators under California Standards).
[259] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; Robert J. Lewton, Are Mandatory, Binding Arbitration Requirements a Viable Solution for Employers Seeking to Avoid Litigating Statutory Arbitration Claims?, 59 Alb. L. Rev. 991, 1033-34 (1996); R. Gaull Silberman et al., Alternative Dispute Resolution of Employment Discrimination, 54 La. L. Rev. 1553, 1554 (1994).
[260] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; Lewton, supra note 259, at 1033-34; Silberman, supra note 259, at 1554.
[261] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; Lewton, supra note 259, at 1033-34; Silberman, supra note 259, at 1554.
[262] See Ovitz, 133 Cal. App. 4th at 853; Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; Lewton, supra note 259, at 1033-34; Silberman, supra note 259, at 1554.
[263] See Ovitz, 133 Cal. App. 4th at 849 (holding that FAA does not preempt California Standards); Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31. See generally Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing against preemption of California Standards).
[264] See Volt Info. Scis., Inc. v. Bd. of Trs. Of Leland Stanford Jr. Univ., 489 U.S. 468, 476 n.5 (1989) (stating that California Standards further federal policy favoring arbitration); Ovitz, 133 Cal. App. 4th at 853 (stating that California disclosure requirements do not reflect hostility to arbitration); Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31; Cal. Ethics Standards, supra note 10, § 7.
[265] Cal. Ethics Standards, supra note 10, § 7; see also California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[266] NASD Rule 10312, supra note 62 (stating disclosure requirements under NASD rules); see also Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[267] Jevne, 111 P.3d at 969; Ovitz, 133 Cal. App. 4th at 853; Cal. Ethics Standards, supra note 10, § 7.
[268] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[269] NASD Rule 10312, supra note 62 (stating disclosure requirements under NASD rules); see also id.
[270] See Volt Info. Scis., Inc. v. Bd. of Trs. Of Leland Stanford Jr. Univ., 489 U.S. 468, 476 n.5 (stating that California Standards further federal policy favoring arbitration); Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[271] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 35-36.
[272] See id. at 34-42; Paul Joseph Foley, The National Association of Securities Dealers' Arbitration of Investor Claims Against its Brokers; Taming the Fox that Guards the Henhouse, 7 N.C. Banking Inst. 239, 241-42 (2003).
[273] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 34; Foley, supra note 273, at 242; NASD – About NASD, supra note 76 (discussing NASD's role in American markets as primary private-sector regulator of securities).
[274] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 34; Foley, supra note 272 at 242; NASD – About NASD, supra note 76.
[275] Foley, supra note 272, at 242.
[276] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 34 (arguing that investors using NASD arbitration forums are especially in need of additional protections afforded by California Ethical Standards).
[277] Id.
[278] Id.
[279] See Federal Arbitration Act, 9 U.S.C. §§ 1-14 (1954); Advest, Inc. v. McCarthy, 914 F.2d 6, 6 (1st Cir. 1990) (stating that judicial review of arbitration awards is limited to circumstances where arbitration has been tainted in certain specific ways).
[280] Advest, 914 F.2d at 6.
[281] 9 U.S.C. §§ 1-14; see id.
[282] United Steelworkers of Am. v. Enterprise Wheel & Car Co., 363 U.S. 593, 599 (1960) (upholding arbitration agreement under collective bargaining agreement).
[283] French v. Merrill Lynch, 784 F.2d 902, 906 (9th Cir. 1985) (upholding arbitrator's judgment because it was not completely irrational or in manifest disregard of law); see also Am. Postal Workers Union v. U.S. Postal Serv., 682 F.2d 1280, 1285 (9th Cir. 1982) (holding that courts must confirm arbitration awards even in case of clear error of law).
[284] See U.S. Postal Serv., 682 F.2d at 1285.
[285] See French, 784 F.2d at 906; U.S. Postal Serv., 682 F.2d at 1285.
[286] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31 (stating that California Standards provide additional disclosure requirements and promote increased fairness in arbitration proceedings). See generally Amicus Brief for Attorney General Bill Lockyer, supra note 84 (arguing against preemption of California Standards).
[287] See Amicus Brief for California Employment Lawyers Association and Trial Lawyers for Public Justice, supra note 90, at 31.
[288] Id.; see also infra Part III.C.1 (discussing risk of bias in NASD administered arbitrations).
[289] See U.S. Postal Serv., 682 F.2d at 1285.
[290] See supra Part III (arguing that California Supreme Court erred in holding that NASD regulations preempt California Standards).
[291] Supra Part III.
[292] Supra Part III.
[293] Supra Part III.
[294] See supra Part III.
Citation
7 U.C. Davis Bus. L.J. 401 (2007)