Information Memos
  02-53
Information Memo   02-53   is available for viewing or printing with Adobe Acrobat
 
Number 02-53 11/21/2002
 
ATTENTION: CHIEF EXECUTIVE OFFICER, MANAGING PARTNERS, COMPLIANCE AND LEGAL DEPARTMENTS
TO: ALL MEMBERS AND MEMBER ORGANIZATIONS
SUBJECT: WAIVER OF CALIFORNIA ETHICS STANDARDS FOR NEUTRAL ARBITRATORS
 

The Securities and Excahnge Commission, on November 12, 2002, approved, on a six-month pilot basis, an amendment to New York Stock Exchange, Inc. Arbitration Rules relating to a waiver of the California Ethics Standards for Neutral Arbitrators. The amendment is summarized below and the text of the amended rule language is attached as Exhibit A.

In September 2001, the California State Legislature passed legislation directing the Judicial Council of California, the administrative arm of the state court system, to establish ethical standards for neutral arbitrators. The Judicial Council adopted a set of arbitration standards that became effective on July 1, 2002 (the "California Arbitration Standards").

Among other things, the California Arbitration Standards impose specific disclosure obligations on arbitrators, permit pre-hearing applications for arbitrator disqualification and create a vacatur remedy for an arbitrator's failure to make the required disclosures -- without any finding of partiality. These unnecessary and onerous disclosure obligations and procedures conflict with the nationally-applicable protections of the NYSE and the National Association of Securities Dealers ("NASD") against bias and encourage collateral and post-award attack on NYSE and NASD arbitrations. They raise the specter of each of 50 states purporting to apply its own scheme for regulating NYSE and NASD arbitrations that conflicts with the schemes of other states and with the uniform, national program that the Securities and Exchange Commission ("SEC") oversees.

The NYSE and NASD, supported by the SEC, requested the California legislature to exempt their arbitrations from the California Arbitration Standards. The legislature declined. Thus, on July 1, the NYSE and NASD ceased appointing new arbitrators for cases pending in California. Cases in which arbitrators were already appointed are proceeding in their normal course.

On July 22, the NYSE joined the NASD in filing a suit seeking a judgment in Federal Court in California declaring the California Arbitration Standards inapplicable to their arbitrations. The SEC, which has filed an amicus brief in support of the NYSE and NASD motion for a declaratory judgment, requested that the NYSE and NASD provide California investors with an in-state means of resolving arbitrable disputes.

To that end, in addition to continuing to offer customers in California mediation and hearings in adjacent states, we amended Rule 600 to offer California investors hearings in California upon their waiver of the California Arbitration Standards. In offering this option, we will provide customers with a copy of the California Standards and a notice explaining that, by waiving application of the California Arbitration Standards, they are confirming their agreement to arbitrate pursuant to our rules, including our rules' protections against biased arbitrators. The notice will also explain that the waiver seeks to protect their arbitrations from the collateral and post-award attack that the California Arbitration Standards encourage.

___________________________
Frank Z. Ashen
Executive Vice President



Cal Info Memo-600.doc

CA Info memo EXHIBIT A.doc