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The securities industry scored a major court victory this week in its fight against California’s ethics rules for arbitrators. Since an adverse U.S. district court ruling last fall, the National Association of Securities Dealers and the New York Stock Exchange have gone around the guidelines by requiring that investors sign waivers before allowing arbitrations with securities companies. But U.S. District Judge Jeremy Fogel ruled in San Jose on Tuesday that federal law pre-empts the state Judicial Council’s controversial rules. The waivers, which require investors to give up any claims under the ethics standards, allowed the securities industry to begin clearing a backlog of hundreds of arbitrations. But even with the waivers, arbitrations are still moving very slowly, according to lawyers who represent consumers in the cases. Even though lawyers who represent investors would rather that securities groups follow the new rules, they concede that getting rid of the waivers would at least speed things up. Unless Judge Fogel’s ruling in Richard Mayo v. Dean Witter Reynolds, Inc., et al., 01-20336, is appealed and overturned, the securities groups are free and clear of California’s new regulations. The new state ethics rules require that arbitrators disclose financial relationships or other conflicts of interest between themselves and parties in disputes. Failure to follow the standards could result in vacating an arbitration award. In his 30-page decision, Fogel said the securities industry is governed by federal regulations, not the California Legislature. “Plaintiff and the Judicial Council, as amicus, contend that application of the California standards is not pre-empted by the [Securities] Exchange Act because the California standards and the [securities industry] arbitration rules share similar goals. . . . While the two sets of rules indeed may share similar goals, this alone does not mean that the state rules are not at odds with the accomplishment of the federal regulatory objectives,” Fogel wrote. Mayo had sued Dean Witter over withdrawals he said were made using a stolen debit card linked to his investment account. The securities company, citing its agreement with Mayo, forced the issue into arbitration. But then the Judicial Council passed the new ethics rules for arbitrators, and the NYSE suspended all arbitrations in the state — including Mayo’s. Fogel’s ruling denied Mayo’s motion to vacate the arbitration. While Mayo’s arbitration was in limbo, the NASD and NYSE sued the Judicial Council. But in November San Francisco Senior U.S. District Judge Samuel Conti threw out that suit, NASD Dispute Resolution Inc. v. Judicial Council of California, 02-3486. That case has been appealed to the Ninth Circuit U.S. Court of Appeals. Mayo’s lawyer, Santa Clara solo William Kennedy, said he hasn’t decided whether to appeal. Along with the Judicial Council, Attorney General Bill Lockyer had joined Mayo’s case as an amicus.

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