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The Second District Court of Appeal has dealt a major blow to California’s tough new ethical rules for securities arbitrators, deciding that federal law pre-empts the state Legislature’s ability to set such standards. Jevne v. the Superior Court of Los Angeles, B167044, is the first published state appellate court ruling on the controversial ethical rules to decide the issue of pre-emption. There are about a dozen other state cases relating to the rules on appeal. Although the unanimous panel of Second District justices ruled that the Judicial Council did nothing wrong in implementing the Legislature’s new rules, it said the guidelines are in conflict with the federal Securities Exchange Act of 1934. “Despite the laudable goals of the Legislature in promulgating the California Standards to protect consumers and maintain judicial scrutiny of securities arbitrations, the disqualification rules � present a clear physical conflict with the [National Association of Securities Dealers] rules,” which are authorized by the Securities and Exchange Commission, wrote Division Seven Justice Fred Woods in an opinion signed by Presiding Justice Dennis Perluss and Justice Laurie Zelon. Such a conflict is one way federal law can pre-empt state law. Attorney General Bill Lockyer, who filed one of several amicus briefs in the closely watched case, had argued that the new rules should be allowed to stand because the federal laws don’t specifically discuss arbitration. “The rules that are promulgated by private entities � don’t speak with the force of a congressional mandate and shouldn’t pre-empt state law,” said Deputy Attorney General Amy Winn, who wrote the AG’s brief. Securities dealers are regulated by the NASD and the New York Stock Exchange, which strongly oppose California’s new rules. Neither organization could be reached for comment late Wednesday. Attorneys for both organizations filed amicus briefs on their behalf. The Judicial Council implemented the new standards last year, after the passage of legislation carried by Sen. Martha Escutia, D-Montebello. The rules were conceived by Gov. Gray Davis and Chief Justice Ronald George in the wake of high-profile corporate scandals and the increasing popularity of arbitration to settle disagreements. They require, among other things, 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. Before state filings like Jevne, the dispute hit federal court. The securities industry sued George and the rest of the council, and a federal judge in San Francisco tossed that suit. But then a federal judge in San Jose ruled in another case that federal law pre-empted the state rules. That case, Mayo v. Dean Witter Reynolds, 01-20336, is pending at the Ninth Circuit U.S. Court of Appeals. While those federal cases were being litigated, the NASD and NYSE simply stopped allowing California cases to go to arbitration. That created a huge backlog, so the securities groups began resolving disputes again, but only if both parties agreed to waive the ethical standards. In the Second District case, a consumer named Jack Jevne refused to waive the California standards. A trial court ruled against him. It’s unknown if he plans to appeal Wednesday’s decision; his attorney, Eric Woosley of Zilinskas & Woosley in Santa Barbara, could not be reached for comment.

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