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Revenge of the Investor

Even if the arbitrators themselves resist the change, the system itself is under attack from the investor's new ally, the states. California fired the first shot in September, 2001, when it passed legislation requiring new ethics standards. It requires arbitrators to disclose their potential conflicts of interest, such as business relationships between the parties and arbitrators' family members.

The NASD and NYSE went through the roof. As soon as the rules took effect on July 1, the two filed suit against California's Judicial Council, claiming that the rules are excessively burdensome and are preempted by federal law. After a brief flurry of papers--with the SEC siding with the two exchanges--U.S. District Court Judge Samuel Conti on Nov. 14 dismissed the suit on the grounds that the 11th Amendment prohibits naming state agencies as defendants. The NASD and NYSE are mulling an appeal.

The struggle in California over arbitration rules illustrates the problems facing investors as they flex their muscles. Wall Street remains as eager as ever to protect its prerogatives. But in state after state their clout is being felt, whether through suburban investor-investigators or Washington labor lobbyists, arbitrators or local prosecutors. They're fighting to make investor voices heard, and for the first time in memory, people in power are listening.

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