End Mandatory Arbitration Clauses, Says SEC Commissioner

A recent article in Investment News reports that state securities regulators are trying to build support among lawmakers on Capitol Hill to restrict or end the use of mandatory arbitration clauses in client contracts with brokers.

In meetings with more than 40 lawmakers, about 17 members of the North American Securities Administrators Association Inc. (NASAA) made the case that investors should be allowed to go to court to settle grievances against their brokers.

SEC Commissioner Luis Aguilar favors such regulation. In a statement, Mr. Aguilar expressed the belief that allowing investors to take their legal claims to court would enhance investor protection and strengthen federal securities laws.

With authority granted by the Dodd-Frank financial reform law, the SEC may prohibit or curtail compulsory arbitration for clients of brokers, as well as investment advisers. However, the SEC has not yet addressed the arbitration provision.

NASAA spokesman Bob Webster said it’s now time for the commission to act under Dodd-Frank to protect the investing public and prevent the further abuse of forced arbitration contracts.

Earlier this year, controversy over compulsory arbitration flared up when a Financial Industry Regulatory Authority, Inc. (FINRA) hearing panel ruled that the regulator could not stop Charles Schwab Corp. from using the arbitration agreements to prohibit clients from engaging in class actions.

But state regulators and others are still pushing for better investor protection through eliminating or restricting mandatory arbitration. A. Heath Abshure, Arkansas securities commissioner and NASAA president, said that arbitration has increasingly become the sole forum available to an aggrieved investor. He argues that investor protection means ensuring appropriate civil remedies for investors.

Will the SEC propose arbitration reform? At least three of the five commissioners need to support such a proposal.

SEC commissioner Elisse Walter told reporters that she would support taking another look at the question. She added that for investors, arbitration presents some significant advantages over court litigation.

Arbitration backers claim the process is more efficient and less costly than a court proceeding. But opponents argue that class actions provide a better venue than arbitration for disputes involving small amounts of money.

Mr. Aguilar argues that investors should not be forced to give up their access to judicial redress. Scott Starr, securities attorney at Starr Austen & Miller agrees. “The securities arbitration system is slanted to assist the brokerage industry, and this is the reason the industry has fought so hard to maintain it,” he says. Mr Starr adds, “Securities arbitration should be optional — not mandatory — so that the defrauded investor and his attorney have the option of a real judge conducting a trial.”

Source: Article “SEC commissioner: Mandatory arbitration must go,” by Mark Schoeff Jr., in Investment News.