IAA backs Obama on banning mandatory securities arbitration

In draft legislation for the Investor Protection Act of 2009, the administration issued guidelines that would give the Securities and Exchange Commission authority to prohibit or restrict mandatory arbitration clauses that brokerage firms typically include in customer contracts.

“We support the administration's proposal,” said David Tittsworth, executive director and executive vice president of the IAA, which represents SEC-registered investment advisers. “We think that investors should have the choice to select a dispute resolution forum.”

The arbitration issue will likely to be debated next Tuesday at a House Financial Services Committee hearing at which industry groups will testify on adviser and other regulatory reform issues.

Predictably, the brokerage industry is opposed to a ban on mandatory arbitration agreements.

The SEC should study the issue, said Kevin Carroll, managing director and associate general counsel of the Securities Industry and Financial Markets Association.

However, “It wouldn't make any sense to give the SEC unfettered power to ban pre-dispute arbitration agreements without the benefit of study,” he said in an e-mail. “It would be unfair to investors and securities firms.”

Most investment advisory firms do not use mandatory arbitration agreements, Mr. Tittsworth said.

The arbitration forum operated by the Financial Industry Regulatory Authority Inc. “can create a perception of unfairness, regardless of its actual results,” he said.

The North American Securities Administrators Association Inc. also supports banning mandatory arbitration clauses in securities industry contracts. The Arbitration Fairness Act of 2009 (H.R. 1020 and S. 931) was introduced earlier in the year by Rep. Hank Johnson, D-Ga., and by Sen. Russell Feingold, D-Wis. The legislation would ban mandatory arbitration clauses widely used in many industries.