State securities cops seek bill to ban pre-dispute arbitration for advisers

NASAA also backs SEC exam user fee, wants crowd-funding redress

Mar 5, 2013 @ 2:51 pm

By Mark Schoeff Jr.

State securities regulators are seeking federal legislation that would ban investment advisers from forcing their clients to use mandatory arbitration to settle claims against them.

They also are urging Congress to prod the Securities and Exchange Commission to propose regulation that would ban pre-dispute arbitration clauses in brokerage contracts or to pursue legislation that would codify that change.

The recommendations are included among a list of several legislative priorities that the North American Securities Administrators Association Inc. released on Tuesday.

“States are seeing the emergence of mandatory pre-dispute arbitration clauses in contracts between state-regulated investment advisers and their clients, despite the investment advisers' fiduciary duty,” said Steven Irwin, Pennsylvania securities commissioner.

The state regulators are also encouraging lawmakers to step into the fray over a recent decision by a Financial Industry Regulatory Authority Inc. hearing panel. The body ruled that Finra could not stop The Charles Schwab Corp. from using arbitration agreements to prohibit clients from engaging in class action law suits.

There are two ways to address the situation, according to Heath Abshure, the NASAA's president. The SEC could develop a rule banning pre-dispute arbitration. It was given such authority by the Dodd-Frank financial reform law. Alternatively, Congress could pass legislation.

“We're going to seek a congressional fix,” said Mr. Abshure, who is Arkansas' securities commissioner. “Even if the SEC were to do nothing, that doesn't mean Congress can't do anything. We're taking the approach that we're going to go after all of them.”

For Mr. Abshure, allowing investors flexibility in settling claims is central to increasing their confidence in the financial markets.

“Harmed investors should be able to seek relief in any forum and not be forced into an expedited arbitration that could foreclose their ability to obtain relief,” Mr. Abshure said. “Investors aren't going to invest if they can't sue if they're defrauded. It's as simple as that.”

The state and provincial regulators group also will support the Financial Industry Regulatory Authority Inc. in its appeal of the hearing panel's decision — a dispute that could go all the way to the Supreme Court.

The arbitration effort is a highlight of the NASAA's legislative agenda. The group also is seeking legislation that would allow the SEC to charge user fees for investment adviser exams, a move it says would strengthen adviser oversight.

Last year, Rep. Maxine Waters, D-Calif., introduced a user-fee bill as an alternative to a measure that would establish one or more self-regulatory organizations for investment advisers. Advisers strongly opposed SRO legislation. Neither a SRO nor a user-fee bill has been reintroduced in the new Congress, which was seated in January and will serve through the end of 2014.

The NASAA also is encouraging lawmakers to introduce legislation that would permit victims of so-called crowd funding to file class action suits.

That type of financing, which involves selling securities over the Internet in small increments to nonaccredited investors, is allowed under the Jumpstart Our Small Business Startups Act. The JOBS Act was signed into law almost a year ago, but the SEC has not yet proposed a crowd-funding rule.

It's an ambitious wish list.

“For too long, our legislative efforts had us playing defense,” Mr. Abshure said. “Our 2013 agenda adds offense to our defense.”

The state enforcers acknowledge that they have a lot of work to do to gain traction on Capitol Hill. They are hopeful that high turnover in the House and Senate gives them new opportunities to build support.

“It's not a sprint,” Mr. Irwin said. “It's a marathon over the next two years. We're going to lay the to lay the groundwork”

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