SEC commissioner: Mandatory arbitration must go

In speech to NASAA, Aguilar rails against industry practice; state regulators don't need convincing

Apr 17, 2013 @ 1:55 pm

By Mark Schoeff Jr.

State securities regulators visited Capitol Hill Wednesday to try to build support among lawmakers for restricting or ending the use of mandatory arbitration clauses in client contracts with brokers. One powerful voice in Washington they won't have to convince: SEC Commissioner Luis Aguilar.

In a speech at a NASAA conference in Washington Tuesday, the Securities and Exchange Commission member called for an end to mandatory arbitration. “I believe the commission needs to be proactive in this important area,” Mr. Aguilar said in prepared remarks. “We need to support investor choice.”

Allowing investors to take their legal claims to court would “enhance investor protection and add more teeth to our federal securities laws,” Mr. Aguilar said. His remarks were first reported by the Wall Street Journal.

About 17 members of the North American Securities Administrators Association Inc. conducted meetings with more than 40 lawmakers, delivering the same message: That investors should be allowed to go to court to settle a grievance against their broker.

The Dodd-Frank financial reform law gives the Securities and Exchange Commission the authority to prohibit or curtail compulsory arbitration for clients of brokers, as well as investment advisers. The commission has not yet addressed the arbitration provision.

“The time is ripe for the commission to act under [Dodd-Frank] to protect the investing public and prevent the further abuse of forced arbitration contracts,” NASAA spokesman Bob Webster said. “This is at the forefront of our agenda.”

Almost all brokerage contracts include a mandatory pre-dispute arbitration clause — and they're also now appearing in agreements between clients and investment advisers, according to state regulators.

Controversy over compulsory arbitration spiked earlier this year, when a Finra hearing panel ruled that the regulator could not stop The Charles Schwab Corp. from using the arbitration agreements to prohibit clients from engaging in class actions.

That decision, however, has not blunted the push to eliminate arbitration — at least among some regulators.

“Arbitration has increasingly become the sole forum available to an aggrieved investor,” A. Heath Abshure, Arkansas securities commissioner and NASAA president, said in a speech at the NASAA conference. “Part of investor protection is ensuring civil remedies for investors, and one size does not always fit all when it comes to remedies.”

It's not clear whether the SEC will propose arbitration reform. At least three of the five commissioners would have to support such a proposal.

On Tuesday, SEC commissioner Elisse Walter answered a question about arbitration carefully when talking to reporters following her own appearance at the NASAA conference. “I would be very supportive of taking another look at the question,” Ms. Walter said. But she added: “Arbitration presents a number of very significant advantages over court litigation for investors.”

Arbitration backers say that the process is more efficient and less costly than a court proceeding. Opponents argue that class actions provide a better venue than arbitration for disputes involving a small amount of money. In his speech on Tuesday, Mr. Aguilar noted that clients ought not to be forced to give up their access to judicial redress.

“Investors should not have their option of choosing between arbitration and the traditional judicial process taken away from them at the very beginning of their relationship with their brokers and advisers,” Mr. Aguilar added. “A client's right to go to court to recover monetary damages is an important right that should be preserved and kept in the client's toolkit.”


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