Franken, Dems tell SEC to ban mandatory arbitration

Dodd-Frank Act allows agency to end the practice

Apr 30, 2013 @ 3:49 pm

By Mark Schoeff Jr.

More than three dozen lawmakers are calling on the Securities and Exchange Commission to end mandatory arbitration clauses in brokerage contracts.

In a letter today, Sen. Al Franken, D-Minn., said that providing a choice of venue for hearing claims against brokers would be fairer for investors, particularly smaller ones. Mr. Franken said that the SEC should use the authority given to the agency under the Dodd-Frank financial law to reform arbitration clauses.

“To our disappointment, in the almost three years since the Dodd-Frank Act's enactment, the commission has largely disregarded this important mandate,” states the letter, which was written by Mr. Franken and signed by 15 senators and 22 House members, all of whom are Democrats. “The time is ripe for the commission to act under [Dodd-Frank] to protect the investing public and prevent further abuse of forced arbitration contracts.”

The legislators also asked the SEC to monitor how many brokers are including mandatory arbitration agreements and class action waivers in their client contracts.

SEC spokesman John Nester declined to comment on the letter. He added that the agency has not taken a position on mandatory arbitration.

The Dodd-Frank law allows the SEC to restrict or prohibit the use of mandatory arbitration.

Almost every brokerage contract contains such a provision. It's not clear when or if the SEC will propose a rule, although it has received some comment letters.

In a speech before state securities regulators two weeks ago,

SEC Commission Luis Aguilar urged the agency to act on its Dodd-Frank authority and end mandatory arbitration.

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

“We are deeply concerned that the commission's failure to respond to the dangers posed by widespread forced arbitration will weaken existing investor protections,” the lawmakers wrote. “Given the uncertainty created by the recent Finra decision, we urge the commission to act quickly to exercise its authority under [Dodd-Frank] to prevent this practice and protect investor rights.”

The North American Securities Administrators Association has made the issue a priority. The letter adds momentum to their efforts to raise its profile on Capitol Hill.

“Forced arbitration should not be the sole forum available to aggrieved investors, especially those investing small amounts,” A. Heath Abshure, Arkansas Securities Commissioner and NASAA president, said in news release distributed by Mr. Franken's office.

Mr. Franken has opposed mandatory arbitration in employment contracts. He's now widened that focus to include financial services agreements.


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