InvestmentNews Editorials

Time to end mandatory arbitration

Aug 18, 2013 @ 12:01 am

It is facing long odds of passage, but Rep. Keith Ellison's recently introduced bill to end mandatory arbitration in broker and investment adviser agreements makes sense. The Democrat from Minnesota believes that investors have grown suspicious of Wall Street, and that doing away with arbitration clauses in such agreements could go a long way toward getting them off the investment sidelines.

“Investors want to get back in the market, but they're rightly wary that the game is rigged against them,” Mr. Ellison said in a statement after introducing the bill. “Investors shouldn't have to sign away their rights in order to work with a financial adviser or broker-dealer. By removing some of these unfair advantages, consumers will be more eager to invest, which will create jobs and strengthen the economy.”

Whether it would have that much of an impact is hard to say, but there are other good reasons to get rid of this long-standing yoke around investors' necks.

The ability to seek redress in the court system when they have been wronged is seen by most Americans as a fundamental right. In fact, most novice investors probably don't even know they have to give up their right to sue their broker until they sign a customer agreement, which almost always contains a mandatory-arbitration clause. Increasingly, investment advisory firms also are asking clients to sign these agreements.

Requiring investors to give up their legal rights in advance of any future dispute is fundamentally wrong and does nothing to instill confidence in the financial advisory industry.

That's a shame because there is nothing inherently wrong with using an arbitration system to resolve investor complaints. In some cases, the system can work to the benefit of an investor and can offer more-timely relief than the court system.

However, it should be up to investors to decide which venue they want to use to pursue their claims. The decision shouldn't be made for them in advance of a complaint, as it is now.

SEC has the power

The Dodd-Frank Act gave the Securities and Exchange Commission the ability to prohibit or limit mandatory-arbitration clauses. That was a clear recognition by Congress that these clauses might be against the best interests of investors.

But in the three years since Dodd-Frank's passage, the SEC has yet to even start the process that might lead to a change in mandatory arbitration, despite the urging of at least one of its members, Luis A. Aguilar, and groups such as the North American Securities Administrators Association.

That is why Mr. Ellison has introduced his bill, the Investor Choice Act of 2013.

In supporting the bill, NASAA rightly points out that the effort by Charles Schwab & Co. Inc. to expand its mandatory-arbitration contracts to include class action waivers “heightens the urgency of passing the Ellison bill to restore the rights of investors.”

NASAA is concerned that if investors were forced to waive their right to join class actions, it would severely limit their ability to bring claims for small amounts of money. “No attorney is going to take a $50,000 securities fraud claim,” NASAA president Heath Abshure told InvestmentNews.

We agree. Unfortunately, Mr. Ellison's bill is facing an uphill climb. Mr. Ellison is a Democrat on the Republican-majority House Financial Services Committee. Getting a hearing on the bill, let alone a favorable vote, may prove formidable.

That's why the bill needs the support of the entire financial advice industry. If advisers really want to act in the best interests of their clients, ending mandatory arbitration is a good place to start.


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