Bill would require SEC to restrict mandatory arbitration

The Securities and Exchange Commission would be required to issue rules prohibiting or limiting mandatory-arbitration clauses in securities contracts under draft legislation introduced last week by Senate Banking Committee Chairman Christopher Dodd, D-Conn. This Senate provision goes further than the proposed Investor Protection Act, approved Oct. 28 by the House Financial Services Committee, which is worded in a way that would give the SEC the authority to adopt such rules but not mandate it. The Consumer Federation of America applauded the provision in the Dodd draft, saying it “strengthens provisions regarding mandatory pre-dispute binding-arbitration clauses in broker and adviser contracts.” A large portion of the brokerage industry has opposed eliminating mandatory arbitration clauses, with trade groups arguing that the arbitration system is more efficient than the courts in resolving securities disputes. “The current arbitration system provides equal protection to all investors in a manner that is fair, and both faster and less expensive than court-based litigation,” Securities Industry and Financial Markets Association spokesman Andrew DeSouza wrote in an e-mail. The provision in the Dodd bill “mandates restrictions by the SEC before the commission even has an adequate opportunity to review the performance of the current system or the impact of any changes on small investors,” he wrote. SIFMA has called for studying the issue before any action is taken. State securities regulators have called for eliminating the clauses and have said that investors should be able to choose whether to use the arbitration system, which is operated by the Financial Industry Regulatory Authority Inc. Like the Investor Protection Act, the Dodd draft would raise the asset threshold for SEC registration of investment advisory firms to $100 million, from $25 million. Advisory firms with less than $100 million would be regulated by the states. That would move about 4,200 advisory firms from SEC oversight to the states. Currently, the SEC oversees 11,300 firms, and the states regulate 14,500 firms. E-mail Sara Hansard at [email protected].