Advocates for ending mandatory arbitration are hopeful that the political atmosphere is right to advance legislation introduced in Congress this week.
On Thursday, Sen. Jeff Merkley, D-Ore., and Rep. Bill Foster, D-Ill., offered bills in their respective chambers, the Investors Choice Act, that would ban pre-dispute mandatory arbitration agreements in brokerage and investment advisory customer contracts. The bill also would prohibit contract clauses that prevent class action lawsuits.
The measures, which are cosponsored by 12 other congressional Democrats, are similar to legislation that has been introduced over the last decade that has stalled.
Like the current iteration, previous versions have been backed by Democrats, who are now in control of Congress and the White House.
“This is the first time that there is a likelihood of it being passed,” said Andrew Stoltmann, a Chicago securities attorney. “There is a perfect storm in Washington, D.C. with a Democratic president, Democratic control of the House and Senate.”
Ending mandatory arbitration has been a priority for the Public Investors Advocate Bar Association.
“I am very optimistic that the Investors Choice Act will pass,” said PIABA President David Meyer. "The time has come. There is a lot of momentum focused on forced arbitration.”
Mandatory arbitration is included in just about every brokerage and advisory client contract.
Arbitration proponents say it is more efficient and cost-effective than legal proceedings in court. Opponents of mandatory arbitration say that investors should have the option of going to court.
The Financial Industry Regulatory Authority Inc. runs the arbitration system in which customer claims against brokerages and registered representatives are adjudicated. Arbitration cases brought against investment advisers are heard in forums such as the one run by the American Arbitration Association.
If investors are given a choice, “it’s going to require the Finra arbitration process and the other forums to become more transparent and more fair in order to attract the cases,” Meyer said. “If arbitration is not a monopoly, the process itself will improve.”
Finra would have to make “meaningful changes to the arbitration forum,” including in discovery procedures, Stoltmann said. “If you get a judge overseeing discovery, it’s a whole new ballgame.”
The Securities Industry and Financial Markets Association came out against the Merkley-Foster bill on Friday.
“The securities arbitration system has worked effectively for decades because it is subject to public oversight, regulatory oversight by multiple independent regulators, and rules of procedure that are designed to benefit investors,” SIFMA chief executive Kenneth Bentsen Jr. said in a statement. “Pre-dispute arbitration agreements are a vital component of this system. [S]ecurities arbitration promotes fair, efficient, and economical dispute resolution for all parties. SIFMA believes we should preserve the current enforceability of arbitration clauses in customer contracts and therefore strongly opposes any effort to ban them.”
A Finra spokesperson declined to comment on the Merkley-Foster bill.
In a response to a letter earlier this year from Sen. Elizabeth Warren, D-Mass. and one of the co-sponsors of the bill, Finra said it places some limits on mandatory arbitration clauses.
“For instance, Finra rules protect a customer’s right to pursue class actions in court nothwithstanding any pre-dispute arbitration agreement,” Finra said.
No such safeguard for class action cases is included in advisory contracts. It’s another reason the Merkely-Foster legislation is needed, Meyer said.
“Probably 50% of our cases are dealing with investment advisers, and 15 years ago, it was probably 10%,” said Meyer, managing principal at the law firm Meyer Wilson. “More money is moving from the broker side to the IA side.”
The Dodd-Frank financial reform law gave the Securities and Exchange Commission the authority to end mandatory arbitration. The agency has not acted to do so.
Warren pressed Gary Gensler on mandatory arbitration during his Senate Banking Committee confirmation hearing for SEC chairman.
“While arbitration has its place, it’s also important that investors...have an avenue to redress their claims in the courts,” said Gensler, who was confirmed by the Senate earlier this week.
But if Congress is going to bring an end to mandatory arbitration, the legislation introduced this week will have to get through a Senate that is evenly divided between Democrats and Republicans.
The Senate GOP can stop the bill through a filibuster that would require 60 votes for approval. It’s not clear whether an arbitration bill would be eligible for a special parliamentary procedure that only requires a simple majority to pass.
A spokesperson for Merkley was not immediately available for comment.
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