House approves bill that would end mandatory arbitration in broker, adviser contracts

House approves bill that would end mandatory arbitration in broker, adviser contracts
Legislation unlikely to get through Senate but sends a message for potential future action.
SEP 20, 2019
Advocates for prohibiting mandatory arbitration for investment disputes say House passage of arbitration legislation Friday gives the issue momentum even though the bill faces long odds of becoming law. The House approved the Forced Arbitration Injustice Repeal Act, or Fair Act, largely along party lines, 225-186. The measure would end predispute arbitration agreements for consumer, employment, antitrust or civil rights claims and includes language covering "securities or other investments." The bill would affect mandatory arbitration clauses that are in nearly every brokerage contract and increasingly are showing up in advisory contracts. The brokerage disputes are handled through the Financial Industry Regulatory Authority Inc.'s arbitration system. "If it became law, Finra arbitration would become voluntary," said George Friedman, a former director of Finra arbitration. "Predispute arbitration agreements for investors and industry employees would be void." But the bill's legislative prospects are limited. It got through the House with the support of only two Republicans. A companion bill in the Republican-majority Senate has 34 co-sponsors, all of whom are Democrats. "It's an uphill battle in the Senate," said Mr. Friedman, who runs an eponymous consulting firm and is an adjunct professor at Fordham University. [Recommended video: Next gen advisers must be more diverse] Nonetheless, the House vote gives opponents of mandatory arbitration hope. "It's an important marker for the future," said Micah Hauptman, financial services counsel at the Consumer Federation of America. "It's clear there is strong support for banning forced arbitration and allowing consumers and investors to have their day in court." House approval of the FAIR Act is believed to be the first time a chamber has passed such legislation. "It means that on the House side at least, members of Congress understand the issues with forced arbitration clauses," said Christine Lazaro, president of the Public Investors Arbitration Bar Association and a law professor at St. John's University. Register today for our Future of Financial Advice event on Nov. 20. During the House debate, Democrats emphasized they were trying to allow consumers their choice of forum to settle disputes. Republicans asserted that the bill would end arbitration, which they praised as cheaper, faster and more effective than the court system. Passing the measure may require a change in the political makeup of Washington, according to Andrew Stoltmann, a Chicago securities attorney. The Fair Act "certainly draws a line of demarcation between Democrats and Republicans and the president," Mr. Stoltmann said. "It lays the groundwork for the ban of mandatory arbitration after the 2020 election, if we get a Democratic-controlled Senate and a Democratic White House." A draft bill that specifically targets securities arbitration, the Investor Choice Act, has been written by Rep. Bill Foster, D-Ill., but not yet formally introduced. It would prohibit forced arbitration clauses in brokerage and advisory contracts. "The more bills we can get to move on these issues, the better," Mr. Hauptman said.

Latest News

Senate wants changes to Trump’s tax bill; here’s what’s expected
Senate wants changes to Trump’s tax bill; here’s what’s expected

‘Revenge tax’ on foreign investors could be scrapped in new version.

CFTC’s regulatory pioneer Bagley dies aged 96
CFTC’s regulatory pioneer Bagley dies aged 96

Veteran legislator helped set the standard for derivatives regulation.

Getting your head round AI when compliance is a big concern
Getting your head round AI when compliance is a big concern

As industry edges closer to the technology, an expert explains the options.

Advisor headcount down at Bank of America, Osaic and UBS so far in 2025, Wolfe Research analyst says
Advisor headcount down at Bank of America, Osaic and UBS so far in 2025, Wolfe Research analyst says

Counting advisor moves in and out of firms requires some art as well as science.

Carson Group's M&A head sees '10-to-15 year bull market' for RIAs
Carson Group's M&A head sees '10-to-15 year bull market' for RIAs

“I'm just a big believer that based on demographics alone, we are looking at a 10-to-15 year bull market in M&A in the RIA and independent wealth space,” said Michael Belluomini, SVP of M&A at Carson Group.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.

SPONSORED Beyond the dashboard: Making wealth tech human

How intelliflo aims to solve advisors' top tech headaches—without sacrificing the personal touch clients crave