The Securities and Exchange Commission may be putting off reforming mandatory-arbitration clauses in brokerage contracts, but that doesn't mean state regulators are backing off their fight to change the system.
The North American Securities Administrators Association Inc. has been pushing the SEC to use its authority under Dodd-Frank to end or limit the pre-dispute mandatory-arbitration provisions that are included in nearly every broker-client agreement.
At the InvestmentNews Regulatory Round Table last Monday, A. Heath Abshure, Arkansas' securities commissioner and NASAA's president, used an example of an investor whose individual retirement account totals $27,000.
“If he's got a mandatory-arbitration provision with a Charles Schwab [& Co. Inc.] class action waiver, that means he's going to arbitration. That's the only alternative he has,” Mr. Abshure said.
The way things are set up, “the [arbitration system] really presents an absolute prohibition and an impossibility for small investors to seek redress for securities fraud,” he said.
But Ira Hammerman, senior managing director and general counsel at the Securities Industry and Financial Markets Association, said that the arbitration process, which the Financial Industry Regulatory Authority Inc. administers, is a fair and efficient way to help small investors.
“It is one where customers who have small claims can go and have those claims resolved,” he said during the round table.
But among independent broker-dealers, there has been a growing “disenchantment” with the system over the past year, according to Dale Brown, president and chief executive of the Financial Services Institute Inc.
“The reality they're experiencing is that it's becoming more unpredictable, more costly,” he said during the round table.
Finra arbitration panels are inconsistent in applying rules related to evidence and the statute of limitations, said Mr. Brown, whose organization comprises independent brokers and financial advisers.
He also is wary of attempts to limit the involvement of industry representatives on arbitration panels.
“Industry participants bring a perspective on how things really work, and I think add to the fairness of the proceedings for investors,” he said.
Mr. Abshure disagreed.
“Industry participants mean they're there as employees of the industry,” he said. “I don't want a broker deciding an arbitration matter.”
The FSI is engaged in conversation with Finra to improve the arbitration system, Mr. Brown said.
But he defended arbitration as the better forum for fraud claims because the court system “is too high a barrier — too costly.”
In a letter last month to 37 lawmakers who urged the SEC to take action on mandatory arbitration, Chairman Mary Jo White wrote that the issue “warrants serious consideration” and that the staff “currently is studying whether — and if so, how and under what circumstances — they would recommend that the commission consider using this authority.”
After the round table, Mr. Abshure and other NASAA officials met with Ms. White, who didn't offer any further details about her position.
Although disappointed she didn't act on the letter from Congress, “she seems very open and willing to talk with us, hear our concerns, which is a good sign,” Mr. Abshure said.
