A bill introduced in the House on Thursday would stop brokers and investment advisers from requiring that investors take claims to arbitration rather than court.
The legislation, written by Rep. Keith Ellison, D-Minn., would
ban pre-dispute mandatory arbitration clauses in contracts between advisers and clients. The measure also would prohibit any restrictions on investors filing class action suits.
Nearly all brokerage — and a growing number of advisory — agreements include provisions forcing investors into arbitration.
“Working Americans shouldn't have to sign away their rights in order to work with a financial adviser or broker-dealer to build a secure retirement,” Mr. Ellison, a member of the House Financial Services Committee, said in a statement. “An investor's right to recover monetary damages through legal action is critical. Working Americans will be more eager to invest their hard-earned dollars when we give them more rights in the financial marketplace.”
Investor claims are adjudicated in the
arbitration system run by the Financial Industry Regulatory Authority Inc., the industry-funded broker-dealer regulator. Critics assert that the forum is biased toward brokerages. Supporters of arbitration say it delivers decisions and awards for investors more efficiently than the court system.
The Dodd-Frank financial reform law gave the Securities and Exchange Commission the authority to end mandatory arbitration. In the nearly five years since the law was enacted, the SEC has not addressed the issue.
Eliminating mandatory arbitration is a priority for state regulators.
“State securities regulators believe that investor confidence in fair and equitable recourse is critical to the health of our securities markets and long-term investments by retail investors,” the North American Securities Administrators Association said in the
legislative agenda it released Feb. 23.
In 2013, Mr. Ellison floated a similar bill. It garnered 30 co-sponsors, all Democrats, and failed to get a hearing in the House Financial Services Committee, which is controlled by Republicans. It died at the end of the congressional session last December and had to be reintroduced in the new Congress.
Republicans' strengthened House majority and their Senate majority pose an even bigger challenge for Mr. Ellison's bill this time, but state regulators are not discouraged. Putting the legislation back in the hopper raises congressional awareness.
“When you push, good things happen,” Michael J. Canning Jr., NASAA director of policy, said at a Feb. 23 event on Capitol Hill. “There are ancillary benefits to keeping that conversation going.”
