Earlier this week, state securities regulators made an appearance on Capitol Hill in an effort to gain support among lawmakers for restricting or ending the use of mandatory arbitration clauses in client contracts with brokers. As reported April 17 by Investment News, one person who needs no convincing on the matter is Securities and Exchange Commissioner (SEC) Luis Aguilar.
During a speech at the North American Securities Administrators Association conference on Tuesday, Aguilar called for an end to mandatory arbitration, saying that he believes the SEC needs to be “proactive” in this important area.
“We need to support investor choice. Allowing investors to take their legal claims to court would “enhance investor protection and add more teeth to our federal securities laws,” Aguilar told the audience.
The same message - that investors should be allowed to go to court to settle a grievance against their broker – was reiterated by about 17 NASAA members when they recently met with more than 40 lawmakers.
The Dodd-Frank financial reform law authorizes the SEC to prohibit or curtail compulsory arbitration for clients of brokers and investment advisers. So far, the SEC has not yet addressed the arbitration provision.
“The time is ripe for the commission to act under [Dodd-Frank] to protect the investing public and prevent the further abuse of forced arbitration contracts. This is at the forefront of our agenda,” said Bob Webster, NASAA spokesman, in the Investment News story.
The issue of compulsory arbitration came to a head earlier this year following a ruling by a FINRA arbitration panel who said that they could not stop Charles Schwab Corp. from using the arbitration agreements to prohibit clients from engaging in class actions.
Arbitration backers say that the process is more efficient and less costly than a court proceeding. Opponents argue that class actions provide a better venue than arbitration for disputes involving a small amount of money. The SEC’s Aguilar noted in his speech on Tuesday that clients should not to be forced to give up their access to judicial redress.
“Investors should not have their option of choosing between arbitration and the traditional judicial process taken away from them at the very beginning of their relationship with their brokers and advisers,” Aguilar said. “A client’s right to go to court to recover monetary damages is an important right that should be preserved and kept in the client’s toolkit.”