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Ending Mandatory Arbitration & Restoring Investor Trust in Wall Street

A recent editorial by Investment News addresses a newly introduced bill intended to end the mandatory arbitration clause found in contracts between financial advisers and their clients.  Rep. Keith Ellison, who introduced the bill, says he believes that doing away with mandatory arbitration could begin the process of rebuilding investor trust in Wall Street.

“Investors want to get back in the market, but they’re rightly wary that the game is rigged against them,” Ellison said in a statement after introducing the bill. “Investors shouldn’t have to sign away their rights in order to work with a financial adviser or broker/dealer. By removing some of these unfair advantages, consumers will be more eager to invest, which will create jobs and strengthen the economy.”

The mandatory arbitration clauses are standard in brokerage contracts and often included by registered investment advisers. Specifically, the clauses dictate that any client complaints must be settled in binding arbitration instead of the courts.

As the Investment News editorial correctly points out, there are other reasons to get rid of mandatory arbitration, not the least of which is the fact that investors should not be required, as they are now, to relinquish their legal rights in advance of a future complaint with their broker. Such a requirement does nothing to instill trust and faith in Wall Street.

In reality, as of three years ago, the Securities and Exchange Commission (SEC) has had the authority to end, or at the very least, limit mandatory arbitration under the Dodd-Frank Act. But the SEC has yet to make a move in that direction.

This summer, one SEC member – Luis A. Aguilar – went against the tide and introduced a bill to kick start the process. That bill, the Investor Choice Act of 2013, is strongly supported by several investor protection and financial groups, including the North American Securities Administrators Association (NASAA), which believes that inclusion of mandatory arbitration provisions in broker/dealer and investment adviser customer contracts denies many investors the ability to pursue legitimate claims against fraudsters.

“Investors deserve better than the current ‘take-it-or-leave-it’ approach to securities dispute resolution. Rep. Ellison’s legislation will ensure that investors have the unencumbered right to seek redress in the appropriate and desired forum,” said Heath Abshure, NASAA President and Arkansas Securities Commissioner, in a statement.

The bottom line: If the investment world hopes to restore the trust of investors – and create true financial reform – it needs to act in their best interests. Period. Ending mandatory arbitration is a beginning.


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