Investment News (November 17, 2021) - Democrats back the legislation, but Republicans are united against it. While the measure was passed by a House committee, an advocate calls winning congressional approval a 'Herculean task.'
Legislation that would prohibit brokers and investment advisers from including mandatory arbitration agreements in customer contracts is headed to the House floor but faces a steep climb up the other side of Capitol Hill.
The House Financial Services Committee Tuesday approved on a party-line vote, 27-23, the Investor Choice Act, which would allow investors to take their claims against brokerages and investment advisory firms to court if they think that’s a better forum for their cases. Nearly all brokerage and advisory contracts include mandatory arbitration clauses.
The bill, written by Rep. Bill Foster, D-Ill., drew support only from Democrats on the committee. It’s not clear when it will come up for a vote by the full House but when it does, it’s likely to pass because Democrats control the chamber.
The situation is different in the Senate, where there is a 50-50 split between Republicans and Democrats. The GOP can filibuster the bill and require 60 votes for passage. A Senate companion measure has been introduced by Sen. Jeff Merkley, D-Ore.
“There is still an uphill, Herculean task to get this legislation passed into law,” said Andrew Stoltmann, a Chicago securities attorney who has helped lead the Public Investors Advocate Bar Association’s advocacy for the bill. “I think it will be approved by the full House. It’s the Senate where all the landmines are. There is a very long way to go.”
Stoltmann and other PIABA members have been meeting with lawmakers. They’re getting support from Democrats but not from Republicans, he said. It’s not just the filibuster that stands in the way. Moderate Democrats also may pose a challenge.
“It’s so easy for the securities industry lobbyists to pick off a couple Democrats in the Senate to effectively block it,” Stoltmann said.
The American Securities Association said the legislation “would severely harm investors” and urged the House committee to focus on bills that have backing from both parties.
The arbitration bill “would be a giant gift to the trial bar while providing no corresponding benefits to investors,” ASA Chief Executive Christopher Iacovella wrote in a Nov. 16 letter to the House panel.
The ASA opposed the mandatory arbitration bill as well as two bills to reform special purpose acquisition companies that also passed on party-line votes. “The ASA encourages the committee to focus on bipartisan legislation that will encourage small business capital formation instead of controversial and partisan bills that have little to no chance of being signed into law.”
During the House committee debate on the bill, Foster asserted that investors shouldn’t be forced to go to arbitration, a system run by the Financial Industry Regulatory Authority Inc., the broker-dealer self-regulator. He cited concerns about arbitration panels being biased toward financial firms, an insufficient appeals process and problems with firms paying arbitration awards when they lose.
“No investor should have to choose between participating in our capital markets and receiving financial advice on one hand and accessing our court system on the other,” Foster said.
The Dodd-Frank financial reform law gave the Securities and Exchange Commission authority to ban or limit mandatory arbitration for brokerage and advisory customers. But the agency has not acted in the 11 years the law has been in existence.
“If the SEC has not used its authority to limit or restrict them, why is it appropriate now for Congress to choose the nuclear option and completely ban mandatory arbitration agreements with broker-dealers and investment advisers altogether?” Rep. Bill Huizenga, R-Mich., said during the panel’s debate. “This bill takes the drastic legal step of eliminating an important legal recourse to everyday investors.”
Republicans also argued that arbitration is a faster, more efficient and less expensive route than going through the court system for investor claims.
“Arbitration does work,” said Rep. French Hill, R-Ark., who is a former brokerage executive.
Foster agreed arbitration is sometimes the best option for investors but said it shouldn’t be the only one.
His bill “will not eliminate arbitration,” Foster said. “It simply gives investors the choice not to use arbitration if they don’t think it’s in their best interest.”