Financial Advisor (September 23, 2019) - The House has passed a bill that would prohibit mandatory arbitration in brokerage and advisor contracts, giving consumer advocates who have been fighting for the measure hope for some type of bipartisan reform.
The Democrat-led House approved the Forced Arbitration Injustice Repeal Act (Fair Act) on Friday by a vote along party lines, save for two Republican votes in favor.
The Senate is not expected to approve the legislation, but advocates of arbitration reform feel there is still a window of opportunity for some type of legislation.
Also, President Trump “strong opposes” the bill and would likely veto such legislation if it makes its way to his desk, the White House said in a strongly worded statement today.
“I don’t see the Senate approving this bill, but I can see them coming out with their own version,” said George Friedman, a former director of Finra arbitration.
The sweeping bill would prevent broker-dealers and investment advisors from offering investors and employees a mandatory arbitration agreement at the outset of a relationship and would even invalidate all existing arbitration clauses. Firms would, however, still be able to offer customers arbitration when a dispute arises.
“I think it’s a good step in terms of demonstrating how serious Congress is in looking at mandatory arbitration clauses,” said Christine Lazaro, president of the Public Investors Advocate Bar Association.
“There is still room for improvement in the arbitration process ... but if arbitration is not mandatory, there is more incentive to make the process easier for investors, so it is preferred,” added Lazaro, who runs the securities arbitration clinic for investors at St. John's University School of Law.
The House bill would end predispute arbitration agreements for consumer, employment, antitrust or civil rights claims and includes language covering securities or other investments.
If ratified, the legislation would negate the mandatory arbitration clauses in every brokerage and advisory contract. Finra's arbitration system currently handles almost all brokerage disputes.
While passage of the legislation is unlikely in the Senate, where a similar bill lacks one Republican co-sponsor, experts on both sides of the issue point to the fact that leading Republicans have stated on the record this year that they want to look at securities arbitration as a window of opportunity for arbitration reform.
Earlier this year, Senate Judiciary Committee Chairman Lindsey Graham (R-S.C.) said, “What’s good for business is not necessarily good for individuals. ... It bothers me that when you sign up for a product or service, you are giving away your rights." He addeed that the committee would take a "long and hard look at how arbitration can be improved" this year. "We will try to find some middle ground. ... There have to be fairness standards.”
Friedman said he thought the House bill needed a good deal of work and would prefer that it offered investors the right to choose arbitration at the outset of a relationship.
“I have my accounts with Merrill and this statute would retroactively nullify the arbitration clause I signed with them,” said Friedman, who left Finra six years ago and is now editor of Securities Arbitration Alert and a professor of law at Fordham University.
Friedman said if given the choice by Merrill Lynch, he would sign the mandatory arbitration clause all over again. “I would sign it absolutely. Court is very expensive and in the state of New York cases are subject to three levels of appeals. Court cases take a long time and are very costly,” he said.
Arbitration has another benefit, said Friedman. "Finra will enforce arbitration as well. If a broker or firm doesn’t pay, they’ll take away your license,” he said.
PIABA’s Lazaro said consumers need to be able to choose for themselves.
“I think it is important that investors have the option to resolve disputes in their forum of choice," he said. "These contracts force investors to give up their right to a jury trial at the outset of a relationship, when a dispute is pretty inconceivable to investors."
“I think the bill in the Senate is less likely to get out committee, but it is certainly increasing attention on mandatory arbitration and the problems that exist,” he said.