InvestmentNews (December 11, 2019) - Measures would have to find GOP support for any hope of Senate approval.
Recently introduced bills in the House and Senate would ban mandatory arbitration agreements in broker and investment adviser client contracts, marking the first time the legislation has been floated in both chambers.
But the bicameral activity doesn’t include Republican support so far, which dims the prospects for arbitration reform.
Last week, Rep. Bill Foster, D-Ill., and Sen. Jeff Merkley, D-Ore., unveiled the Investor Choice Act, which would end forced arbitration and ban the prohibition of class-action lawsuits in brokers’ and investment advisers’ contracts with their customers.
Client disputes with brokers are currently heard in the Financial Industry Regulatory Authority Inc.’s arbitration system, which allows brokerage clients to pursue class-action cases. Client disputes with investment advisers are usually pursued in private arbitration forums.
Most brokerage and investment adviser contracts include mandatory arbitration clauses.
“Individuals shouldn’t be forced to surrender their legal rights because they choose to work with a financial advisor or broker dealer to plan for their retirement and invest their hard-earned money,” Mr. Foster said in a statement.
In previous Congresses, similar legislation has been offered in the House. Now the measure has a wider reach.
“This is the first time there’s been companion legislation in the Senate,” said Christine Lazaro, a professor of clinical legal education at St. John’s University. “That’s a good step forward.”
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How far the legislation will progress depends on whether it gets bipartisan support. Mr. Foster’s bill has a strong chance to advance in the Democratic-majority House, although the House Financial Services Committee has not yet scheduled a vote.
In the Republican-majority Senate, the situation is more challenging.
Amanda Critchfield, a spokeswoman for the Senate Banking Committee, declined to comment on the bill’s prospects. The panel has not scheduled action on the measure.
“I haven’t seen anything that would indicate the Senate Banking Committee is going to take this up anytime soon,” said Jason Rosenstock, a partner at Thorn Run Partners, a government relations consulting firm.
Earlier this year, the House approved the Forced Arbitration Injustice Repeal Act, which includes a provision that prohibits mandatory arbitration in securities contracts. It would amend the Federal Arbitration Act.
The Investor Choice Act complements that legislation, said Greg Cybulski, a spokesman for Mr. Foster. It would amend Depression-era laws governing brokers and investment advisers.
Under the Investor Choice Act, “there’s no ambiguity as to whether a mandatory arbitration clause would be permissible in investment-advice contracts,” said Ms. Lazaro, who is past president of the Public Investors Arbitration Bar Association.
The financial industry generally supports mandatory arbitration.
“Many of the criticisms of arbitration are based upon the flawed premise that alternative mechanisms — such as litigating through courts — provide better outcomes for consumers and investors and give them a meaningful and realistic option for resolving dispute,” Thomas Quaadman, executive vice president of the U.S. Chamber of Commerce, said in prepared testimony earlier this year at a House Financial Services Committee hearing that focused in part on a draft of the Investor Choice Act. “In fact, the opposite is true. Litigation typically involves enormous costs, delays, and — in the case of class actions — the majority of cases result in no recovery at all for members of the class.”
The bills would allow clients to pursue arbitration as an option for legal recourse but would lift mandates to use it.
The Dodd-Frank financial reform bill allowed the Securities and Exchange Commission to ban mandatory arbitration in broker and adviser contracts. The agency has not acted on that authority.