WealthManagement (February 6, 2024) By Patrick Donachie

The “Investor Choice Act” would prohibit b/ds and advisors from mandating client arbitration. Additionally, PIABA and other investor advocates are pressuring the SEC to ban the practice.

Rep. Bill Foster (D-Ill.) and Sen. Jeff Merkley (D-Ore.) reintroduced legislation prohibiting forced arbitration clauses in client contracts. 

The “Investor Choice Act” would outlaw the mandatory arbitration agreements foisted on brokerage or investment advisory clients and make it illegal for broker/dealers or advisors to ban class action lawsuits in customer contracts. 

The reintroduction of the legislation comes as numerous investor protection advocacy groups, including the Public Investors Advocate Bar Association, Better Markets and the Consumer Federation of America, last week formed a new coalition to pressure the SEC to reform its rules on the clauses.

Foster and Merkley have long supported the legislation, previously introducing it without success in 2021 and 2019. Like those earlier iterations, it would amend the 1934 Securities Exchange Act to prohibit a b/d or advisor from including contractual mandates that “restrict, limit or condition the ability of a customer or client” to select a forum for resolution.

The rule would also prohibit b/ds and advisors from outlawing clients pursuing resolution in an “individual or representative capacity or on a class action or consolidated basis.” 

Several Democrats are co-sponsoring the legislation in the House and Senate, including Sens. Dick Durbin (D-Ill.), Elizabeth Warren (D-Mass.), as well as Reps. Jan Schakowsky (D-Ill.) and Gregory Meeks (D-New York). In a statement, Merkley stressed that every client deserves “a fair shot at justice” if they’ve been wronged.

“But when an investment advisor or broker chooses the judge, pays the judge, and promises future business to the judge, it’s clear that the system meant to deliver that justice is rigged,” he said.

Several organizations endorsed the potential legislation, including PIABA and the CFA, Public Citizen, Americans for Financial Reform and the North American Securities Administrators Association, an advocacy arm for state securities regulators. 

In a letter to the chairmen and ranking members of the Senate Banking Committee and House Financial Services Committee, NASAA Executive Director Joseph Brady threw the organization’s weight behind the legislation, writing that Congress would “be empowering retail investors” by passing the legislation.

Last summer, an SEC report commissioned by the House Appropriations Committee found clients were at a significant disadvantage, with about six in 10 RIAs including arbitration mandates in client contracts. Of those, about 92% and 60% specified an arbitration forum and location conducive to the advisory firm instead of the client. So, RIAs can demand arbitration in the American Arbitration Association or JAMS, where arbitrators’ fees can run daily costs into the thousands. In December, the SEC Investor Advocate cited this report when recommending the SEC “temporarily suspend” the use of forced arbitration clauses in client agreements. 

During a conference announcing the coalition’s campaign in Washington, D.C., PIABA President Joseph Peiffer said he wasn’t sure what actions (if any) the commission had taken in response to the Investor Advocate report but stressed advocates would not stop until there was a solution. 

“The bad guys thrive in the dark,” he said. “And I don’t think it’s a partisan issue to say that all of these sorts of disputes should be out in the open."