Financial Advisor (April 16, 2021) - A bill introduced yesterday would prohibit broker-dealers and advisors from making clients sign mandatory arbitration agreements.
The Investor Choice Act would also void existing arbitration agreements and ban prohibitions that force investors to waive their right to bring class action lawsuits, according to the bill which was introduced in both the Senate and House by Sen. Jeff Merkley (D-Ore.) and Rep. Bill Foster (D-Ill.).
The bill would amend the Securities Exchange Act to make it illegal for any “broker, dealer, funding portal or any municipal securities dealer” to include a mandate for arbitration in the event of a dispute. The bill also outlaws any customer agreement that restricts the ability of a customer or client to select or designate a forum for resolution of that dispute. The amendment also prohibit any security from registering with the SEC if its issuer mandated arbitration for customer-advisor disagreements.
Newly confirmed Securities and Exchange Commission Chairman Gary Gensler has already voiced his support for the change. Gensler said during his confirmation hearing that he believes investors should not be bound by mandatory arbitration clauses, but should be able to take broker-dealers and investment professionals to court to settle disputes if they chose to.
“While arbitration has its place, I think it’s so important investors ... have an avenue to redress their claims in the courts,” Gensler said.
According to 2018 Finra statistics, claimants were awarded damages in only 40% of arbitration cases, down from the previous three years.
The legislation would also make it unlawful for national exchanges to list the securities of a company that mandates forced arbitration, stipulates arbitration forums and/or prohibits class actions.
In a statement, Merkley said that the changes would address the current “rigged” system, where the “investment advisor or broker chooses the judge, pays the judge, and promises future business to the judge.”
“Issuers, brokers, dealers, and investment advisers hold powerful advantages over investors, and mandatory arbitration clauses leverage those advantages to severely restrict the ability of defrauded investors to seek redress,” according to the new legislation.
Investors “should be free to either choose arbitration to resolve disputes if they judge that arbitration truly offers them the best opportunity to efficiently and fairly settle disputes and pursue remedies in court should they view that option as superior to arbitration,” the bill states.
Twelve additional Democrat lawmakers co-signed the bill, including Rep. Carolyn Maloney (D-N.Y.) and Rep. Gregory Meeks (D-N.Y.), Sen. Elizabeth Warren (D-Mass.) and Sen. Sheldon Whitehouse (D-R.I.).
“Investors should be able to exercise their right to a day in court if they believe that is the best remedy. If arbitration is an appropriate option, investors should have the right to evaluate it as an option after their dispute arises,” said David P. Meyer, president of the Public Investors Arbitration Bar Association.
“Many investors, however, are still likely to choose Finra arbitration because is often the best option for aggrieved investors to pursue their claims against their broker and brokerage firm. The Finra arbitration process has improved significantly over the past 20 years. And, if the playing field is leveled by giving investors the choice to pursue arbitration at the time the dispute arises, I firmly believe the Finra arbitration process will work hard to make the process more fair and transparent,” Meyers said.