One of the most encouraging developments that I’ve seen so far in the nearly four-year debate over advisor reregulation is the flurry of calls to end mandatory arbitration for brokerage clients. It seems that the current attack on broker arbitration ironically was caused by Charles Schwab & Co.’s recent victory over FINRA’s challenge of the brokerage’s expanded mandatory arbitration clause, which now also precludes its clients from participating in class actions against the firm. The backlash may be worse than FINRA’s initial decision.
As reported by Melanie Waddell on AdvisorOne, a group of some 37 U.S. Senators and Congressmen led by Senator Al Franken (D-Minn.) sent a letter to the SEC that same day, which read in part: “When brokers engage in fraudulent or illegal behaviors that lose investors’ savings, mandatory arbitration clauses limit investors’ ability to protect their rights under the law… …We were alarmed to see further attempts to erode investor rights when Charles Schwab, one of the country’s largest brokers, expanded the mandatory arbitration clauses in its customer agreements to include a mandatory class-action waiver clause.”
Schwab’s “victory” also appeared to be the impetus behind SEC Commissioner Luis Aguilar’s anti-arbitration clause remarks to an April 16th meeting of the North American Securities Administrators Association. “Investors should not have their option of choosing between arbitration and the traditional judicial process taken away from them at the very beginning of their relationship with their brokers and advisers,” Mr. Aguilar said in his prepared statement (reporters were not allowed into the NASAA session). “A client’s right to go to court to recover monetary damages is an important right that should be preserved and kept in the client’s toolkit,” he said, before concluding: “I believe the Commission needs to be proactive in this important area. We need to support investor choice.”
Commissioner Aguilar’s comments seem to have hit home with the state securities regulators. On May 3, NASAA sent its own letter to the SEC also urging the agency to “insure that investors have meaningful remedies and a choice of forums” in which to resolve disputes with brokerages,” wrote A. Heath Abshure, president of NASAA (Mr. Abshure also blogs regularly for AdvisorOne). “It has been our longstanding position that the ‘take it or leave it’ approach represented by these mandatory clauses is harmful to investors.” “These clauses,” Abshure continued, “have become even more troubling” in light of the Schwab decision. “That’s wrong on the merits and bad public policy. Forced arbitration should not be the sole forum available to aggrieved investors.”