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May 16, 2013 at 08:05 PM
(Editor’s Note: This commentary was written before it was reported that Charles Schwab had temporarily removed language in contracts that banned customers from filing class-action lawsuits.)
Forced arbitration has reemerged as a hot-button issue in recent weeks with calls for its demise coming from members of Congress, an SEC commissioner, a far-ranging band of consumer advocates and public interest groups, state securities regulators and others.
And for good reason. For too long, investors have been forced into a ‘take it or leave it’ scenario by mandatory pre-dispute arbitration clauses in customer agreements with their broker-dealers, and more recently their investment advisors. The time for this denial of investor rights to end is now.
That’s why NASAA supports the Arbitration Fairness Act, legislation reintroduced last week by Sen. Al Franken (D-Minn.) and Rep. Hank Johnson (D-Ga.) to eliminate forced arbitration clauses in employment, consumer, civil rights and antitrust cases. NASAA, along with Sen. Franken and 36 of his colleagues in the House and Senate, and consumer organizations ranging from AARP to the Consumer Federation of America and Public Citizen, recently called upon the SEC to use its authority under the Dodd-Frank Act to ban or limit forced arbitrations.
SEC Commissioner Luis Aguilar agrees that the time has come to end what he calls “the denial of investor choice.”
At our annual NASAA/SEC 19(d) meeting last month, Commissioner Aguilar said “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.” State securities regulators could not agree more.
Why this flurry of arbitration-related activity after months, if not years, of relative quiet on the arbitration front? Just that: the sound of silence. It has been nearly three years since Dodd-Frank Section 921 gave the SEC the authority to end forced arbitration, yet noting has been done. Within this vacuum of inaction, some have taken aggressive steps to expand the reach of forced arbitration.
For example, states have seen the emergence of forced arbitration clauses in contracts between state-registered investment advisors and their clients, despite the fiduciary duty imposed upon investment advisors.
These clauses have become that much more troubling to NASAA in light of a decision by Charles Schwab & Co. to include class action waivers in the arbitration provisions of its customer contracts—an obvious attempt by Schwab to insulate itself from liability to its own clients.
