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September 17, 2013 at 07:01 AM
Each year, thousands of investors file complaints against their stockbrokers, and almost every broker-dealer presently includes in its customer agreements a provision that forces those investors to submit all disputes to mandatory arbitration. This is increasingly becoming the case with investment advisor customer contracts as well.
NASAA does not oppose arbitration agreements if they are entered into voluntarily and after a dispute is known. NASAA does adamantly oppose pre-dispute prohibitions on investors’ rights to choose an appropriate forum to hear their claims.
NASAA is equally alarmed at the expansion of pre-dispute arbitration provisions to include class-action waivers. The combination of mandatory pre-dispute arbitration provisions and class-action waivers virtually eliminates any reasonable recovery forum for small to medium sized claims.
Congress shares NASAA’s concerns over the increased use of mandatory pre-dispute arbitration provisions in contracts between investors and broker-dealers and investment advisors. Section 921 of the Dodd-Frank Act, for example, gave the Securities and Exchange Commission explicit authority to restrict or prohibit broker-dealers and investment advisors from including mandatory pre-dispute arbitration agreements in their customer contracts.
In the more than three years since the enactment of Dodd-Frank, the SEC has failed to act under Section 921.
Meanwhile, reasonable recovery forums for investors have all but disappeared when mandatory pre-dispute arbitration agreements are combined with class-action waivers.
Earlier this summer, the Supreme Court held that a group of merchants were bound by individual arbitration agreements with American Express even if a class action was the only way to make their claim economically viable. The decision was the latest in a series of recent rulings that have fundamentally transformed the very nature of arbitration. The arbitration forum, intended as a fair and equitable way to resolve disputes between mutually consenting parties, has devolved into a blunt contractual device routinely deployed by the strong to prospectively deny rights and recourse to those who are much weaker.
Even more pressing is a decision by the Charles Schwab & Co. brokerage firm to expand its mandatory pre-dispute arbitration contracts to require that customers waive their right to participate in class actions.
