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Consumer Groups Lobby SEC to Drop Support of Mandatory Arbitration

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Members of the Secure Our Savings, or SOS, campaign rallied Tuesday to voice their concern that Securities and Exchange Commission officials are fueling speculation that the agency may abandon the decades-old view that it’s a violation of securities laws to insert mandatory arbitration clauses into company charters.

In a letter to SEC Chairman Jay Clayton, 133 SOS members — which include the Consumer Federation of America, U.S. PIRG, Better Markets, Americans for Financial Reform — said that the SEC, Congress and the courts “have long recognized the important role that private lawsuits play in both deterring fraud and compensating defrauded investors without always having to rely upon government action.”

Forcing defrauded investors to arbitrate their claims individually “would effectively eliminate both the deterrent effect of class-action shareholder lawsuits and the opportunity for these defrauded investors to recover their losses,” the SOS members said. “That is because the issues in a typical case of financial fraud are too complex, and the costs of discovery and expert testimony are too high, for these claims to be dealt with effectively through individual arbitration.”

The Consumer Federation sent a separate white paper to Clayton the same day, titled A Settled Matter: Mandatory Arbitration Is Against the Law and the Public Interest, detailing why it would be “both contrary to the securities laws and bad public policy to permit public companies to adopt forced arbitration agreements.”

The paper states that forced arbitration clauses violate anti-waiver provisions of the securities laws and that corporate charters and bylaws do not constitute contracts that are subject to the Federal Arbitration Act.

Barbara Roper, the federation’s director of investor protection, told ThinkAdvisor that “SEC leaders from both parties have defended investors’ right to bring private actions in recognition of the role they play, not only in compensating defrauded investors, but in supplementing the SEC’s limited enforcement actions.”

The white paper, Roper added, “explains why, if a company forces the issue onto the SEC’s agenda, Chairman Clayton should reaffirm the SEC’s long-held position that forced arbitration is contrary to the law, bad for investors, and bad for the markets.”

Roper continued that ”this isn’t a question of whether shareholders’ claims will be heard in court or in arbitration. It’s a question of whether they will be allowed to proceed at all. Because these cases are so expensive to prosecute, they are only economically viable if investors can band together in class actions. Those who favor mandatory arbitration know that. They aren’t trying to shift these claims to a more affordable venue. They’re trying to shut down investors’ right to redress entirely.”

The federation’s white paper was written in response to Clayton’s statement last April, in a letter to Rep. Carolyn Maloney, D-N.Y., in which he “encouraged those with strong views to support their position with robust, legal and data driven analysis,” the consumer group said.

“Clayton noted then, as he has before, that he does not entirely control whether the [arbitration] issue comes before the commission,” the group said. “A company could force the issue onto the commission’s agenda in one of several ways — including by attempting to go public with a forced arbitration clause in its offering documents or by changing its bylaws to incorporate such a clause.”

If that happens, the group said, the white paper is designed to help “persuade the commission to reaffirm the position the SEC has maintained for many decades — under Democratic and Republican leadership alike — that private lawsuits serve as an essential supplement to the SEC’s own enforcement efforts and that efforts to deprive investors of their right to bring such actions are illegal under the securities laws and bad public policy.”

While Clayton “has pledged to adopt a deliberative process should the issue arise in the context of a registered IPO of a U.S. company,” they continued, Clayton “has not provided the broader assurances needed to put the issue to rest.”

Referring to a recent interview with Politico Pro, the gorup added that SEC Commissioner Hester Peirce “recently revived the [arbitration] issue with her suggestion that companies ‘absolutely’ should have that right.”


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