Securities and Exchange Commissioner Luis Aguilar recently announced that he was in favor of putting an end to mandatory securities arbitration. He advocates the adoption of new rules by the SEC that would prohibit or restrict pre-dispute arbitration agreements. Pre-dispute arbitration agreements, which are imbedded in virtually every customer account agreement at every brokerage firm in the U.S., waive most of the customer’s rights to take a dispute involving a brokerage account to court. This has the effect of forcing customers into arbitrations sponsored by the securities industry’s self-regulatory organization (SRO). In most cases, the SRO is the Financial Industry Regulatory Authority (FINRA).
In his remarks to the association of state securities regulators known as NASAA, Mr. Aguilar was quoted as saying: “By providing investors with the ability to choose the forum in which to bring their legal claims and protect their legal rights, we enhance investor protection and add more teeth to our federal securities laws. … I believe the commission needs to be proactive in this important area. We need to support investor choice. (“U.S. SEC’s Aguilar urges end to mandatory arbitration agreements,” by Sarah N. Lynch, Reuters).
The SEC is authorized to prohibit or restrict the use of pre-dispute arbitration agreements under the 2010 Dodd-Frank Wall Street reform law. Commissioner Aguilar’s statements may prod his fellow Commissioners at the SEC to use that authority.
According to the article, at least one of Mr. Aguilar’s fellow Commissioners has expressed doubts that banning pre-dispute arbitration agreements would provide “significant advantages” over court litigation. Meanwhile, the new SEC Chairman, Mary Jo White, has apparently not disclosed her views on the subject.
Mr. Aguilar is also concerned that pre-dispute arbitration agreements may be expanded into other investment agreements. For example, many investment advisory firms do require customers to sign similar arbitration agreements binding disputes to be determined before other forums.
In addition, state regulators remain concerned about the crowdfunding provision in the 2010 Jumpstart Our Business Startups (“JOBS”) Act. That law requires the SEC to create new rules permitting crowdfunding, which would enable startup companies to raise seed capital via unregistered securities offerings over the Internet. Most investors would be limited to investing $2,000 in a particular offering. Regulators are concerned, however, because any scam artist with a computer could take advantage of unsophisticated investors through this largely unregulated new marketing channel.
Since it is often not economically feasible to file individual arbitrations and court actions to recover relatively small sums, class actions, which aggregate numerous small claims, provide the only practical means of loss recovery for these investors. However, some customer agreements also contain class action waivers. If securities brokerage agreements are allowed to rely on class action waivers, defrauded investors could be left with no available legal remedy.
In 2012, Charles Schwab & Co., Inc. compelled 8.8 million customers to waive their class action rights in their customer agreements. FINRA sued Schwab to overturn the waivers, but a disciplinary hearing panel found that Schwab was permitted to require its customers’ to sign them. FINRA has since appealed that decision.
NASAA members reportedly intend to ask Congressmen to sign a letter asking the SEC to prohibit all such pre-dispute arbitration agreements and class action waivers.
Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.