The Department of Treasury released its financial regulatory reform proposal on June 17. The report, a product of consultations with a wide range of people from members of the President’s working group on financial markets to industry and market participants, recommends that the SEC study the use of mandatory arbitration clauses in retail investor contracts. Specifically, the proposal recommends legislation that would give the SEC specific authority to study mandatory arbitration and to prohibit mandatory arbitration clauses in broker-dealer and investment advisory accounts with retail customers if deemed appropriate.
The underlying reasoning for the proposal, as stated in the report, is that mandatory arbitration agreements may undermine the investor’s rights because they have given up their access to courts.
This position is certainly debatable depending on which side of the coin one is. For the small investor, arbitration can be a relatively prompt and a moderately inexpensive means of resolving complicated disputes, especially when contrasted with litigation before a court. Alternatively, others argue investors have lost the right to bring their claims before a jury of their peers and instead are forced to seek relief in an industry- prejudiced forum. The proposal requires that, before the SEC prohibits arbitration clauses, a study would need to be conducted on the use of mandatory arbitration clauses in these contracts to consider whether investors are harmed by being unable to obtain effective relief for justifiable grievances and whether changes to arbitration are appropriate.
The proposal, however, leaves unanswered significant questions. Would such a prohibition be the end of all arbitration in broker-dealer and investment advisory disputes? Would individuals still have the option to choose arbitration in their investor disputes if it’s a reasonable option for them? It will be interesting to see what the SEC study reveal’s if the reform proposal is passed.
Click here for access to the government’s reform plan. http://www.financialstability.gov/docs/regs/FinalReport_web.pdf