Pending Legislation to End Mandatory Securities Arbitration?


Investors who have been defrauded by their brokers and financial advisers are almost universally required to bring their claims through arbitration rather than lawsuits, but that may be about to change. Bills have been introduced in both houses of Congress that, if passed, would put an end to mandatory arbitration clauses in contracts, giving wronged investors the option of going to court if they want to. Both bills are titled The Arbitration Fairness Act of 2009.

The House bill, H.R. 1020, was introduced by Congressman Hank Johnson of Georgia in March, and the Senate version, S. 931, was introduced by Senator Feingold of Wisconsin in April. While the House version proposes to eliminate compulsory arbitration in consumer, employment and franchise agreements without specifically mentioning securities or investment disputes, the Senate bill includes “services relating to securities and other investments” in its definition of consumer contracts in which such clauses would be prohibited. Both bills are currently in the Judiciary Committees of both houses, where the texts will presumably be reconciled if there is the political will to do so.

While it is too early to predict the chances that this legislation will succeed, it would appear that there is a movement in Congress to make arbitration of securities and investment disputes optional rather than mandatory. If investors had the option to bring claims in Court, it is likely that small claims would continue to be addressed by arbitration simply because litigation costs would make those claims economically non-viable. According to attorney Craig T. Jones of the Atlanta law firm of Page Perry, which practices primarily in the investment fraud arena, “arbitration can be a useful and efficient way of handling many claims, but where the stakes are high on both sides there is no substitute for full discovery, a fair trial on the merits, and a right to appeal with all of the rules and safeguards built into the process.”

Now that the Democrats control the White House and both houses of Congress, the votes to enact pro-consumer arbitration reform are there if there is the political will to do so. Curiously, the White House has moved slowly on this issue, and rather than advocating an outright ban, the Obama administration has so far only proposed giving the SEC the regulatory authority to study and prohibit mandatory arbitration clauses in investment contracts. According to the Treasury Department’s Financial Regulatory Reform blueprint that was released on June 17, 2009, “although arbitration may be a reasonable option for many consumers to accept after a dispute arises, mandating a particular venue and up-front method of adjudicating disputes?and eliminating access to the courts?may unjustifiably undermine investor interests.” The blueprint recommends that the SEC “conduct a study on the use of mandatory arbitration clauses in [investor] contracts” and “consider whether investors are harmed by being unable to obtain effective redress of legitimate grievances, as well as whether changes to arbitration are appropriate,” while also giving the SEC “clear authority to prohibit mandatory arbitration clauses in broker-dealer and investment advisory accounts with retail customers.” (U.S. Department of Treasury, “A New Foundation: Rebuilding Financial Supervision and Regulation,” p. 72). It is not clear whether this reflects a measured response or a lack of political commitment to this issue by the Administration. But with financial regulatory reform being so high on the President’s agenda, one would think that any proposed change?regulatory or legislative?that would broaden the options for those who fell victim to the very abuses that reform is aimed at would be a political priority.

“We are always ready to represent investors who have been wronged by their brokers and advisers,” says Jones, “whether it is in court or arbitration. If arbitration ever becomes optional, we will decide on a case-by-case basis whether it is best for that particular client to sue or go to arbitration.” Page Perry’s lawyers are experienced at both litigation and arbitration, and says Jones, “we would love to have the freedom to choose.”