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Published: November 2009

SEC should investigate, have power to prohibit investment arbitration clauses

Coalition: Fair Arbitration Now

In a letter to Representatives Barney Frank and Spencer Bachus, of the House Financial Services Committee, Consumer Action joined its Fair Arbitration Now coalition members in supporting a provision of H.R. 3817 that would require the Security and Exchange Commission (SEC) to do a study on the use of arbitration clauses in broker-dealer and investment advisory accounts. The letter also opposes two amendments to the bill that would undermine the SEC's authority in prohibiting such clauses.

Below is the full text of the letter:

We write to express our support for Section 201 of H.R. 3817, which directs the Securities and Exchange Commission (SEC) to study the use of forced arbitration clauses in broker-dealer and investment advisory accounts with retail customers and grants the SEC authority to prohibit forced arbitration clauses in these contracts. We strongly oppose the Price and Lee amendments to H.R. 3817, amendments 6 and 12, respectively, because they would undermine the SEC’s authority or gut it entirely, thereby harming investors.

Securities arbitration clauses are presented on a non-negotiable, take-it-or-leave it basis. Brokerage firms have an unfair advantage in arbitration because they are more experienced with the arbitration forum and the rules are set up to favor brokers. The combination of these factors leads to reduced investor win rates and diminished awards. Private arbitration also harms the public because it impedes the development of federal securities laws and hampers public disclosure of important information.

It is particularly important that the SEC’s arbitration authority apply to existing contracts because investor confidence would be undermined by a grant of prospective authority only. Most current securities claims have arisen out of the mortgage and financial market crisis, in which a huge number of average investors were sold investments that they thought were low-risk but were in fact quite risky. Securities arbitration filings are reaching record levels: There have been 4,991 FINRA arbitration filings in the first eight months of 2009, and FINRA expects to end the year with almost 7,550 filings, the most since the technology stock collapse in 2004. Providing SEC authority over existing contracts will instill confidence in investor-victims by increasing the likelihood of accountability for bad actors who contributed to the current crisis. A congressional failure to support accountability will undermine investor confidence and could prompt untold numbers of harmed investors to leave the marketplace.

In addition, providing transparency for all investor claims, not just prospective claims, will shine sunlight on the events and practices that spawned the mortgage crisis, which will better inform regulators and improve future regulation.

For these reasons, we urge the Committee to support Section 201 of H.R. 3817, and to oppose the Price and Lee amendments.

Other Organizations

American Association for Justice | National Association of Consumer Advocates | Public Citizen

More Information

H.R. 3817

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