Thursday, October 1, 2009

The IAA Favors Banning Mandatory Arbitration

I am constantly amazed at the positions people take on issues when they haven't thought the entire issue through. The Investment Adviser Association, a trade association of investment advisers,  supports the Obama's administration's efforts to ban mandatory arbitration clauses in securities contracts.

That is an easy position to take when it doesn't affect you, and when it damages your competitors. Arbitration clauses are so widespread in customer agreements because the government forces broker-dealers and individual brokers to arbitrate their disputes with customers. In order to level the playing field, firms started including arbitration agreements in their customer agreements, so that they had the ability to force a customer to arbitration.

Of course, the government does not force investment advisers to arbitrate their disputes with their customers; yet.

If pre-dispute arbitration clauses are banned, there will be no impact on the members of the IAA - no one will be able to force them to arbitrate a claim, since there is no rule that requires them to do so; yet. However, banning pre-dispute arbitration clauses, without addressing the government-forced arbitration clause for brokers, creates a one way street - customers can force brokers to arbitrate, but brokers cannot force customers to arbitrate.

How is that fair, just, or equitable? Clearly it is not.

The IAA thinks it is a good idea to ban such agreements and to create a one way arbitration agreement for their competitors? I'll be here to remind them of this position when the government combines the regulations for advisers and brokers, and forces investment advisers to arbitrate their disputes, as they currently force brokers and broker-dealers to arbitrate.

If arbitration is unfair, then let's ban it. It if is unfair  then the rule should be that no one can be forced to arbitrate a dispute before it arises. Ban pre-dispute arbitration agreements, and ban agency rules which force over 650,000 employees to arbitrate their disputes with their employers and their customers.
 
The Investment News article on the IAA position is here.