Saturday, March 9, 2013

State Regulators Attempting to Ban Customer Arbitration

According to, state securities regulators are seeking federal legislation that would ban investment advisers from forcing their clients to use mandatory arbitration to settle claims against them. They also are urging Congress to prod the Securities and Exchange Commission to propose regulation that would ban pre-dispute arbitration clauses in brokerage contracts or to pursue legislation that would codify that change.

This new push to end arbitration is curious for two reasons First, it completely ignores the fact that it is the SEC which created the setting for mandatory arbitration of customer disputes. In the 1970s, the SEC approved a rule by the NASD which required all brokerage firms, and all individual brokers, to arbitrate their disputes with each other, and with any customer. The SEC thereby created a system where a customer could force a firm to arbitrate, but the firm, and its employees, did not have the same right. As a reaction to that government mandate, the industry began using predispute arbitration agreements, which the United States supreme Court has ruled are valid.

The second problem with the proposal is the fact that while the state administrators are supposedly concerned about investors' rights to trials and "fair" hearings, they have completely ignored the fact that the SEC and FINRA require over 600,000 brokerage firm employees to arbitrate their disputes with customers and with their employers. I am unawre of any other industry where the government requires employees to arbitrate their disputes with their employer.

Not really a surprise though, as the NAASAA is apparently a bit out of touch. Consider this quote from the same article, and keep in mind that the markets are hitting record highs:

In discussing the misquided attempt to ban arbitration agreements, the head of the Arkansas Securities Commission said that allowing investors flexibility in settling claims is central to increasing their confidence in the financial markets.

“Harmed investors should be able to seek relief in any forum and not be forced into an expedited arbitration that could foreclose their ability to obtain relief . . . Investors aren't going to invest if they can't sue if they're defrauded. It's as simple as that.”

Putting aside the mistaken notion that "expedited arbitration" forecloses the ability to obtain relief, one has to wonder with the market hitting record highs, which investors the spokesman thinks are not investing because they might have to arbitrate if they have a dispute.

Two additional points - lets focus here - there are millions of investors with millions of accounts. There were less than 5,000 arbitrations filed last year. The percentage of investors who are impacted by this is miniscule.

Second, the fact that arbitration is more efficient and reaches resolution in less time than a court case does not make arbitration "expedited" and certainly does not mean that investors cannot obtain relief. Arbitration panels award millions of dollars to investors every year.

Are taxpayer dollars really going to be used to enact legislation that affects a handful of people to prevent the uses of agreements that the Supreme Court has already ruled are valid and constitutional?


The attorneys at my firm represent investors, brokers and firms in securities arbitrations and in securities enforcement proceedings. For a free telephon consultation regarding your securities law issue, call us at 212-509-6544 or send an email to