A top U.S. securities regulator on Tuesday urged the government to consider adopting new rules that would prohibit or restrict brokerages and advisers from forcing customers to sign away their right to sue.
“By providing investors with the ability to choose the forum in which to bring their legal claims and protect their legal rights, we enhance investor protection and add more teeth to our federal securities laws,” said U.S. Securities and Exchange Commission member Luis Aguilar in prepared remarks before the North America Securities Administrators Association’s (NASAA) annual conference in Washington, D.C.
“I believe the commission needs to be proactive in this important area. We need to support investor choice.”
Brokerages typically require customers to sign pre-dispute arbitration agreements when opening their accounts.
These agreements have also been widely used by other types of companies, including credit card companies, who say they help reduce legal costs and prevent frivolous litigation.
But critics say the agreements erode customers’ legal rights and often result in arbitrations that rule against customers.
The 2010 Dodd-Frank Wall Street reform law gives the SEC the authority to scale back or prohibit the use of pre-dispute arbitration agreements. So far, the SEC has not taken steps toward proposing new rules banning or limiting the agreements.
Aguilar, a Democrat, said on Tuesday that he is concerned more investment advisory firms are following brokerages in requiring customers to sign similar agreements.
Whether Aguilar’s statements could spur the SEC into action remains unclear.
Elisse Walter, another Democratic commissioner at the SEC, said she also believes arbitration agreements are worth another look. But she expressed skepticism it would change the status quo and noted that arbitration has some “significant advantages” over court litigation.
The agenda of the SEC is controlled by the agency’s new chairman, Mary Jo White, who was sworn in last week. So far, her views on securities regulatory policy are largely unknown.
JOBS Act Worries
Aguilar’s comments to state securities regulators came one day before members of NASAA plan to make the rounds on Capitol Hill where they will ask members of Congress to sign a letter calling on the SEC to enact rules to limit or ban the use of mandatory arbitration agreements and class action waivers.
Minnesota Democrat Senator Al Franken is expected to take the lead on the letter, a spokeswoman in his office confirmed.
NASAA has long fought against the use of pre-dispute arbitration agreements.
But Heath Abshure, the Arkansas Securities Commissioner and President of NASAA, told Reuters on the sidelines of Tuesday’s conference that regulators’ concerns are now heightened due to a provision in the 2010 Jumpstart Our Business Startups, or JOBS, Act.
That law requires the SEC to write rules permitting a new capital-raising strategy known as “crowdfunding,” in which startups can raise small sums of money over the Internet.
Investors with lower incomes would have their investments capped at $2,000. These small stakes would need to be sold through an intermediary, such as a broker-dealer, which presumably could require investors to sign away their rights to file claims in court.
Abshure said securities lawyers are not likely to take on an arbitration claim for $2,000. If the investor has already signed away their rights to access small claims court or a class-action, they could be out of luck, he added.
While the Financial Industry Regulatory Authority, which runs the securities industry’s arbitration forum, has a program for hearing smaller claims from investors, opponents of mandatory arbitration say they should also have the option of going to court.
A recent ruling related to a dispute between Charles Schwab Corp. and FINRA, however, could help shine a spotlight on the issue.
FINRA had filed a disciplinary case against the brokerage in 2012 in connection with Schwab’s move in late 2011 to force 8.8 million customers to waive their class action rights.
A hearing panel upheld Schwab’s measure in February— a ruling that could potentially give brokerages even more leeway to impose restrictions on investors through class action waivers. FINRA is appealing the ruling to the National Adjudicatory Council, a FINRA appellate body that reviews disciplinary decisions.
If the SEC ultimately decides to weigh in on the debate or to adopt rules, it could bolster FINRA’s efforts.
In addition, the SEC could also potentially weigh in on the dispute between FINRA and Charles Schwab if either party further appeals the ruling by FINRA’s appellate body.