SEC Commissioner Speaks on Mandatory Arbitration


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Via the Securities Law Prof Blog, we learned of SEC Commissioner’s Elisse B. Walter’s comments on mandatory securities arbitration at the 2011 annual NASAA Conference:

Regardless of changes in the relationship between investors and the professionals to whom they turn for advice, disagreements will arise that need to be resolved quickly and fairly. Following the dictates of Dodd-Frank, the SEC intends to thoroughly review the mandatory arbitration provisions that are written into most brokerage contracts.

I believe that in recent years FINRA has provided a relatively cost-effective way to fairly resolve disputes. Nonetheless, I also completely understand the frustration of investors who are denied their opportunity for a day in court and find themselves forced to make their case in front of an arbitration forum.

As readers may already know, the Restoring American Financial Stability Act of 2010 (a.k.a. the “Dodd-Frank Wall Street Reform and Consumer Protection Act” ) would give the SEC the power to ban or limit mandatory arbitration in certain agreements. The final version of the bill is here.

Here are some relevant provisions:

SEC. 921. AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.
(a) AMENDMENT TO SECURITIES EXCHANGE ACT OF 1934.—Section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o), as amended by this title, is further amended by adding at the end the following new subsection:
‘‘(o) AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.—
The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.’’.
(b) AMENDMENT TO INVESTMENT ADVISERS ACT OF 1940.—Section 205 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–5) is amended by adding at the end the following new subsection:
‘‘(f) AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.—
The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any investment adviser to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.’’

Stay tuned.

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