Broker-dealers, investment advisers and issuers would be prohibited from including predispute mandatory arbitration clauses in their customer agreements under legislation approved by the House Financial Services Committee.
Touted by Committee Chair Maxine Waters (D-CA) as a way to “correct long-standing and deeply unfair practices of forcing customers to resolve their claims through arbitration instead of as part of a class action,” the Investor Choice Act (H.R. 2620) was approved by the committee Nov. 16 on a party-line vote of 27-23.
H.R. 2620 was reintroduced by Rep. Bill Foster (D-IL) in April. Sen. Jeff Merkley (D-OR) sponsored companion legislation in the Senate.
In general, the legislation would amend the Securities Exchange Act of 1934 to specify that it shall be unlawful for any broker, dealer, funding portal or municipal securities dealer to enter, modify or extend an agreement with customers or clients of that entity with respect to a future dispute between the parties that:
- mandates arbitration for that dispute;
- restricts, limits, or conditions the ability of a customer or client of that entity to select or designate a forum for resolution of that dispute; or
- restricts, limits, or conditions the ability of a customer or client of that entity to pursue a claim relating to that dispute in an individual or representative capacity or on a class action or consolidated basis.
Similarly, the legislation would amend the Investment Advisers Act of 1940 to make it unlawful for any investment adviser to enter, modify or extend an agreement with customers or clients of the investment adviser with respect to a future dispute between the parties based on the same criteria outlined above.
The legislation also specifies that a security may not be registered with the Commission if the issuer of the security mandates arbitration for any dispute between the issuer and the shareholders of the issuer, without regard to whether such a provision in the bylaws, documents or contract is otherwise permissible under title 9 of the U.S. Code.
A committee background memo on the legislation contends that problems and concerns with pre-dispute mandatory arbitration and the reliance of FINRA as the arbitration venue include:
- cases being decided by nonlawyers;
- decisions that are not bound by legal precedent and do not follow federal or state rules of evidence;
- documents and evidence submitted that are not made publicly available; and
- that nearly 30% of arbitration awards against brokers went unpaid in 2020.
What’s more, the committee argues that forced arbitration provisions have resulted in less-than-desirable outcomes for investors as awards by arbitration panels can be lower than litigation and are not a fair method to resolve a dispute as securities industry insiders can be part of the arbitration panels hearing and deciding the outcome of the arbitration and damages, if any.
While it’s possible this legislation will pass in the House if it comes up for a vote, the bill would face an uphill battle in the Senate, where it would take 60 votes to limit debate in the evenly divided chamber.
Sen. Elizabeth Warren (D-MA) has pressed SEC Chairman Gary Gensler to use the Commission’s existing authority under the Dodd Frank Act to prohibit the use of forced arbitration by broker dealers, but so far, no action has been taken.
In addition to the Investor Choice Act, the House Financial Services Committee approved five additional bills on Nov. 16. One of those was the Empowering States to Protect Seniors from Bad Actors Act (H.R. 5914) which was introduced by Rep. Josh Gottheimer (D-NJ). That bill would transfer the responsibility for administering the Senior Investor Protection Grant Program established by Sec. 989A of the Dodd-Frank Act from the Consumer Financial Protection Bureau to the SEC. It also would establish an interdivisional task force within the SEC to review grant applications and oversee the administration of the program. The bill passed the committee by a voice vote.