Investors should be free to choose arbitration to resolve disputes or pursue remedies in court should they view that option as superior to arbitration, under legislation reintroduced in both the U.S. House and Senate.
Rep. Bill Foster (D-IL) has joined with Sen. Jeff Merkley (D-OR) to reintroduce the Investor Choice Act, prohibiting pre-dispute mandatory—or what the sponsors describe as “forced”—arbitration agreements. First introduced in 2015, the legislation would also ban prohibitions on class-action lawsuits in customer contracts that investors enter into with broker-dealers or investment advisors.
“Individuals shouldn’t need to surrender their legal rights because they choose to work with a financial advisor or broker dealer to plan for their retirement and invest their hard-earned money,” Foster said in a statement. “This legislation levels the playing field for consumers and prevents them from being victims of a rigged system that denies them fair legal recourse if they are wronged.”
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.
“The securities arbitration system has worked effectively for decades because it is subject to public oversight, regulatory oversight by multiple independent regulators, and rules of procedure that are designed to benefit investors,” SIFMA President and CEO Ken Bentsen said in a statement opposing the legislation. “Pre-dispute arbitration agreements are a vital component of this system.”
While this legislation appears to be specifically targeted at retail investors and does not appear to cross into the ERISA space, many retirement plans include provisions requiring employees and plan participants to arbitrate any disagreements they may have with the employer or plan fiduciaries before they could take a dispute to court to seek resolution.
Given the Democrats’ control of Congress and the White House, it is certainly possible the Investor Choice Act will pass the House of Representatives, but the legislation would face an uphill battle in the Senate, where it would take 60 votes to limit debate.
The use of force arbitration clauses came up during the Senate confirmation hearing of Gary Gensler to be chair of the SEC. Pointing to section 921 of the Dodd Frank Act, Sen. Elizabeth Warren (D-MA) pressed Gensler to use the Commission’s existing authority to prohibit the use of forced arbitration by broker dealers. In response, Gensler emphasized that he would look to not only those authorities, but all authorities that help protect investors and promote capital formation and efficient markets.
