Securities and Exchange Commission Looks At Arbitration

The SEC is considering a new policy that could let companies resolve shareholder complaints via arbitration. If adopted, this policy could limit a shareholder’s ability to sue the company in court.

A move toward arbitration could shift the balance of power between corporate managements and shareholders during a time when the balance has been more and more in favor of shareholders. The change could also restrict shareholders’ ability to recover financial, as well as other kinds of compensation from corporations.

The SEC is also examining whether corporations should be allowed to change their bylaws to make room for arbitration. This type of amendment will, in some cases, require the approval of shareholders.

Christopher Cox, SEC chairman says he doesn’t see arbitration as a remedy for all problems. He has a track record of trying to limit what he considers to be excessive securities regulation. Just this year, the SEC supported business in a “friend of the court” brief that was part of a Supreme Court case that had to do with the standards needed by a plaintiff to have a case go forward. According to the SEC, it was supporting the standard that was approved by most of the appeals courts.

A blue-ribbon committee suggested arbitration as a dispute resolution last November. An SEC roundtable may be a forum where this issue could be addressed.
There are many kinds of disputes that are already being settled through arbitration. Companies often include arbitration clauses in their contracts and brokerage firms insist that clients resolve claims in front of an arbitration panel.

There are many out there who claim that the possibility of shareholder lawsuits has helped remove some of the competitive edge among U.S. financial markets. In 2006, U.S. companies settled about 95 shareholder class action suits for alleged misconduct, paying a collective total of approximately $17.6 billion. Those who oppose these kinds of lawsuits say that lawyers are getting rich at the shareholder’s expense because of these cases and companies that might have listed stock in the US are now scared to do so as a result.

Giving companies the choice of arbitrating shareholder disputes could likely result in staunch opposition from trial lawyers and groups representing investors’ rights. Arbitration critics claim that the panels used by brokerages usually side with the industry instead of the consumer. Also, consumers’ rights to look at and review important information from the opposition is not as clear as in litigation.

Many arbitration hearings take place in private, instead of public. Last year, 42% of investors who settled their disputes against brokers in arbitration were compensated. The National Association of Securities Dealers says those figures are down from the 53% of 2000. Even though settlement figures are higher than in past years, the total number of securities class-action lawsuits filed has reached its lowest point in the last decade-says Stanford Law School and Cornerstone Research.

If arbitration continues to gain momentum, a few consumer groups could become worried that by limiting shareholder litigation, the country will lose a powerful means of preventing corporate wrongdoing. Shareholders may also have to pay for hiring a lawyer instead of filing a suit with a class.

If the SEC lets shareholder disputes be resolved in arbitration, this could further decrease the influence the plaintiffs bar’s influence. Recent SEC talks seem to be part of a number of initiatives designed to lower the regulatory burden on U.S. businesses. The SEC has even revised how commissioners review cases involving possible corporate penalties. Instead of waiting until the SEC staff arrived at a preliminary settlement, the revision allows commissioners to get involved earlier. SEC Chairman Cox says this will result in quicker resolutions and stricter penalties. Staffers have expressed concern that the change could deter staff lawyers from pursuing penalties.

A move toward arbitration would be a major policy change by the SEC in the way it interprets federal securities laws.

Shepherd Smith and Edwards represents investors that have filed claims against brokerage firms and their employers for misconduct resulting in investors losses. We have successfully helped thousands of investors across the country recover their losses. Contact Shepherd Smith and Edwards today at or by calling (800) 259-9010 for your free consultation.

SEC Explores Opening Door To Arbitration, Wall Street Journal, April 16, 2007
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Securities and Exchange Commission

How The Securities Arbitration Process Works

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