The Investor Choice Act in Congress, A U.S. House bill written by Keith Ellison, D-Minn., is looking to stop investment advisers and brokers from obligating investors to pursue their claims in arbitration instead of going to court. The proposed legislation would bar pre-dispute mandatory arbitration clauses in contracts between clients and their representatives.
As of now, almost all brokerage agreements, and an increasing number of investment adviser ones, come with provisions mandating that investors take their disputes to the arbitration system, which is run by the Financial Industry Regulatory Authority. There are those that believe that the forum favors brokers and advisers. Meantime, others say that the arbitration system is much more efficient for investors than going to court.
This is not the first time that Ellison has pushed for ending mandatory arbitration. He unveiled a similar bill in 2013 but it did not become law. The Public Investors Arbitration Bar Association has put out a statement voicing its support for Ellison’s latest bill, which it says gives investors back their right to choose whether they want to take their dispute to court or arbitration.
The 2010 Dodd-Frank Act granted the U.S. Securities and Exchange Commission the power to put a stop to mandatory arbitration. However, the SEC has yet to tackle the issue.
FINRA Arbitration and Arbitrators
Nearly all customer claims against broker-dealers are resolved in FINRA arbitration. Each case is heard by a three-arbitrator panel. The parties decide who can be on the panel by eliminating candidates until there are three left. Parties are allowed to choose all-public panels.
The SEC has just approved a proposal by FINRA that would put limits on who can become a public arbitrator to be able to preside over such disputes. The rule categorizes anyone who has ever worked in the financial industry as an industry (or nonpublic) arbitrator.
Also, anyone who spent at least 20% of their time over the previous five years representing investors with securities claims would go from being a public arbitrator to a nonpublic one. They could go back into the public arbitrator category after a cooling off period of five years.
Anyone who has been a plaintiff’s lawyer for over 15 years is permanently barred from serving as a public arbitrator. Also disqualified as public arbitrator are accountants, lawyers, and others who worked for financial firms for over 20 years. If they worked for firms for less time, they could go back under the public arbitrator category five years after they stop working for them. In its regulatory order, the SEC said that it believes the proposed rule change would tackle any perceived bias toward Wall Street on the part of public arbitrators by moving certain individuals that fit the specific criteria into the nonpublic arbitrator category.
Bill would end mandatory arbitration in brokerage contracts, Investment News, February 26, 2015
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