The White House proposal to give the Securities and Exchange Commission the authority to ban mandatory-arbitration contracts falls short in looking out for investors' interests, according to attorneys who represent investors in securities disputes.
The White House proposal to give the Securities and Exchange Commission the authority to ban mandatory-arbitration contracts falls short in looking out for investors' interests, according to attorneys who represent investors in securities disputes.
Draft investor protection legislation the Department of the Treasury sent to Capitol Hill on July 10 includes a provision that would give the SEC authority to prohibit or limit the use of mandatory-arbitration clauses in broker-dealer, investment advisory and municipal-securities dealer agreements with customers.
The investor protection draft is the second legislative proposal sent by the administration to Congress to fulfill President Obama's plan to reform financial services regulation in the wake of the financial crisis.
“Our concern is that what the Obama administration is suggesting could turn out just to be additional delay,” said Scott Shewan, executive vice president and president-elect of the Public Investors Arbitration Bar Association of Norman, Okla., an organization of plaintiff's attorneys.
“We're pleased that President Obama has this on his radar screen,” said Mr. Shewan, who is also a partner with Born Pape & Shewan LLP of Clovis, Calif. “However, we're concerned that all he's asking for is for the SEC to study the issue.”
Mr. Shewan suggested that SEC Chairman Mary Schapiro's previous role as chief executive of the Financial Industry Regulatory Authority Inc. of Washington and New York may make her less inclined to ban mandatory arbitration. That's be-cause Finra operates the arbitration system used by the securities industry.
“She would not be likely to im-mediately say we need to do away with mandatory arbitration,” Mr. Shewan said.
John Nester, a spokesman for the SEC, declined to comment. He did, however, point out that Ms. Scha-piro is recused from making decisions involving Finra for two years after her appointment as SEC chairman last January.
ARBITRATION FAIRNESS ACT
PIABA wants to see passage of the Arbitration Fairness Act, which was introduced in Congress this year by Sen. Russ Feingold, D-Wis., and Rep. Hank Johnson, D-Ga. The bill would ban all mandatory-arbitration contracts in employment or consumer disputes as well as in civil-rights cases.
State securities regulators also support passage of the legislation. But they have not yet taken a position on the administration's most recent proposal, said John Cronin, chairman of the arbitration project group of the North American Securities Administrators Association Inc. of Washington.
“We are very pleased that the folks in Washington are taking a serious look at securities arbitration and are recognizing that there are problems with the system the way it is now,” added Mr. Cronin, who is also Vermont's securities director.
Predictably, the securities industry is opposed to ban or limit mandatory arbitration.
“SIFMA continues to believe that the securities arbitration system is a fair forum for investors that is a faster, more efficient and cost-effective means of resolving securities-related disputes than going to court,” Andrew DeSouza, spokesman for the Securities Industry and Financial Markets Association of New York and Washington, wrote in an e-mail.
If the SEC eliminated mandatory arbitration, studies show that “very few parties would agree to arbitration,” and that could put people with smaller claims at a disadvantage since they may not be able to afford to litigate, he wrote.
PILOT PROGRAM
Last October, Finra launched a two-year pilot program in which some investors have the option of appearing before an all-public arbitrator panel.
Through July 10, 232 of the 442 arbitration cases filed since the launch, or 52%, had gone into the pilot program, said Brendan Intindola, spokesman in the New York office of Finra.
Finra is studying the program, and the level of participation will be a “key area of analysis,” he said.
Other aspects that will be examined include the length of the hearings and the outcome of the claims, Mr. Intindola said. Arbitration cases traditionally have taken 12 to 15 months, and no information is yet available about the outcome of the cases in the pilot program, he said.
Finra is not taking a position on whether arbitration should be mandatory in securities disputes, Mr. Intindola said. John Duval, president of litigation consulting firm John Duval Associates LLC in Milan, N.Y., believes that mandatory-arbitration clauses should be banned. Mr. Duval, who formerly operated Duval Asset Management LLC in Milan, is now an industry arbitrator and mediator, as well as an expert witness in securities cases.
Cases involving disputes over matters such as brokerage firms' allegedly raiding other brokers for registered representatives are technical in nature and are best decided by arbitration panels, he said. But other disputes brought by investors against a broker may be more appropriate for juries to decide, Mr. Duval said.
E-mail Sara Hansard at shansard@investmentnews.com.
