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May 2, 2013

Consumer and Investor Groups Urge SEC to Restrict Forced Arbitration in Investor Contracts

Dodd-Frank Gives SEC Authority to Stop Brokers From Forcing Investors to Give Up the Right to Go to Court

WASHINGTON, D.C. – The Securities and Exchange Commission (SEC) should end the use of pre-dispute forced arbitration clauses in contracts that investors enter into with brokerage firms and investment advisors, 16 consumer and investor groups wrote in a letter to SEC Chairman Mary Jo White today. This authority is expressly granted in the Dodd-Frank Wall Street Reform and Consumer Protection Act and would help reverse a larger trend of the securities industry using contractual fine print to force investors out of the courts and into private arbitration forums that often favor the investment firms.

The letter is in step with a similar move by U.S. Sen. Al Franken (D-Minn.) and 36 other members of the Senate and House of Representatives who called on White to protect the investing public by prohibiting forced arbitration clauses from being included in brokerage contracts.

The groups signing today’s letter include AARP, Americans for Financial Reform, American Association for Justice, Center for Justice & Democracy, Citizen Works, Consumer Action, Consumer Federation of America, Consumers Union, DC Consumer Rights Coalition, Homeowners Against Deficient Dwellings, National Association of Consumer Advocates, National Association of Shareholder and Consumer Attorneys, National Consumers League, Public Citizen, U.S. Public Interest Research Group, and Workplace Fairness.

Forced arbitration clauses are hidden in the fine print of the overwhelming majority of contracts that investors enter into with broker-dealers and investment advisors to receive financial services. Forced arbitration and bans on class actions shield firms from being held accountable for practices that harm large numbers of investors but where each financial injury is too small for most individuals to seek redress on their own.

“For too long, investors have had to surrender their right to seek redress in court,” said Christine Hines, Public Citizen’s consumer and civil justice counsel. “Given recent industry actions to further restrict legal protections, the time is ripe for the SEC to act.”

Specifically, Charles Schwab is leading the race to the bottom in further dismantling investor protection. Schwab has been battling with the Financial Industry Regulatory Authority (FINRA) for the past year over whether Schwab can insert class-action bans within the forced arbitration clauses in its contracts. According to FINRA, contracts with the ban on class actions were sent to almost 7 million Schwab customers. A petition by Public Citizen now has almost 19,000 signatures calling for Schwab to stop denying its customers their basic right to access the court system.

“Brokerage firms were responsible for many fraudulent actions that led to or arose from the financial crisis,” the groups said in today’s letter, naming Schwab as one of the offenders identified by the SEC. “Ensuring that investors can choose the forum in which to resolve disputes with broker-dealers and investment advisors is critical both to remedying those past abuses and deterring future misconduct.”

Section 921 of the Dodd-Frank law specifically authorizes the SEC to prohibit or limit the imposition of forced arbitration by securities dealers when such limitation would be in the interest of the public and investors.

“If the SEC issues this rule,” Hines said, “it will be able to get some assistance from private investors in terms of holding corporations accountable.”

“Congress is aware of the integral role of private enforcement in protecting the integrity of the securities market,” the groups wrote. “It realized that the SEC alone cannot combat the fraud and malfeasance that can run rampant at the hands of insatiable market participants.”

The letter is available here.


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