Feb. 22, 2013
Decision by Industry Organization Removes Crucial Tool for Investor Oversight of Wall Street
Statement of Christine Hines, Consumer and Civil Justice Counsel
The U.S. stock market may have just lost a critical safeguard – accountability to investors. On Thursday, a panel at the Financial Industry Regulatory Authority (FINRA), an industry-run group that regulates brokerage firms and exchange markets, disregarded its own policy, ruling that brokerage firm Charles Schwab and Company may insert class-action bans in its take-it-or-leave-it contracts with investors.
Schwab sought to capitalize on a recent corporate trend, following the 2011 U.S. Supreme Court decision in AT&T Mobility v. Concepcion, which permitted corporations to insert class-action bans within forced arbitration clauses in their one-sided contracts with consumers, investors and employees.
Forced arbitration clauses are used overwhelmingly by the securities and financial services industries. The practice deprives individuals of their right to seek redress in court. Studies and surveys on FINRA arbitration have shown that biases in favor of corporate entities and against weaker investors are evident in the private arbitration process.
Although limited to arbitration, investors who had similar claims against a broker-dealer could, under FINRA rules, band together in a single action in court against the firm. However, FINRA’s decision eliminates class actions, leaving serious claims such as fraud, unsuitable trading, breach of fiduciary duty and other securities law violations to be resolved in secret forums on an individual basis.
Even before FINRA’s ruling, Massachusetts Secretary of the Commonwealth William Galvin took a public stance against arbitration clauses in investor-broker contracts, calling them “troubling” and a “cause for concern.” He then rightly called for the Securities and Exchange Commission (SEC) to take action.
The SEC can and must protect its investors and preserve the integrity of securities markets by exercising authority granted to it under the 2010 Dodd-Frank financial reform law. It should immediately issue a rule to eliminate forced arbitration by Wall Street. It should prohibit forced arbitration and class-action bans in broker-dealer contracts with investors. It’s the only way that investors will be able to hold broker-dealers accountable for their malfeasance.