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Not Surprisingly, the Securities Industry Wants to Keep Forced Arbitration in Investor Contracts

Investor choice is so overrated.

That’s what a securities industry executive and lobbyist wants us to believe about a bill in Congress that aims to restore investors’ legal rights.

Overwhelmingly, brokerage firms use their contracts with investors to force their customers to resolve disputes in a private system called arbitration. This means that if an ordinary investor thinks she was wronged by her broker-dealer, she cannot exercise her basic right to go to court because the non-negotiable contract terms forbid her from doing so.

Kevin Carroll of the Securities Industry and Financial Markets Association complains about “the unilateral right” that investors would have if they could choose to go to court instead of being forced into arbitration. To Carroll, it is more appropriate for the industry to be able to unilaterally eliminate investors’ access to the courts and to dictate how disputes should be resolved, then to let individual investors have their day in court.

Carroll laments that restoring investors’ choice would lead to the decline of an arbitration process that his industry controls and influences through the industry-run Financial Industry Regulatory Authority (FINRA).  But why should he worry? If the arbitration system is fair, as his industry contends, then investors will continue to use it after they are able to weigh their options.

He further asserts that if investors had the option to choose arbitration or court, they may make the wrong choice. And he suggests that investors don’t need the court system, because “reasonable people, familiar with the (arbitration) process,” will work to improve  it. His paternalistic stance is a clear admission of a fox who wants to continue guarding the henhouse.

Millions of us are ordinary or small investors who use brokerage firms and broker-dealers to help us invest our life savings. We rely on broker-dealers to provide expert advice on investments. But sometimes things go wrong.  Sometimes customers suffer financial losses, not because of the usual risks posed by investing money, but because of misconduct by unethical or careless broker-dealers.

During the financial crisis, several prestigious brokerage firms abused the financial system by misleading investors about shoddy mutual funds and other deceptive products , and wiped out much of the savings of small investors.

In such situations, most of us believe that we have the option to turn to our court system to seek compensation for the losses and hold the wrongdoer accountable. But the one-sided contracts that securities industry firms foist on their customers eliminate that right.

The Investor Choice Act (H.R. 2998) introduced in August by Rep. Keith Ellison (D-Minn.) would empower small investors to choose how to resolve disputes – whether in court or arbitration – with the sophisticated and powerful broker-dealer industry.

Even Congress is concerned about forced arbitration in investor contracts. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the Securities and Exchange Commission to write a rule to restore investor choice by restricting forced arbitration.

Rep. Ellison’s bill would merely codify such a rule – codification that seems essential as long as industry lobbying groups continue to tilt the terms of broker-dealer contracts against investor interests.

Christine Hines is Public Citizen’s consumer and civil justice counsel. You can follow her on Twitter @chines_citizen.

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