Pre-Dispute Mandatory Arbitration Challenged

On Wednesday April 17 up to seventeen members of the North American Securities Administrators Association Inc. (NASAA) met with lawmakers in Washington to garner support for ending, or at the very least restricting, the use of pre-dispute mandatory arbitration clauses in client contracts with investment brokers. With these clauses generally being presented as standard procedure, investors may not be aware that they are, in effect, losing their right to use the judicial system in any dispute arising out of agreements entered into with brokers. In other words, they cannot sue a broker who violates the terms of the agreement or neglects to act in the best interests of a client, the investor. Critics of mandatory arbitration clauses note that investors should be given the choice of omitting the clause from an agreement, thereby giving themselves a greater measure of protection should the client/broker relationship go sour.

While the Dodd-Frank financial reform law signed into federal law by President Barack Obama in July 2010 makes provision for the Securities and Exchange Commission (SEC) to either curtail or prohibit compulsory arbitration being written into investor agreements with brokers, it has not yet used this provision. NASAA spokesman Bob Webster was reported as saying that the time is ripe for the SEC to use this Dodd-Frank provision to protect the investing public, and that this issue is top of the organization’s agenda. At a NASAA conference, Arkansas securities commissioner and president of NASAA, A. Heath Abshure, pointed out that arbitration is becoming the only forum investors have to redress injustices. State regulators have noted that pre-dispute mandatory arbitration clauses are even being incorporated into some agreements between clients and investment advisers.

In a comment to reporters regarding arbitration, SEC commissioner Elisse Walter was reported as saying that “arbitration presents a number of very significant advantages over court litigation for investors.” SEC commission Luis Aguilar noted that a “client’s right to go to court to recover monetary damages is an important right that should be preserved and kept in the client’s toolkit.”

Founded in 1919, NASAA‘s primary goal is to protect investors from fraud through a network of state, federal and industry regulators.