A new bill would ban mandatory arbitration agreements between aggrieved investors and advisors or broker/dealers. The Investor Choice Act, which was introduced in the Senate and House of Representatives by Sen. Jeff Merkley (D-Ore.) and Rep. Bill Foster (D-Ill.), would also ban any prohibitions on class action lawsuits, which are often embedded in clients’ contracts.
“Individuals shouldn’t need to surrender their legal rights because they choose to work with a financial advisor or broker/dealer to plan for their retirement and invest their hard earned money,” Foster said. “This legislation levels the playing field for consumers and prevents them from being victims of a rigged system that denies them fair legal recourse if they are wronged.”
The bill would amend the Securities Exchange Act of 1934 to make it illegal for any “broker, dealer, funding portal or any municipal securities dealer” to include a mandate for arbitration in the event of a dispute, and outlaws any customer agreement that “restricts, limits, or conditions the ability of a customer or client of that entity to select or designate a forum for resolution of that dispute.” The amendment would also disallow any security from registering with the SEC if its issuer mandated arbitration for customer/advisor disagreements.
In a statement, Merkley argued that the amendments would address the pitfalls of a “rigged” system, where the “investment advisor or broker chooses the judge, pays the judge, and promises future business to the judge.” He and Foster were joined by 12 Democratic lawmakers who signed onto the bill, including Reps. Carolyn Maloney (D-N.Y.) and Gregory Meeks (D-N.Y.), as well as Sens. Elizabeth Warren (D-Mass.) and Sheldon Whitehouse (D-R.I.), who said consumers needed a “fair, transparent system” to get justice.
“Forced arbitration lets broker/dealers and financial advisors muscle Americans out of the courtroom and into proceedings they control,” Whitehouse said.
In a statement supporting the legislation, Public Investors Advocate Bar Association President David P. Meyer said investors had been deprived of the chance to opt out of arbitration, because by doing so, they would not be able to open brokerage accounts. This trend continued as investors increasingly moved into the investment advisory space, according to Meyer.
“For brokerage firm disputes, it seems clear that many investors would still choose to use FINRA dispute resolution. But the existence of real choice undoubtedly would have the salutary side effect of making the FINRA process fairer, more transparent and more investor friendly,” he said. “Giving investors the option to also bring claims in court when appropriate would help to ensure that FINRA will continue to improve the arbitration process such that many investors opt to have their cases heard there.”
In addition to covering individual investors’ disputes with brokers, the legislation would also address binding and forced arbitration clauses that could be adopted by corporations concerning disputes with shareholders, according to Barbara Roper, the director of investor protection for the Consumer Federation of America. She also believed that many individual claims will still be brought in FINRA arbitration if this legislation passed.
“But they’ll have to compete for the business by running a fair, transparent, affordable and efficient process,” she said. “And then investors will have the choice to arbitrate if they believe that’s their best option.”
Foster previously sponsored similar legislation in 2019; that year, the House Committee on Financial Services held a hearing in which witnesses testified about the merits of such an amendment. Some, including congressional delegate Michael San Nicolas (D-Guam), who’d previously worked as an advisor, worried the bill could lead to class action attorneys filing numerous and frivolous lawsuits against brokers and advisors.
But supporters, including Remington A. Gregg, the counsel for civil justice and consumer rights with Public Citizen, said this concern was overstated because of the high bar necessary for such suits to reach a courtroom. He cited 2018 statistics from FINRA indicating that claimants had been awarded damages in only 40% of cases, which marked a decline over the previous three years.
While that bill was not passed, Roper believed it was possible that the current legislation could pass in the current Congress.
“It’s not a given, but I think it has the potential to pass,” she said. “Forced arbitration is extra unpopular with the public across party lines. In the eyes of the investing public, this is not a partisan issue."