SIFMA defends mandatory-arbitration system

NEW YORK — As some U.S. senators find fault with the arbitration system that resolves client disputes with broker-dealers, the brokerage industry’s largest trade group is defending the process.
In a May 4 letter to Securities and Exchange Commission Chairman Christopher Cox, Senate Judiciary Committee Chairman Patrick Leahy, D-Vt., and committee member Russell Feingold, D-Wis., asked the SEC to ban mandatory arbitration “in fulfillment of its statutory duty to protect individual investors.”
The two senators want to change the legal process for investors and broker-dealers, arguing that it is wrong to force investors into arbitration and that they should have greater choice in resolving legal disputes.
But last Tuesday, an official with the Securities Industry and Financial Markets Association of New York and Washington defended the system, though he conceded that it has evolved over the years.
Arbitration has gotten to be so much like traditional court litigation that the industry may lose interest in keeping disputes
in arbitration, SIFMA general counsel Ira Hammerman said at
the annual public-policy conference held in Washington by the North American Securities Administrators Association Inc. of Washington.
“Arbitration is not perfect,” Mr. Hammerman said, but it is a more efficient way for customers to voice their claims.
Most investors sign agreements requiring them to take disputes to NASD’s arbitration system.
At the NASAA meeting, another Senate Banking Committee member wholeheartedly agreed with his two colleagues.
“We’ve got to make sure that those who are seeking real redress have that opportunity to do that,” said Sen. Robert Casey, D-Pa.
“Today I’m joining [Mr. Leahy and Mr. Feingold] in that call,” he said. “That was the right thing to do.”
Broker-dealers essentially force clients into selecting arbitration, Mr. Leahy and Mr. Feingold wrote in the letter to Mr. Cox.
“The SEC should act to require that brokers allow investors to have an actual choice between the courts and arbitration, thereby restoring the element of voluntariness assumed by the court,” they wrote.
Although Mr. Leahy and Mr. Feingold are looking for change in securities arbitration, they recognize its strengths.
“The appeal of arbitration and mediation for disputes that are relatively straightforward or that involve modest damages will ensure that such alternative dispute resolution processes can continue to be the primary means for resolving disputes even after the implementation of a rule that is more protective of investors,” they wrote.
But the two senators certainly want the avenue of the courts open for investors in some way, they said.
Two Supreme Court cases from the 1980s paved the way for broad judicial enforcement of mandatory arbitration clauses under federal laws, they noted.
“In both cases, the assumptions and rationale underlying the Supreme Court’s rulings are clear: that arbitration increases rather than limits options and that the SEC will actively monitor arbitration to ensure it offers adequate investor protection,” the two lawmakers wrote.
“That mandatory arbitration clauses are now an industry norm — and thus a de facto requirement imposed upon investors — is a significant shift from one of the presumptions essential to the court’s decisions,” they wrote.
A spokesman for the SEC, John Nester, said that the commission had “no response” to the letter.
Washington bureau chief
Sara Hansard contributed to this story.
Bruce Kelly can be reached at [email protected].