State securities regulators continued to pressure the Securities and Exchange Commission to end mandatory arbitration clauses in brokerage contracts on Friday.
In a
letter to SEC Chairman Mary Jo White, the North American Securities Administrators Association urged the agency to utilize the power given to it by the Dodd-Frank financial reform law to end or restrict the compulsory arbitration provisions included in almost every brokerage agreement with clients.
The letter also asked the SEC to overturn a ruling earlier this year by a hearing panel of the Financial Industry Regulatory Authority Inc. that allowed The
Charles Schwab Corp. to ban class-action lawsuits within arbitration clauses.
“The decision by Charles Schwab & Company to include these class-action waivers in the arbitration provisions of its customer contracts is yet another example of the pernicious effects of mandatory arbitration clauses,” wrote A. Heath Abshure, Arkansas securities commissioner and NASAA president. “Now, more than ever, it is essential that the SEC use its authority to insure that investors have meaningful remedies and a choice of forums in which to resolve disputes with broker-dealers and investment advisers.”
Mr. Abshure described Schwab's move on class-action lawsuits as an attempt to “flaunt Finra rules.”
“Charles Schwab's attempt to unilaterally alter its account agreements to include the class action waiver is an obvious attempt by the firm to insulate itself from liability to its own clients, which clearly violates public policy and may further violate Charles Schwab's regulatory duty to 'observe high standards of commercial honor and just and equitable principles of trade,'” Mr. Abshure wrote.
Earlier this week, a group of 37 members of Congress sent a letter to the SEC urging the Commission to do away with mandatory arbitration clauses in brokerage agreements.
Schwab spokesman Greg Gable asserted that customers are better off using arbitration than going through the court system to settle claims.
“We amended our customer agreements to include the class action waiver because class action litigation too often results in resolutions benefiting class action lawyers rather than their clients,” Mr. Gable wrote in an email.
He pointed to a 2011 study of Finra arbitration results in The Securities Arbitration Commentator that showed that customers had a 45% win rate and a median award of $163,300 while in small claims the win rate was 34% and the median award was $10,800.
SEC spokesman John Nester declined to comment on the NASAA letter. In an email, he added: “As a general matter, we share their interest in this issue.”
A Finra rule prohibits brokers from limiting class-action suits. But earlier this year, the Finra hearing panel concluded that Schwab could put a class-action waiver in its arbitration agreements because Finra's ban violates the Federal Arbitration Act.
The state regulators assert that the SEC can supersede federal arbitration law when it comes to enforcing Finra arbitration rules.
“If the hearing panel's decision is not overturned, there is a good chance that many other brokerage firms will follow suit and also restrict their investors from exercising their rights to participate in class actions,” Mr. Abshure wrote.
The option of filing class-action lawsuits is important for investors who are seeking to recover modest amounts of money, Mr. Abshure argued.
“The pursuit of these smaller claims would otherwise be economically impractical given the fees and costs associated with litigation, including Finra arbitration proceedings,” Mr. Abshure wrote. “Absent the class action vehicle, identical or practically indistinguishable claims may be subject to varying and inconsistent outcomes depending on the characteristics of the forum before which they are brought.”
