Last Tuesday, Luis Aguilar, a commissioner for the Securities and Exchange Commission (SEC), showed that he was serious about investor protection. At an annual conference for securities regulators, Aguilar expressed his personal support for an SEC rule that would permit investors to decide how to resolve disputes with broker-dealers and investment advisors. If Aguilar’s fellow commissioners agree and the SEC adopts such a policy, investors will have the option of pursuing their legal claims in court.
Aguilar said, “[i]nvestors … should have the unencumbered right to seek redress in all available forums.” He explained,
Arbitration may be a viable option after a dispute arises and both parties knowingly agree to go into arbitration. However, my main concern with pre-dispute mandatory arbitration is the denial of investor choice; investors should not have their option of choosing between arbitration and the traditional judicial process taken away from them at the very beginning of their relationship with their brokers and advisers.
Currently, the overwhelming majority of broker-dealers and investment advisors include language in their contracts that force investors to resolve disputes against them in private arbitration. Brokerage firm Charles Schwab has raised the stakes by not only forcing individual customers to resolve disputes in arbitration, but by recently adding a provision in its investor contracts that deny customers the ability to band together in class actions against it.
The ban on class actions will harm small investors the most because many lack the resources to pursue valid claims on their own in costly arbitration. They will be unable to recover for losses resulting from all-too-frequent violations, such as misrepresentations about the nature or value of investments.
Since last Monday, Commissioner Aguilar’s statement endorsing investors’ right to seek redress in court has been making headlines in the investment community. The Investment News also agreed with Aguilar that investors should be able to choose a forum to resolve their disputes with broker-dealers and investment advisors. While Aguilar’s statement is a positive development, our work is far from complete.
In 2010, Congress expressly authorized the SEC to restrict forced arbitration between investors and broker-dealers and investment advisors as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. To protect investors, the SEC must adopt a rule to eliminate forced arbitration from these contracts.
Jon Croteau is an intern with Public Citizen’s Congress Watch division