Last week, U.S. Securities and Exchange Commission (SEC) Commissioner Robert Jackson cautioned the agency against taking any potential action that would handcuff investors from holding corporate bad actors accountable for wrongdoing. Public Citizen applauds Commissioner Jackson for standing up against corporate wrongdoers seeking to evade accountability if they cheat investors.
Forced arbitration clauses, also known as “rip-off clauses,” frequently are hidden in the fine print of take-it-or-leave-it agreements. These clauses deprive people of their day in court when they are harmed. Because they constitute a Get Out of Jail Free card for corporate wrongdoing, they have become ubiquitous in contracts governing bank accounts, student loans, cell phones, employment and even nursing home admissions. It turns out that rip-off clauses also can be used to deprive investors of their right to access the justice system if they are wronged.
Forcing investors into a secretive process away from public view weakens accountability when companies engage in wrongdoing, makes it more difficult for the SEC to conduct its oversight functions against bad actors and lessens the likelihood that wrongdoers will be deterred from committing fraudulent behavior in the future.
In 2012, the private equity firm Carlyle Group lobbied the SEC to allow it to sneak arbitration clauses into their initial public offering (IPO) documents. Public Citizen led the charge against this request and ultimately prevailed. Rather than admit defeat, large corporate entities and their lobbyists have been waiting for corporate friendly regulators to take control of the SEC for another bite at the apple to close the courthouse doors on investors.
And now, some SEC commissioners now seem eager to assist. In August 2017, Public Citizen wrote to SEC Chair Jay Clayton to express concern over comments by Commissioner Michael Piwowar who indicated his support for including forced arbitration clauses in IPO documents. Public Citizen argued that allowing forced arbitration and class-action prohibitions by issuers would be inconsistent not only with the SEC’s statutory investor-protection mandates but also with the commission’s past actions.
Then in February, U.S. Sen. Elizabeth Warren (D-Mass.) questioned Chairman Clayton on whether the SEC was prepared to allow companies to insert forced arbitration clauses into IPO documents. Clayton said that he “was not anxious” to take the step, but refused to answer the question. It’s a troubling sign that the SEC is turning against investors and against public opinion: There is overwhelming and bipartisan support for banning forced arbitration clauses.
Securities laws are complex to navigate, and it may be impossible to take on a behemoth investment company as a solo investor. That’s why it is so important that investors have the right to band together to bring a class action against unscrupulous corporate actors.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted after the Great Recession to protect consumers from the irresponsible actions of the financial industry, explicitly authorized the SEC to prohibit forced arbitration clauses related to brokers, dealers and investment advisors. If the Great Recession taught us anything, it should be that loosening rules designed to protect consumers is the last thing we should be doing.
Commissioner Jackson should be applauded for standing up for investors, and his fellow commissioners should follow his lead.