Major reform initiatives currently proceeding through Congress have provided a fresh opening for opponents of the mandatory arbitration provisions that broker-dealers commonly include in agreements with their customers.
A bill passed by the House (H.R. 4173) would specifically empower the SEC to prohibit, condition, or limit the use of mandatory arbitration provisions by broker-dealers, investment advisers, or municipal securities dealers. Similarly, a major draft reform bill that the Senate is considering would mandate that the SEC take such action, if the SEC “finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.”
Although both of these bills appear to give the SEC the ultimate discretion as to whether to impose any prohibitions, conditions or limitations on mandatory arbitration provisions, the SEC has not indicated what its views on that question may be. Moreover, both bills also would require the Comptroller General to evaluate and report to Congress on FIN RA’s arbitration program.
The SEC could also be influenced by the new Consumer Financial Protection Agency (CFPA) that both H.R. 4173 and the Senate draft would create. The CFPA would have the power to prohibit or limit mandatory arbitration agreements with respect to financial products or services that are within the CFPA’s jurisdiction. Even as to products and services that are not within the CFPA’s jurisdiction, both bills would mandate coordination and consultation between the CFPA and the SEC, with the object of promoting comparable treatment of products and services that are similar to or compete with one another.
Thus, as a practical matter, the SEC, the Comptroller General, the Congress, and the CFPA could all have considerable influence on the fate of mandatory arbitration provisions, if this legislation becomes law.