Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, May 16, 2007

Will Congress Take on Securities Arbitration?

A May 4 letter to the SEC by Senators Feingold and Leahy, urging that investors should not be required to arbitrate their disputes with their brokers, has received considerable publicity lately.  In addition, Senator Robert Casey expressed similar views in a speech to state regulators.  The House Financial Services Committee has scheduled a June 26 hearing and has called the SEC Commissioners to testify about whether the SEC is vigorously protecting investors.  See WSJ, Change Is in the Wind On Investor Arbitration.

I find it interesting that the politicians are not focusing on a broader question -- the issue of consent in the context of standard-form arbitration agreements. In addition to brokerage agreements, a wide range of consumer contracts (e.g., credit-card agreements, service contracts for extermination services) and employment contracts contain arbitration clauses, since the Supreme Court, beginning in the 1980s, made arbitration a federal policy.  As I have written frequently, I do not believe that securities arbitration is unfair to investors and, indeed, courts would be a far worse option for most investors, given the anti-investor bias of the federal securities laws.  Thus, in my view, the SEC should focus its attention on making sure that the securities arbitration process is as fair as possible for investors.

It should be noted too that securities arbitration has not worked out quite as brokerage firms expected, especially since the Supreme Court's 1995 decision that arbitrators could award customers punitive damages.  If a brokerage firm thought it could gain a competitive edge by making arbitration voluntary, it might well do so on its own.

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