Richard Ketchum, Chairman and Chief Executive of FINRA, testified before the House Financial Services Committee today in support of allowing the SEC to ban mandatory arbitration clauses in securities contracts. It is common practice for broker dealers to stipulate a mandatory dispute resolution forum in the event of a broker/client dispute. Such clauses, normally found within new brokerage account applications, have become a contentious subject as Congress and the SEC move to reform the securities industry in the wake of the subprime meltdown.
FINRA, who counts among its member many in the securities industry, does not object to a proposal spearheaded by the Obama administration and undertaken by House Capital Markets Subcommittee Chairman Paul Kanjorski, D-Pa., that would give the SEC the authority to prohibit or limit mandatory arbitration clauses.
As expected, the securities industry has seen the move to ban such clauses as a negative development, bad for both broker and client. For those that hold such a view, these arbitration clauses are touted as ensuring fairness and cost effectiveness for all involved.
The move by FINRA to support allowing the SEC this new power greatly weakens the position of the securities industry. Indeed, the proposal is far more likely to be enacted by Congress with Ketchum’s support, where some want an outright ban on all mandatory arbitration clauses.