The system of mandatory arbitration of disputes between brokerage firms and customers is again in the news. This time the North American Securities Administrators Assocation, Inc. has been lobbying the SEC to act on its authority under Dodd-Frank to end or limit the use of pre-dispute mandatory arbitration agreements included in virtually all customer agreements used by Wall Street.
Heath Abshure, Arkansas’ securities commissioner and NASAA president, used an example of an investor whose individual retirement account totals $27,000. “If he’s got a mandatory arbitration provision with a Charles Schwab class action waiver, that means he’s going to arbitration. That’s the only alternative he has. Find the securities lawyer who is going to take a $27,000 class action fraud case…” He added that the way things are currently set up, “The [arbitration system] really presents an absolute prohibition and an impossibility for small investors to seek redress for securities fraud.”
Ira Hammerman, senior managing director and general counsel at SIFMA, countered that the arbitration process, which is administered by FINRA, is the fairest and most efficient way to help small investors.
“It is one where customers who have small claims can go and have those claims resolved. A customer can literally fill out in handwriting a piece of paper … and even in that $27,000 account can have their so-called day in court, where if it were a real court, there’s no way that anyone could pursue that case,” Mr. Hammerman said at the InvestmentNews event.
The defendants in arbitration cases also have misgivings. Among independent broker-dealers, there has been a growing “disenchantment” with the system over the last year, according to Dale Brown, president and chief executive of the FSI.
