The Expert's Examiner

NASAA in early March released its legislative agenda for the new Congress. Arbitration reform is now a key focus. The 16-page NASAA Legislative Agenda for the 116th Congress has four core principles: 1) Putting Main Street Investors First; 2) Ensuring the Integrity of our Capital Markets; 3) Fostering Capital Formation and Market Transparency; and 4) Ensuring Investor Rights in a 21st Century Marketplace. The latter states: “Congress must reaffirm the rights of investors in the modern securities marketplace and ensure our securities laws effectively protect these rights.” How? Four bullet points are listed: Secure Investor Choice and Transparency in Dispute Resolution; Make Harmed Investors Whole; Safeguard Shareholder Rights; and Data Security and Privacy. Arbitration is prominently featured in the first two.

Secure Investor Choice and Transparency in Dispute Resolution

The Agenda observes that nearly every retail customer agreement contains a pre-dispute arbitration agreement (“PDAA”) calling for FINRA arbitration. This is problematic because, “[a]mong other things, investor confidence means that [investors] have a choice of forum when it comes to resolving disputes with their investment professionals.” NASAA suggests three ways to address this concern (headers and excerpts repeated verbatim; footnotes omitted):

• Mandatory Arbitration: The 116th Congress should discourage the proliferation of mandatory arbitration provisions in contracts used by financial services firms…. NASAA supports legislation that would ban the use of mandatory pre-dispute agreements by broker-dealers and investment advisers that limit investors’ ability to pursue recourse in any forum.
• Transparency and Accuracy in Dispute Resolution. Today, financial professionals can seek expungement of customer complaint information from their regulatory records, using arbitration proceedings and uncontested civil actions. The 116th Congress should examine this process and consider measures to prevent the removal of this important information from the records of financial professionals.
• Forced Arbitration in IPOs. The Commission has not formed a definitive view on mandatory arbitration clauses included in a company’s governing documents submitted in connection with an IPO, and currently reviews these clauses on a case-by-case basis…. To remedy this, Congress should enact legislation requiring the SEC to ensure that these clauses are not included in pre-IPO filings, or alternatively, prohibit acceleration of the effective date of an issuer’s registration statement pursuant to Section 8(a) of the Securities Act of 1933.

Make Harmed Investors Whole

The Agenda observes that, despite several remedial steps over the years, the problem of unpaid arbitration Awards remains a serious concern and suggests that the 116th Congress “should take steps to reduce and eventually eliminate unpaid judgments resulting from disputes between investors and securities firms…. NASAA has long supported measures to address the problem of unpaid awards, and we encourage Congress to make it a priority to fix this problem.” While no specific fixes are contained in the Agenda’s main body, a footnote observes that Sen. Elizabeth Warren “has sponsored legislation in the Senate that would address the problem by effectively requiring firms to pay them and FINRA to backstop the firms.”

(ed: *After being less of a priority in recent years, arbitration is clearly on the front burner for NASAA. We suspect that the new Democrat majority in the House is a cause. **As we read the Agenda, NASAA is not recommending that PDAAs be banned, but that dispute resolution clauses give a choice of forum – including court -- or, perhaps, a voluntary clause, as on the commodities side. ***The legislative agenda Webpage is http://www.nasaa.org/issues-and-advocacy/nasaa-legislative-agenda-for-the-116th-congress/.) (SAC Ref. No. 2019-11-01)