SEC Commissioner Aguilar Urges End to Mandatory Arbitration Clauses in Brokerage Agreements

By on April 22, 2013

Arbitration is usually the only method for clients to seek compensation for wrongs committed by their brokers and financial advisors. Mandatory arbitration clauses are included in virtually all account-opening brokerage agreements. Their effect is to deny clients their day in court. Instead of a judge and jury determining the legal nuances and merits of complaints, arbitration forces clients to go before arbitrators that work for an organization.  In the case of broker dealers that organization is Financial Industry Regulatory Authority (FINRA).

Clients and their lawyers often view FINRA arbitrations as biased against the clients and towards the broker.  Potential arbitrators are selected for each particular case from a list provided by the parties. Because the brokerage defendants in these cases are repeat players, there is a built-in incentive for arbitrators to please the brokerage industry: if it doesn’t, it is unlikely to get picked for future arbitrations.  Anecdotes about too-cozy relationships between arbitrators and the securities industry are a dime a dozen.

The case against mandatory arbitration received a boost recently when Securities and Exchange Commission commissioner Luis Aguilar, in a speech before the North America Securities Administrators Association’s on April 16, 2013, stated his belief that brokerage clients should decide whether they want to go to arbitration. Although the 2010 Dodd-Frank Act gave the SEC the authority to limit or prohibit mandatory arbitration clauses in the, it has not acted on the matter. Whether Commissioner Aguilar’s views are shared by the other for Commissioners remains to be seen.