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1 1 (April 5, 2022)

handle is hein.crs/govefnu0001 and id is 1 raw text is: April 5, 2022 Legislation to Repeal Mandatory Securities Arbitration Introduction Virtually all securities broker-dealers and reportedly most investor advisors require their customers to agree that disputes that may arise between them must be resolved through arbitration rather than through lawsuits filed in federal or state courts. Critics of this practice argue it unfairly denies investors the right to seek redress through other avenues. Proponents of the practice argue arbitration results in fair outcomes at less cost to the parties involved. Two companion bills-S. 1171 and H.R. 2620, which was marked up by the House Financial Services Committee (HFSC) on November 16, 2021-would prohibit financial intermediaries from mandating that their customers submit to arbitration to resolve disputes instead of litigating them through federal or state courts. To do so, the bills would amend the Securities Act of 1933 (P.L. 73-22) and the Investment Advisers Act of 1940 (P.L. 76-768). Specifically, they would prohibit broker-dealers, investment advisers, and other intermediaries from incorporating mandatory arbitration clauses in customer agreements. Supporters argue that this would more fairly give investors the benefit of seeking redress in several ways. Also, under the bills, customer agreement prohibitions on class action suits would be banned. If enacted, the legislation would also void mandatory arbitration agreements that were in effect before the bills became law. The legislation would also amend the Securities Exchange Act of 1934 (P.L. 73-291) to require that security exchange rules not allow the listing of any company whose bylaws, governing documents, or contracts provide that disputes between shareholders and the company would be subject to mandated arbitration. Supporters of S. 1171 and H.R. 2620 say that the bills would ensure that securities firm customers would no longer have to surrender their rights to litigate disputes when they engage with the firms. Detractors acknowledge this outcome but argue that the reform would ultimately kill securities arbitration, ending the benefits it provides to investors. Background The role of arbitration. Clients of broker-dealers and investment advisors, who provide them with investment recommendations, may allege that they have engaged in various illegal acts, such as breach of fiduciary duty (for advisors), negligence, unsuitable investment recommendations (historically for brokers), conflicts of interest, misrepresentation, omissions of material facts, and fraud. Historically, such investor disputes could be resolved through various avenues, including litigation in court or arbitration. Growing prevalence of arbitration. Court cases have been instrumental in the growing use of mandatory securities arbitration. According to one analysis, before the late 1980s, a minority of broker-dealers had voluntary customer arbitration agreements. Since then, two U.S. Supreme Court rulings, Shearson/American Express v. McMahon, 482 U.S. 220 (1987) and R. de Quijas v. Shearson/Am. Express, 490 U.S. 477 (1989), are widely seen to have established that the securities industry can compel investors to have their disputes adjudicated through arbitration forums as indicated in their customer arbitration clauses. Now mandatory arbitration provisions are said to be nearly universal. The brunt of the policy debate surrounding mandatory arbitration clauses for securities transactions revolves around broker-dealer arbitration hearings conducted by the Financial Industry Regulatory Authority (FINRA)-the self-regulatory organization that is the principal regulator of broker-dealers and has 8,000 or so arbitrators. The Securities and Exchange Commission (SEC) oversees FINRA. Arbitration hearings resolve a fraction of the total number of customer disputes filed with FINRA, the vast majority of which are settled prior to an arbitration hearing through direct negotiation or mediation. For cases involving investment advisers, which group oversees the arbitration is less clear-cut. Some are dual registered as investor advisors and broker-dealers and may undergo FINRA arbitration. However, for those who are solely registered as investor advisors, arbitration is typically conducted by one of two alternative dispute resolution groups, the American Arbitration Association (AAA) and an arbitration group known as JAMS (formerly known as Judicial Arbitration and Mediation Services). On a few occasions, FINRA, also conducts some investor advisor arbitrations where the advisor is not dual registered. Most of the discussions and research on mandatory securities arbitration has focused on FINRA broker-dealer arbitration, not arbitration involving investor advisors. This may stem from the fact that until the past decade or so the use of mandatory arbitration in what many argued was the more deferential to customers fiduciary-based advisory industry was said to be limited. It is now said to be typical. As such, the arguments presented in the next section focus on FINRA broker-dealer arbitrations, except where otherwise noted. The provisions that would ban mandatory arbitration between shareholders and their firms. The backstory behind the aforementioned legislative provisions that would :tps://crsreport

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