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States urge SEC to halt forced investor arbitrations
State securities regulators on Friday urged the SEC to prohibit Wall Street brokerages from requiring customers to settle legal disputes through arbitration, which prevents customers from going to court, joining a chorus of groups opposing such clauses.
The North American Securities Administrators Association (NASAA), in a letter to the chairman of the U.S. Securities and Exchange Commission, Mary Jo White, urged the agency to insure that investors have "meaningful remedies and a choice of forums" in which to resolve disputes with brokerages.
"It has been our longstanding position that the 'take it or leave it' approach represented by these mandatory clauses is harmful to investors," A. Heath Abshure, president of NASAA, a Washington-based organization whose members are mostly U.S. state securities regulators, wrote in the letter.
A flurry of organizations sent letters to the SEC this week voicing opposition to forced arbitration agreements that brokerages typically require customers to sign when they open accounts.
Under such agreements, disputes are typically heard in the Financial Industry Regulatory Authority's arbitration unit. Customers are prohibited from suing in court. Some investment advisers that register with states or the SEC are also using the agreements, according to state regulators.
Critics say the agreements erode customers' legal rights and can lead to rulings against investors.
Unlike lawsuits, arbitrations are binding on both parties and typically offer no recourse of an appeal.
The 2010 Dodd-Frank Wall Street reform law gives the SEC the authority to restrict or prohibit the use of arbitration agreements, but the agency has not exercised that power.
An SEC spokesman declined to comment specifically about the letter because the agency has not responded yet. He added that the SEC shares an interest in the issue as a general matter.
The securities industry has defended the arbitration system.
"It's faster and cheaper than court, and it delivers fair, transparent and merit-based outcomes for all investors," said Ira Hammerman, general counsel for the Securities Industry and Financial Markets Association. Eliminating the mandatory agreements would erode many of those benefits, Hammerman said in a statement.
On Monday, a group of 37 federal lawmakers led by Senator Al Franken, a Democrat of Minnesota, also sent a letter to the SEC asking it to exercise its authority.
On Thursday, 16 consumer and investor groups wrote a similar letter to the SEC. They include the Public Citizen and Consumer Federation of America, as well as AARP, which lobbies on behalf of older Americans.
The letters expressed concern about a 2011 move by Charles Schwab Corp that expanded mandatory arbitration clauses in its customer contracts to include class-action waivers.
FINRA filed a disciplinary case against Schwab last year alleging the class action waiver violated its rule. A hearing panel, in February, upheld the clause..
FINRA is appealing the ruling to the National Adjudicatory Council, its appellate body.
[Source: By Suzanne Barlyn, Reuters, 03May13]
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