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Letter to SEC Chairman Mary Jo White - Protect Consumers' Legal Rights Against Wall Street

Today, U.S. Sen. Al Franken (D-Minn.) pressed the Securities and Exchange Commission (SEC) to prevent Wall Street brokerage firms from forcing investors into unfair arbitration agreements.

Minnesotans planning for retirement or saving for their children's college funds rely on the advice of their brokers to help them make smart investment choices. However, when brokers engage in fraudulent or illegal behaviors that lose investors' savings, mandatory arbitration clauses limit investors' ability to protect their rights under the law.

Sen. Franken and a group of key Senate and House colleagues urged the SEC to use its existing authority to prevent mandatory arbitration clauses in broker-investor contracts. The need for the SEC to act increased after one of the country's largest brokerage firms decided to dramatically expand its mandatory arbitration provisions in a way that would harm investors.

In a letter to SEC Chairman Mary Jo White, Sen. Franken, along with 36 of his Congressional colleagues, urged the SEC to use its authority - granted to the SEC in the Dodd-Frank Wall Street reform law - to to prevent further forced arbitration contracts in customer service agreements.

"We are deeply concerned that the Commission's failure to respond to the dangers posed by widespread forced arbitration will weaken existing investor protections," wrote Sen. Franken and his colleagues in their letter. "We urge the Commission to act quickly to exercise its prevent this practice and protect investor rights."

"As the closest regulators to Main Street investors, state securities regulators commend Sen. Franken for his leadership and shared belief that investors should not be forced into the "take it or leave it' scenario they now face with mandatory pre-dispute arbitration clauses in customer agreements with their broker-dealers. These clauses have become even more troubling in light of the recent decision by Charles Schwab to expand its forced arbitration contracts to require that investors waive their right to participate in class actions. That's wrong on the merits and bad public policy. Forced arbitration should not be the sole forum available to aggrieved investors, especially those investing small amounts," said A. Heath Abshure, Arkansas Securities Commissioner and president of the North American Securities Administrators Association, the oldest international investor protection organization and the voice of state securities regulators in the United States.

The Senators and Representatives also pressed the SEC to track how many brokerage firms are inserting mandatory arbitration agreements and class action waivers into consumer contracts so that they can closely monitor the growing use of this abusive practice.

The below letter to SEC Chairman White was signed by Sens. Patrick Leahy (D-Vt.), Tom Harkin (D-Iowa), Bernie Sanders (I-Vt.), Richard Blumenthal (D-Conn.), Dick Durbin (D-Ill.), Sheldon Whitehouse (D-R.I.), Jeff Merkley (D-Ore.), Mazie Hirono (D-Hawaii), Sherrod Brown (D-Ohio), Martin Heinrich (D-N.Mex.), Frank Lautenberg (D-N.J.), Robert Menendez (D-N.J.), Ron Wyden (D-Ore.), and Elizabeth Warren (D-Mass.). In the House, the letter was signed by Reps. Ed Markey (D-Mass.), John Conyers Jr. (D-Md.), Jerrold Nadler (D-N.Y.), Bobby Scott (D-Va.), Mel Watt (D-N.C.), Jan Schakowsky (D-Ill.), Raul Grijalva (D-Ariz.), Gwen Moore (D-Wisc.), Bruce Braley (D-Iowa), Peter Welch (D-Vt.), Hank Johnson (D-Ga.), Niki Tsongas (D-Mass.), Chellie Pingree (D-Maine), Ted Deutch (D-Fla.), Carol Shea-Porter (D-N.H.), David Cicilline (D-R.I.), Suzanne Bonamici (D-Oreg.), Jared Huffman (D-Calif.), Chris Van Hollen (D-Md.), Paul Tonko (D-N.Y.), Judy Chu (D-Calif.), and Steve Cohen (D-Tenn.).

Dear Chairman White,

We write to express our strong belief that the Securities and Exchange Commission (the "Commission") should promptly exercise its authority under Section 921 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to prohibit the use of mandatory arbitration provisions in customer service agreements.

The Dodd-Frank Act was enacted, among other reasons, to protect American consumers from abusive financial services practices. Section 921 reflects Congress's concern over the increasingly widespread use of mandatory arbitration agreements in customer and client contracts, and grants the Commission authority to restrict or prohibit the use of these provisions. Ensuring a choice of forum, particularly for small investors, heightens fairness and ultimately enhances participation in our capital markets. To our disappointment, in the almost three years since the Dodd-Frank Act's enactment, the Commission has largely disregarded this important mandate.

The time is ripe for the Commission to act under Section 921 to protect the investing public and prevent further abuse of forced arbitration contracts.

Recently, we were alarmed to see further attempts to erode investor rights when Charles Schwab, one of the country's largest brokers, expanded the mandatory arbitration clauses in its customer agreements to include a mandatory class action waiver clause. In this instance, Schwab argued that, in response to the Supreme Court's interpretation of the Federal Arbitration Act (FAA) in AT&T Mobility v. Concepcion, it could include a waiver of class action and class arbitration rights in its customer agreements. FINRA initiated a disciplinary action against Schwab for violation of FINRA rules barring class action waivers. In February, however, a FINRA hearing panel ruled that although Schwab's actions did in fact violate FINRA rules, those rules could not be enforced under Concepcion.[1]

While the Supreme Court in Concepcion did find that the FAA preempts state actions that would restrict the use of arbitration, the facts in the Schwab case are notably distinguishable-not least because FINRA is a membership organization seeking to enforce its own rules. However, the ambiguity created by the panel's ruling underscores the urgency with which the Commission should adopt rules under Section 921.

Section 921 was included in the Dodd-Frank Act to address the threat to consumers posed by mandatory arbitration clauses in investment contracts. During Congress's deliberation of this section, legislators heard concerns that investors forced into arbitration must face "high upfront costs; limited access to documents and other key information; limited knowledge upon which to base the choice of arbitrator; the absence of a requirement that arbitrators follow the law or issue written decisions; and extremely limited grounds for appeal."[2]

If arbitration offers investors an efficient forum to resolve disputes, as some argue, investors may choose that option-but they should be given the choice. It is equally important that investors not be precluded from bringing class actions because of contractual fine print imposed by a mandatory waiver class action clause.

Although evidence suggests that the use of mandatory arbitration agreements is widespread, we are concerned about the lack of transparency and reliable data regarding the prevalence of such agreements. We encourage the Commission to track how many brokerage firms are inserting mandatory arbitration agreements and class action waivers into consumer contracts, so that this questionable practice may be better monitored and addressed.

We are deeply concerned that the Commission's failure to respond to the dangers posed by widespread forced arbitration will weaken existing investor protections. Given the uncertainty created by the recent FINRA decision, we urge the Commission to act quickly to exercise its authority under Section 921 to prevent this practice and protect investor rights.

We recognize that the Commission is balancing competing demands, and that it must prioritize its recent mandates by Congress. The exigent circumstances at hand, however, require that the Commission exercise its authority under Section 921 of the Dodd-Frank Act and prohibit the use of mandatory arbitration provisions.

[1] FINRA Department of Enforcement v. Charles Schwab & Company Inc. (CRD No. 5393) Disciplinary Proceeding No. 201102976021. February 21, 2013.
[2] Senate Committee on Banking, Housing, and Urban Affairs on S. 3217, S. Rep. No.111-176, at 110.

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