A Chink in the Mandatory Arbitration Armor

Hundred dollars on fishing hook
Hundred dollars on fishing hook

I have long railed against the insidious system known as mandatory arbitration which is foisted upon investors who deal with brokers. I testified about the unfairness of this system before a congressional sub-committee. I co-authored a study showing the dismal results for investors when they attempted to recover losses caused by the misconduct of their brokers. It's not surprising that a comprehensive study found most participants in these arbitrations believed the sessions were biased and unfair.

Consumer advocates and independent securities regulators have long called for the abolition of the mandatory arbitration process. William Galvin, the highly respected Secretary of the Commonwealth of Massachusetts, testified that FINRA's mandatory arbitration system is "an industry sponsored damage-containment and control program masquerading as juridical proceeding."

The North American Securities Administrators Association (NASAA) recently sent a letter to the Chairman of the SEC, stating: "It has been our longstanding position that the 'take it or leave it' approach represented by these mandatory clauses is harmful to investors." Sixteen consumer and investors groups (including the AARP) wrote similar letters to the SEC, as did 37 members of Congress.

The Public Interest Arbitration Bar Association (PIABA, whose members represent aggrieved investors in FINRA arbitrations) urged Congress to give investors a choice as to where to bring their claims. PIABA noted the obvious unfairness of investors being forced to bring their claims "in a forum that is financially supported by the very firms that those claims are being filed against." (Full disclosure: I was formerly a member of PIABA.)

The proponents for eliminating mandatory arbitration got a significant boost in a speech at the annual meeting of NASAA in April. SEC Commissioner Luis Aguilar called for an end to mandatory arbitration, noting: "The inclusion of such provisions in brokerage and advisory contracts diminishes investor protection."

Who is in favor of keeping this cozy system intact? The securities industry, of course. The general counsel for the Securities Industry and Financial Markets Association asserted: "It's faster and cheaper than court, and it delivers fair, transparent and merit-based outcomes for all investors."

If your broker is enthused at the prospect of resolving claims against him in a system administered by an organization that receives financial support from the brokerage industry, you know it's a terrible idea.

Dan Solin is the director of investor advocacy for THE BAM ALLIANCE and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.