As everyone knows, back in the 1980s, broker-dealers fought hard for the ability to include in a customer agreement a clause mandating that all disputes be dealt with in the arbitration forum, rather than in court. It was not an easy fight, as to require a customer to arbitrate means that certain rights that would otherwise be available in court – expanded discovery, additional motion practice, an actual judge presiding over the process rather than a volunteer whose skill set may or may not be appropriate or relevant, the right to appeal – are sacrificed in an effort to provide a system that is faster (Ha!) and cheaper (Ha Ha!). But, the fight was won, and ever since, arbitration clauses are routine.
But not everyone is a fan. Indeed, you may recall that buried in Dodd-Frank is a provision that gave the SEC the right to simply declare the end of mandatory arbitrations. Armed with that power, the SEC basically did, um, nothing. It conducted a study, or something. But it’s been over ten years, and if anyone was breathlessly awaiting some action by the SEC on this hot, hot topic, they have long since expired from lack of oxygen.
I am wondering now, however, if that’s how things will remain. Earlier this month, President Biden’s – first time I am typing those two words together! – nominee to head the SEC, Gary Gensler, was questioned by the U.S. Senate Banking Committee. Including, notably, Elizabeth Warren, no fan of FINRA or of mandatory arbitration. Check out this exchange she had with Mr. Gensler:
Senator Warren: Okay. And then finally, let me ask about the tilted roulette tables on Wall Street. If someone has been cheated by a broker dealer, hypothetically, for example, if Robinhood cheated individual investors, hypothetically, should that company be able to use forced arbitration clauses to avoid getting sued and held accountable?
Mr. Gensler: I think, Senator, that while arbitration has its place, I think it’s also important that investors, or in that case, customers have an avenue to redress their claims in the courts.
Senator Warren: Good. You know. As you know, the SEC has the power to require disclosures that will be helpful to the investing public-like climate risk disclosures and private equity practices. And Section 921 of the Dodd-Frank Act gives the SEC the authority to prohibit the use of forced arbitration by broker-dealers when it is “in the public interest and for the protection of investors.” In other words, the SEC has the tools to make the markets function better. So, if you are confirmed, Mr. Gensler, will you commit to picking up those tools and using them to make the markets more honest and more transparent?
Mr. Gensler: Senator, if confirmed, I look forward to looking at all of the authorities. Not just this one. But all of the authorities to help protect investors, promote the capital formation and the efficient markets that we talked about. And this is an important authority that was vested in the agency and looking at the economic analysis, working with fellow commissioners. I think we should look at all the authorities.
Senator Warren: I appreciate that. You know. Congress has given the tools to the SEC. We just need the SEC to pick up these tools and use them. The SEC has been asleep on the job for long enough. It’s time for the Commission to get off its behind and protect investors and consumers and I expect to see progress on all of these areas under your leadership.
My heavens, do you think Senator Warren tipped her hand regarding what she wants to see happen? “Tilted roulette wheel.” Jeez.
Clearly, she thinks that the current system of “forced arbitration” – even her use of “forced” vs. “mandatory” conjures up rather nasty images – does not hold BDs accountable, does not make the markets more honest, does not provide transparency, and, most important, does not protect investors and consumers. But none of that was surprising. She has maintained these views for a long time, and her frequent expression of her distaste for mandatory arbitration may be the principal reason that FINRA has displayed its long history of kowtowing to PIABA when it complains about the supposed unfairness of FINRA’s arbitral forum.
What IS surprising is Gensler’s answer, which I highlighted, in which he acknowledged that it’s important for investors to have the ability to go to court. THAT is nothing we have heard coming out of the mouth of any Chairperson of the SEC since Dodd-Frank. And while Mr. Gensler is hardly obligated if he is confirmed actually to do anything that he told the Banking Committee, you still have to take his comments seriously.
It will be very interesting to see what shakes out here. Senator Warren is a powerful force in the Senate, more so now, under the Biden administration (which she, as well as other Democratic candidates, helped happen by gracefully bowing out of the race two days after the Super Tuesday results came in) than she had been. Does President Biden owe it to her to look into this pet issue of hers? Gensler’s answer certainly suggests that she will be taken seriously, at a minimum.
But, let me be clear about something: as I have undoubtedly said before, I am perfectly ok if I am required to defend my BD clients in court, rather than in a FINRA arbitration. Indeed, that’s how I started my career, almost 40 years ago now, helping Chuck Murphy, my inimitable mentor, the partner for whom I principally worked, defend BDs in customer cases filed in federal court in the Northern District of Georgia. (My first notable accomplishment as a baby attorney was winning a partial motion for directed verdict on a claim that my client had sold an unregistered security. We lost the rest of the case, but, hey, I won my piece, despite not really knowing what I was doing.) I am ready, willing and able to return to the court setting, if the SEC says that must happen.
I wonder, however, if the claimants’ bar can say the same thing. Some of the Statements of Claim I receive likely could not survive a motion to dismiss for failure to state a claim. (Of course, I can’t file that motion in arbitration, as the Code of Arbitration Procedure doesn’t allow it.) Some could not survive a motion to dismiss based on the statute of limitations (an argument that makes arbitration panels really uncomfortable, for some reason). Some could not survive a motion on the pleadings. Some could not survive a motion for summary judgment. Some might even subject the lawyer who signed it to sanctions under Rule 11, given how far removed some of these things are from the truth. I acknowledge that court will cost my clients more, and will take longer. But, if it means that justice is really served, that the playing field is truly level, and I can go into battle armed with the various procedural devices that don’t exist in arbitration, then I would be all in.
