MANDATORY ARBITRATION CLAUSES FORCE DEFRAUDED INVESTORS INTO ARBITRATION. THEY CAN'T GO TO COURT. PREVIOUSLY THEY COULD SELECT BETWEEN NASD ARBITRATION AND NYSE ARBITRATION. FROM NOW ON EVERYTHING GOES TO FINRA. IF SENATE BANS MANDATORY ARBITRATION CLAUSES, DEFRAUDED INVESTORS WILL BE ABLE TO CHOOSE BETWEEN COURT AND FINRA.
by Lawrence C. Melton, Esq., firstname.lastname@example.org
THE HAYES LAW FIRM, www.dhayeslaw.com
On July 26, 2007, the S.E.C. (Securities Exchange Commission) finally issued an Order approving consolidation of the NYSE and NASD regulatory arm. The Order is available at: https://www.sec.gov/rules/sro/nasd/2007/34-56145.pdf
This announcement comes at a time when the U.S. Senate is considering a ban on mandatory arbitration clauses. So, while the S.E.C., NASD and NYSE plan to limit the choices a defrauded investor has for recourse, the U.S. Senate tries to expand the choices.
Earlier this year the NASD and the New York Stock Exchange (NYSE) agreed to a merger that would combine the member regulation operations into a single, new self-regulatory organization (SRO) that will be the sole private-sector regulator for all 5,100 securities brokers and dealers doing business with the public in the United States. The new SRO, under the title FINRA, Financial Industry Regulatory Authority, will bring together all of NASD and NYSE enforcement functions, including customer arbitration.
Defrauded investors seeking relief in arbitration could be hurt by the consolidation. Competition between NASD and NYSE for arbitration case filings is beneficial for investors. Eliminating that competition through consolidating NASD and NYSE arbitration is not.
Concurrently, the U.S. Senate is grappling with the issue of mandatory arbitration in securities disputes. When an investor opens an account at a brokerage house, the investor is required to sign a contract containing a clause for mandatory arbitration. In other words if a dispute arises between an investor and his broker, the dispute must be resolved in arbitration, and not in court.
MANDATORY ARBITRATION CONTRACTS SHOULD BE BANNED
Legally, the arbitration agreement is nothing more than an "adhesion contract." An adhesion contract is defined as a "standardized contract form offered to consumers on essentially a take it or leave it basis without affording consumer realistic opportunity to bargain and under such conditions that consumer cannot obtain desired product or services except by acquiescing in form contract." BLACK'S LAW DICTIONARY 40 (6th ed. 1990). The "distinctive feature of adhesion contract is that weaker party has no realistic choice as to its terms." Id.
Patrick J. Leahy is a Democratic Senator from Vermont who heads the Senate Judiciary Committee. Russell D. Feingold is a Democratic Senator from Wisconsin and a member of the Senate Judiciary Committee. Earlier this month Senators Leahy and Feingold wrote a letter to Christopher Cox, the Chairman of the Securities Exchange Commission, asking that the SEC ban mandatory arbitration "in fulfillment of its statutory duty to protect individual investors."
Forced into the arbitration forum, the customer is denied meaningful choice. The customer does not have the opportunity to file his or her case in court. The two forums for arbitration of security disputes are the National Association of Securities Dealers and the New York Stock Exchange. The dispute resolution branches of the NASD and NYSE are in the process of merging. Not only will the customer be denied the right to choose between arbitration and court, but he or she will be denied the right to choose between different arbitration forums. After the merger all securities dispute will be decided by FINRA.
Twenty years ago, the Supreme Court ruled that brokerage firms could enforce adhesion contracts (client agreements) to bring claims to arbitration rather than to the courts. The initiatives of Senator Leahy and Feingold seek to reverse this trend. The New York Times reports the Senators said the following:
Arbitration is fine for straightforward disputes involving modest claims, the senators said. But for many investors, the courts are preferable. Arbitration not only lacks a court-supervised discovery process, they wrote, it does not require panelists to follow rules of evidence or provide written opinions justifying their decisions.
"Investors are entitled to a real choice when it comes to settling disputes, and the fact that there seems to be a take-it-or-leave-it trend in brokerage contracts with investors is very troubling," Mr. Feingold said in a statement."
Morgenson, Gretchen, Dear S.E.C., Reconsider Arbitration, The New York Times, May 6, 2007. https://select.nytimes.com/2007/05/06/business/yourmoney/06gret.html
Arbitration is supposed to be quick, cost-effective, informal and flexible. The disputes are supposed to be decided on principles of fairness, as opposed to technicalities and procedural issues. Over the years the underlying goals of arbitration have been compromised. Today security arbitration is inefficient, slow, inept and expensive. Most importantly, there is a lack of fairness in the system. The NY Times provides the example of Mabel Strobel:
Should Mr. Leahy and Mr. Feingold hold hearings on mandatory arbitration, they may want to call Mabel Strobel, 86, as a witness. Ms. Strobel sued Morgan Stanley, her former brokerage firm, in 2002 after she lost $281,729. Although she won her case in 2004, her $5,000 damage award paled next to the $10,350 she was ordered to pay in arbitration fees. And that was on top of the 4281,729 she lost.
Morgenson, Gretchen, Dear S.E.C., Reconsider Arbitration, The New York Times, May 6, 2007.
THE HAYES LAW FIRM, www.dhayeslaw.com, phone number: 1-866-332-3567
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