The End of Mandatory Securities Arbitration?

Abstract

In this essay, I examine recent Congressional efforts to ban pre-dispute arbitration clauses in securities brokerage account agreements and thus eliminate mandatory arbitration of customer-broker disputes. In the proposed Arbitration Fairness Act, Congress would ban such clauses in all consumer contracts, including in the securities industry. However, securities arbitration - whose fairness is regulated with substantial oversight by the Securities and Exchange Commission - does not suffer from the same features and flaws that critics of arbitration in other forums have excoriated as oppressively unfair. In the recently-enacted Dodd-Frank Act, Congress delegated to the SEC the authority to prohibit arbitration clauses in customer agreements through admininstrative rule-making. After examining these regulatory efforts, I argue that neither Congress nor the SEC should prohibit mandatory securities arbitration because it would have significant adverse consequences for investors and for the vitality of the dispute resolution mechanism. The essay concludes by asserting that regulators should not enact arbitration reform that needlessly and without foundation brands securities arbitration as the evil twin of adhesive consumer arbitration.