Economy & Finance

SEC review of brokerages use of arbitration not seen in 2013

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WASHINGTON (Reuters) – Wall Street brokerages’ use of mandatory arbitration clauses merits a regulatory review, but the Securities and Exchange Commission will not have time to undertake one before 2014, an SEC commissioner said on Monday.

The agency will wrap up other priorities before looking at whether firms can require customers to settle legal disputes through arbitration, Commissioner Elisse Walter said. Those other priorities include rules required by the Dodd Frank financial reform law and the JOBS Act, as well as money market fund reform.

“I personally do think it’s something to take a hard look at,” Walter said during the Financial Industry Regulatory Authority’s (FINRA) annual conference in Washington. “I don’t know when the commission will find time to do this,” Walter said.

When brokerage customers open new accounts, they typically are required to sign contracts agreeing to resolve potential legal disputes with their firms in FINRA’s arbitration unit instead of court.

Critics say the agreements erode customers’ legal rights and can lead to rulings against investors. Unlike lawsuits, arbitrations are binding on both parties and typically offer no recourse of an appeal.

The 2010 Dodd-Frank Wall Street reform law gives the SEC the authority to scale back or prohibit the use of pre-dispute arbitration agreements. So far, the SEC has not taken steps toward proposing new rules banning or limiting the agreements.

Walter’s comments follow efforts by Democratic lawmakers, investor advocacy groups and state regulators, who wrote letters to the SEC in recent weeks urging it to prohibit mandatory arbitration for brokerage customers. The securities industry has argued the system is fair, efficient, and cost-effective.

Another SEC commissioner, Luis Aguilar, in April, urged the agency to support rules that would give investors a choice between arbitration and court.

The SEC already has made a sweeping data request of the securities industry and the public for another purpose that could help inform the agency’s analysis of arbitration practices, Walter told reporters after her remarks.

That request, aimed at determining whether to streamline standards of conduct for certain types of financial advisers, includes questions about the processes through which customers may pursue legal cases against their advisers and related costs.

Potential industry and investor costs that may stem from prohibiting mandatory arbitration are a key piece of the puzzle that the SEC needs to analyze, Walter told reporters. “You have to look at what consequences are,” she said.

The result of that analysis, however, would not foreclose the SEC from prohibiting the practice, she said.

(With additional reporting by Sarah N. Lynch- editing by Linda Stern and Leslie Adler)

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