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Provision in Dodd-Frank act gives SEC the power to end Mandatory Arbitration
Posted by: Robert Rex
October 13, 2010

 from InvesmentNews:

"A little-known provision within the Dodd-Frank Act gives the Securities and Exchange Commission the power to remove mandatory arbitration language from client-broker agreements. If the SEC strips out the language, it would expose broker-dealers to huge costs, experts said."

 "Currently, if an investor has a problem with a broker, the investor's only recourse is to have the complaint heard by an arbitration panel put together by the Financial Industry Regulatory Authority Inc. But if the SEC nixes mandatory arbitration, investors could choose instead to hire lawyers to pursue private lawsuits. And unlike scores of other sections in Dodd-Frank that require the SEC to study an issue before making changes, this provision states that the commission can put out a rule for comment at any time."

"Critics of the current rule said that removing mandatory arbitration would be better for investors. They point out that if the SEC does pass a rule change, it doesn't mean that investors will be stymied from pursuing arbitration. Under Finra rules all investors have the right to seek out arbitration; a change in the rule by the SEC would just give investors the choice between arbitration and litigation, experts said."

We'll be watching this closely to see how it unfolds. While it is true that this change would only add an additional choice for investors, one has to wonder if having the option of going to court would affect arbitration settlements as well. Many smaller cases are too expensive to try in court, and perhaps this knowledge would affect the treatment these cases receive in FINRA arbitration, which for all its flaws, is actually a pretty fair and efficient system for resolving disputes between brokers and investors. As the article says, bigger cases would tend to be handled with lawsuits, as the perception is that bigger awards are more likely to be won there than in arbitration.

source: http://www.investmentnews.com/article/20101012/FREE/101019970

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