A top U.S. securities regulator on Tuesday urged the government to consider adopting new rules that would prohibit or restrict brokerages and advisers from forcing customers to sign away their right to sue.
“By providing investors with the ability to choose the forum in which to bring their legal claims and protect their legal rights, we enhance investor protection and add more teeth to our federal securities laws,” said U.S. Securities and Exchange Commission member Luis Aguilar in prepared remarks before the North America Securities Administrators Association’s annual conference in Washington, D.C.
“I believe the commission needs to be proactive in this important area. We need to support investor choice.”
Aguilar’s comments come just shy of three years since the enactment of the 2010 Dodd-Frank Wall Street reform law, which bestowed the SEC with new powers to bolster investor protections.
One provision in the law gives the SEC the authority to scale back or prohibit the use of pre-dispute arbitration agreements, which are routinely used by brokerages.
So far, however, the SEC has not taken any steps toward proposing new rules banning mandatory arbitration agreements, which in general are widely supported by corporations, which say keeping the disputes out of court help reduce costs and prevent frivolous litigation.
Aguilar, a Democrat, said he is concerned that more investment advisory firms are requiring customers to sign similar agreements as well – a maneuver that forces investors to sign away their right to sue before they even know about the nature of a dispute.
Whether Aguilar’s statements could spur the SEC into action remains unclear. He is one of five voting commissioners, and his views on some issues have diverged from those of some of his peers on the commission.
The agenda of the SEC is controlled by the agency’s new chairman, Mary Jo White, who was sworn in last week. So far, her views on securities regulatory policy are largely unknown.
A recent ruling related to a dispute between Charles Schwab Corp. and the Financial Industry Regulatory Authority could help shine a spotlight on the issue.
FINRA had filed a disciplinary case against the brokerage in 2012 in connection with Schwab’s move in late 2011 to force 8.8 million customers to waive their class action rights.
A hearing panel upheld Schwab’s measure in February – a ruling that could potentially give brokerages even more leeway to impose restrictions on investors through class action waivers.
FINRA is appealing the ruling to the National Adjudicatory Council, a FINRA appellate body that reviews disciplinary decisions.
If the SEC ultimately decides to weigh in on the debate or to adopt rules, it could bolster FINRA’s efforts.
In addition, the SEC could also potentially wind up weighing in on the dispute between FINRA and Charles Schwab if the either party further appeals the ruling by FINRA’s appellate body.
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