On April 3, 2019, the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, part of the House Committee on Financial Services, held a hearing entitled: Putting Investors First: Reviewing Proposals to Hold Executives Accountable.  The hearing examined six legislative proposals that are designed to hold public company executives accountable to both investors and the general public.

One of the bills considered, the Investor Choice Act of 2019, sponsored by Rep. Bill Foster (D-Ill.), would prohibit broker/dealers and investment advisors from including mandatory arbitration clauses in customer account agreements. The bill would also prohibit public companies from including mandatory arbitration clauses in their bylaws or other corporate governance documents.

Almost all broker/dealer account agreements include a provision requiring the parties to settle any future dispute through arbitration. The Financial Industry Regulatory Authority (FINRA) is responsible for overseeing and administering arbitration between broker-dealers and their customers.  The bill states:

“Brokers, dealers, and investment advisors hold powerful advantages over investors, and mandatory arbitration clauses, including contracts that force investors to submit claims to arbitration or to waive their right to participate in a class action, leverage these advantages to severely restrict the ability of defrauded investors to seek redress”.

The Subcommittee heard testimony from Melanie Lubin, Maryland Securities Commissioner, who was speaking on behalf of the North American Securities Administrators Association (NASAA).  Ms. Lubin voiced NASAA’s support for banning mandatory arbitration clauses, pointing out that arbitrators are not obligated to follow the law and that litigants have limited opportunities for discovery and appeal rights.

The other proposals examined at the hearing include a bill to require the SEC complete rulemaking as directed by the Dodd-Frank Act.  The Dodd-Frank Act was passed over 8 years ago and directs the SEC to issue a rule requiring exchange traded companies to have policies in place to prevent executives from keeping incentive compensation paid due to material noncompliance with the financial reporting or accounting rules. However, the SEC has never issued this rulemaking.  If passed, the bill would require the SEC to finalize the rulemaking within 60 days. If it fails to do so, the SEC Chair is required to testify in the House Financial Services Committee and the Senate Banking Committee once a month until the rule is finalized.

A copy of the committee memorandum on the hearing can be found here.

If you believe that you have been misled by a financial advisor or have concerns about an arbitration clause in a customer agreement with a financial services company, please call the Costello Law Group at 410-832-800 (or Toll Free 877-418-0003)for a free consultation.