Thirty-seven members of the United States Congress, including Senators and Representatives, signed and submitted a plea for prohibition of mandatory arbitration provisions in customer service agreements. The legislators presented their argument in a letter to U.S. Securities and Exchange Commission Chair Mary Jo White, calling for her to exercise the SEC’s authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
As most of our readers should know, the Dodd-Frank Act is a federal statute signed into law by President Obama on July 12, 2010. The Act represented a major change in the American financial regulatory environment and affects almost every aspect of the nation’s financial services industry. It includes the SEC Whistleblower Act and a “whistleblower bounty program” that allows people who provide information that leads to successful SEC enforcement to receive 10 to 30 percent of the monetary sanctions in excess of $1 million.
Section 921 of the Frank-Dodd Act reflects Congress’s concern of the use of mandatory arbitration agreements in customer and client contracts. As we have stated on numerous occasions arbitration clauses take away a person’s access to the courts, and the right to a trial by jury. Instead, cases are diverted to a costly private legal system that favors huge corporate defendants. Forced arbitration undermines consumer protection, civil rights and other laws that level the playing field between Big Business and individuals.
The Act grants the SEC the authority to restrict or prohibit the use of mandatory arbitration provisions. However, the legislators write that in the nearly three years since enactment of the Frank-Dodd Act, the SEC has “largely disregarded this important mandate.” One thing that helped spur Congressional leaders to action in this matter is a recent decision by investment brokerage firm Charles Schwab to expand mandatory arbitration clauses in its customer agreements to include a waiver of class action rights. The letter addressed the Schwab action:
In this instance, Schwab argued that, in response to the Supreme Court’s interpretation of the Federal Arbitration Act (FAA) in AT&T Moblity v. Concepcion, it could include a waiver of class action and class arbitration rights in its customer agreements. FINRA initiated a disciplinary action against Schwab for violation of FINRA rules barring class action waivers. In February, however, a FINRA hearing panel ruled that although Schwab’s actions did in fact violate FINRA rules, those rules could not be enforced under Concepcion. [FINRA Department of Enforcement v. Charles Schwab & Company Inc. (CRD No. 5393) Disciplinary Proceeding No. 201102976021. February 21,2013.]
It appears that the letter, and pressure from consumer groups, has had an effect. Schwab temporarily reversed its requirement that clients waive their right to bring class-action lawsuits. “Effective immediately, Schwab is modifying its account agreements to eliminate the existing class-action lawsuit waiver for disputes related to events occurring on or after May 15, 2013 and for the foreseeable future,” the San Francisco-based brokerage company said in a statement that was posted on its website May 15th.
Public Citizen congratulated the company for its “responsible” decision. The consumer watchdog group said many of its 19,000 supporters who signed a petition also are Schwab customers who spoke directly to the firm. That type contact is very important and quite often gets results. But just as things seemed to be headed in the right direction, the progress was slowed. A member of the SEC announced in late May that the arbitration issues wouldn’t be considered until 2014. It was said that the agency “didn’t have time” to take it up until then.
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