SEC Commissioner Comments on Restricting Mandatory Pre-dispute Arbitration Agreements and Section 921 of Dodd-Frank

On April 16, 2013, Commissioner Luis A. Aguilar of the Securities and Exchange Commission (“SEC”) gave a speech to the North American Securities Administrators Association in Washington, D.C.   Interestingly, he provided comments concerning the mandatory predispute arbitration agreements.  As previously discussed in this prior post, Section 921 of Dodd-Frank Act provides the SEC with the discretionary rulemaking authority to restrict mandatory pre-dispute arbitration, and provides the SEC with means to curtail FINRA arbitration.  However, the SEC has done nothing meaningful to address this issue.  Below are some of Commissioner Aguilar’s comments:

Investors also should have the unencumbered right to seek redress in all available forums. This is why I want to spend a few moments discussing pre-dispute mandatory arbitration provisions. Currently, almost all customer agreements with brokerage firms include an arbitration clause requiring customers to arbitrate their claims in an arbitration forum– and they’re now popping-up in the investment advisory industry.  By adding such provisions, brokerage and advisory firms are essentially requiring their clients to give up their legal rights before the client even knows about the nature of a dispute, and before the client has had the opportunity to consider whether giving up those rights would be in their interest. The inclusion of such provisions in brokerage and advisory contracts diminishes investor protection.


A client’s right to go to court to recover monetary damages is an important right that should be preserved and kept in the client’s toolkit.  A client’s right to bring private actions under the Exchange Act is meaningful, and the client should not be required to waive – prematurely – their legal rights, including their rights to bring an action in federal or state court.


In passing the Dodd-Frank Act, Congress recognized the need to protect investors from abusive practices in the financial services industry. As many of you know, Section 921(a) of the Dodd-Frank Act authorizes the Commission to prohibit or restrict mandatory pre-dispute arbitration provision in customer agreements, if such rules are in the public interest and protect investors.  The authority covers broker-dealers and investment advisers.  I believe the Commission needs to be proactive in this important area. We need to support investor choice.

(Emphasis added).  With the third anniversary of Dodd-Frank approaching, perhaps this is a sign that the SEC will finally consider exercising its authority on this issue.