Are We Seeing the Start of a Tectonic Shift on Mandatory PDAAs in the Financial Services Field?

This article first appeared on Securities Arbitration Alert (SAA), here.

This is less a letter from the editor and more your editor’s musings, but I wonder whether we are seeing the start of a tectonic shift on mandatory predispute arbitration agreements (“PDAA”) in the financial services field?

For example:

• As reported in SAAs 2021-13 (Apr. 5), -10 (Mar. 18), & -08 (Mar. 4), new SEC Chair Gary Gensler said at his March 2 Senate Banking Committee confirmation hearing that he was “open” to reconsidering the industry’s use of binding mandatory arbitration for resolving customer disputes. To me this indicates that the Commission will at a minimum exercise its Dodd-Frank section 921 authority to study securities arbitration.

• As reported recently two major firms — Wells Fargo and Goldman Sachs — are rethinking PDAA use in the investor and employment realms, respectively.

• The proposed FAIR Act, which would among other things ban PDAA use in employment and investor contracts, is inexorably moving toward at least House passage. It already has 183 cosponsors.

• As reported in SAA 2021-14 (Apr. 22), the Investor Choice Act of 2021 (“ICA”) was reintroduced April 15 by Jeff Merkley (D-OR) and by Rep. Bill Foster (D-IL). This iteration of the ICA – H.R. 2620 and S. 1171 – is essentially the same as the old one in that it would amend the FAA, the Securities Exchange Act of 1934, and the Investment Adviser Act of 1940, to ban the use of mandatory predispute agreements by broker-dealers and investment advisers and guarantee class action participation.

• The new proposed ICA also retains a section from the last one amending the Securities Act of 1933 to state: “A security may not be registered with the Commission if the issuer, in its bylaws, registration statement, or other governing documents mandates arbitration for any disputes between the issuer and the shareholders of the issuer.”

• Last, a bipartisan bill was introduced in the House April 30 that would bar application of mandatory predispute arbitration agreements to sexual assault claims. Specifically, Representatives Karen Bass (D-CA) and Debbie Lesko (R-AZ) introduced R. 2906, the purpose of which is: “To amend title 9 of the United States Code to prohibit the enforcement of predispute arbitration agreements with respect to sexual assault claims.”

As our editorial notes suggest, perhaps these BDs are trying to position themselves for a day when customer and/or employees will get to choose whether to agree to PDAAs? I also wonder whether other firms will follow suit. Time will tell….

George Friedman

George H. Friedman is the publisher and Editor-in-Chief of the Securities Arbitration Alert, a weekly online publication covering the latest developments in financial services arbitration and mediation. He is also the principal of George H. Friedman Consulting, LLC, providing expert advice on arbitration and mediation in general and the FINRA…