One Reason to Cheer Obama's Regulation Overhaul

I missed it in my first read (er...skim) of Obama's financial regulatory overhaul scheme, but there's a pro-investor gem buried therein. Evidently I'm not the only one to have missed it, as I can't find a reference to it in the media. A trial lawyers group brought it to my attention.

Seems that the plan takes baby steps toward abolishing the hideous system of forced investor arbitration. On page 72 it says as follows:

The SEC should study the use of mandatory arbitration clauses in investor contracts.

Broker-dealers generally require their customers to contract at account opening to arbitrate all disputes. Although arbitration may be a reasonable option for many consumers to accept after a dispute arises, mandating a particular venue and up-front method of adjudicating disputes – and eliminating access to courts – may unjustifiably undermine investor interests. We recommend legislation that would give the SEC clear authority to prohibit mandatory arbitration clauses in broker-dealer and investment advisory accounts with retail customers. The legislation should also provide that, before using such authority, the SEC would need to conduct a study on the use of mandatory arbitration clauses in these contracts. The study shall consider whether investors are harmed by being unable to obtain effective redress of legitimate grievances, as well as whether changes to arbitration are appropriate.

It's namby-pamby and overcautious. Hell, why not just abolish the damn system? Well, it seems that the proposed Consumer Financial Protection Agency would have the power to do just that if the SEC won't. On page 62 it says:

To improve incentives for compliance, the CFPA should have authority to restrict or ban mandatory arbitration clauses. Many consumers do not know that they often waive their rights to trial when signing form contracts in taking out a loan, and that a private party dependent on large firms for their business will decide the case without offering the right to appeal or a public review of decisions. The CFPA should be directed to gather information and study mandatory arbitration clauses in consumer financial services and products contracts to determine to what extent, and in what contexts, they promote fair adjudication and effective redress. If the CFPA determines that mandatory arbitration fails to achieve these goals, it should be required to establish conditions for fair arbitration, or, if necessary, to ban mandatory arbitration clauses in particular contexts, such as mortgage loans.

I'd be happier if the report just said "abolish mandatory arbitration," rather than dicking around with it like this. But what the hey, this is no-drama Obama and all that.

© 2009 Gary Weiss. All rights reserved.