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.

Some Progress on Arbitration

The chairman of the Senate Judiciary Committee, Patrick Leahy of Vermont, and committee member Russ Feingold of Wisconsin, have come out of the blue to endorse an end to Wall Street's unfair, anti-investor system of compulsory arbitration.

Here's the letter, which they sent to SEC Chairman Chris Cox, and here is a New York Times column on the subject (subscription required). A statement from Leahy on the subject is here.

Hopefully this is not just momentary grandstanding, and Leahy will push this issue in his committee.

© 2007 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site, gary-weiss.com.

Epilogue to a Nightmare

I begin and end Wall Street Versus America by recounting the story of Rand Groves, an entrepreneur from New Jersey whose portfolio was destroyed in the technology bust, and who was ripped to shreds when he brought a claim against his broker before an NASD arbitration panel.

Groves's plight is typical of the stacked deck investors when they have a beef against a broker. Even though the broker in the Groves case apparently fabricated evidence, which would have serious consequences in a court case, the NASD arbitrators couldn't have cared less. Groves lost his case, and a subsequent appeal went down the tubes despite the loss of a crucial tape of the proceedings.

Well, I've learned that the case was recently tossed out again by a New Jersey appellate court. That was hardly surprising, because it is almost impossible to to overturn a securities industry arbitration on appeal.

I understand that state regulators are looking at the entire securities arbitration system. I hope so, because the Securities and Exchange Commission couldn't care less.

© 2006 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

An Offer He Can Refuse

A former Merrill Lynch customer named Rand Groves plays a prominent role in my book, as an example of the kind of agony investors face if they have a serious dispute with a brokerage firm. As explained in the Introduction, available on my website, Rand feels he was.... well, suffice to say that he is no fan of Merrill.

Today Rand sent me a copy of an invitation that he just received for a retirement seminar -- from Merrill, naturally. It is being held at a restaurant in Trenton called "Rat's." Really.

It's a tempting invitation, as you can imagine, but Rand isn't going.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

A Broken System

There's a good article in the New York Times about the stacked-deck securities arbitration system. The inherent unfairness of the system, which denies brokerage customers their Constitutional right to the courts, is the focus of the first chapter of Wall Street Versus America. The chapter is available on my website, here.

According to the Times piece, a big WorldCom shareholder, having lost a $900 million securities arbitration against Citigroup, is asking a federal court to overturn the decision on the grounds that the arbitrator had an undisclosed conflict of interest. If true, that would be contrary to NASD rules.

However, I think the issue here is much broader. Even when the rules are followed to the letter, investors are deprived of a truly neutral forum in which to adjudicate their complaints. The courts, with all their failings, provide such a forum.

The investor in this Citi case has a very high hurdle to surmount if he is to win his case. That's because arbitration is designed to provide finality. That's fine in situations in which people voluntarily consent to arbitration. But you have no choice if you are a brokerage customer. It's part of the standard language of brokerage agreements.

The Times piece quotes a lawyer as saying that "arbitration was a cost-effective way of resolving disputes, but only if the disclosure system could be trusted."

Well, if it's so great, why not make it voluntary? Investors should have that choice, and regulators should require brokerages to give them that choice. Make no mistake about it: that won't happen if the public doesn't demand it. Right now, the only "public pressure" that comes their way is from a small handful of cultlike fanatics on the phony "naked shorting" issue.

It would be great to see the same kind of pressure exerted by real investors on a real issue. Mandatory arbitration is one such issue. Unfortunately, there are no murkily-funded pressure groups or email spams or letter-writing campaigns -- such as sustain the naked-shorting cultiests -- devoted to fighting mandatory securities arbitration. So the injustice of the system continues every day, ignored by the industry's putative watchdogs.

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Wall Street Versus America: The Rampant Greed and Dishonesty That Imperil Your Investments will be published by Penguin USA on April 6.

Click here for its Amazon.com listing and here for my web site.