Top institutional investor advocates urged Congress last week to push the Securities and Exchange Commission to bar provisions in corporate bylaws and broker-dealer contracts that require investors agree to mandatory arbitration.

“Forced arbitration schemes, particularly schemes that bar class action, cannot supplant judicial enforcement of fiduciary duties owed to shareholders,” the California Public Employees Retirement System (CalPERS) wrote in testimony to the Senate Judiciary Committee last week.

CalPERS, the Council of Institutional Investors and others stressed the importance of allowing investors to sue advisors, brokers and public corporations in court, noting shareholder suits against Enron, WorldCom, Tyco, Bank of America and Global Crossing brought in $19.4 billion for investors at the start of the century while SEC enforcement actions obtained only $1.8 billion.

They said those successes have spurred the proliferation of mandatory arbitration clauses in financial advisor agreements, corporate by-laws and other contracts which force disputes to be settled in a process controlled by the same companies against who the claims are being brought.

The Council of Institutional Investors said it is concerned that two recent U.S. Supreme Court decisions upholding contracts that require arbitration and prohibit investor class actions and lawsuits allow corporations to avoid liability when they insert these measures in by-laws. The group added the class-action bars can be inserted in by-laws by corporate boards without shareholder approval.

In a statement to the Judiciary Committee, the trial lawyers’ trade group, the American Association for Justice, contended forced arbitration grants corporations a license to steal and violates the law.

Sen. Al Franken (D-Minn.), who chaired the committee hearing, said forced arbitration virtually gives large corporations the ability to opt out of the civil justice system.

Without class actions, he said, individual investors can be powerless to challenge misconduct because legal expenses can be much more than the money they could recoup.