The House has passed a bill that would prohibit mandatory arbitration in brokerage and advisor contracts, giving consumer advocates who have been fighting for the measure hope for some type of bipartisan reform.
The Democrat-led House approved the Forced Arbitration Injustice Repeal Act (Fair Act) on Friday by a vote along party lines, save for two Republican votes in favor.
The Senate is not expected to approve the legislation, but advocates of arbitration reform feel there is still a window of opportunity for some type of legislation.
Also, President Trump “strong opposes” the bill and would likely veto such legislation if it makes its way to his desk, the White House said in a strongly worded statement today.
“I don’t see the Senate approving this bill, but I can see them coming out with their own version,” said George Friedman, a former director of Finra arbitration.
The sweeping bill would prevent broker-dealers and investment advisors from offering investors and employees a mandatory arbitration agreement at the outset of a relationship and would even invalidate all existing arbitration clauses. Firms would, however, still be able to offer customers arbitration when a dispute arises.
“I think it’s a good step in terms of demonstrating how serious Congress is in looking at mandatory arbitration clauses,” said Christine Lazaro, president of the Public Investors Advocate Bar Association.
“There is still room for improvement in the arbitration process ... but if arbitration is not mandatory, there is more incentive to make the process easier for investors, so it is preferred,” added Lazaro, who runs the securities arbitration clinic for investors at St. John's University School of Law.
The House bill would end predispute arbitration agreements for consumer, employment, antitrust or civil rights claims and includes language covering securities or other investments.
If ratified, the legislation would negate the mandatory arbitration clauses in every brokerage and advisory contract. Finra's arbitration system currently handles almost all brokerage disputes.