The Financial Advisor spoke to Adjunct Professor George Friedman for his take on the newly-passed House bill to prohibit mandatory pre-dispute arbitration agreements.
“As written, the FAIR Act disregards the benefits of resolving disputes through arbitration, including lower costs, faster resolution, and reduced burden on the judiciary. By limiting contractual options, this bill would hurt businesses and the very consumers and employees it seeks to protect,” the White House added.
The House bill would end pre-dispute 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.
Chances of passage of the bill in the Republican-led Senate are slim, however. In fact, the Senate’s version of the Fair Act doesn’t have one co-sponsor.
“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.
Friedman said he thought the House bill needed a good deal of work and would prefer it offer investors the right to choose arbitration at the outset of a relationship rather than after a dispute occurs.
“I have my accounts with Merrill and this statute would retroactively nullify the arbitration clause I signed with them,” said Friedman, who left FINRA six years ago and is now a professor of law at Fordham University and editor of Securities Arbitration Alert.
Friedman said if given the choice by Merrill Lynch now, he would sign the mandatory arbitration clause all over again. “I would sign it absolutely. Court is very expensive and in the state of New York, cases are subject to three levels of appeals. Court cases take a long time and are very costly,” he said.
Another benefit to arbitration, according to Friedman? “FINRA will enforce arbitration as well: If a broker or firm doesn’t pay, they’ll take away your license,” Friedman said.