On November 5, I blogged (here) about the House Financial Services Committee’s Investor Protection Act and its provision empowering the SEC to enact regulations banning mandatory arbitration in customer-broker account agreements.  In that post, I wrote: “I don’t quite understand the significance of this provision, as I understood that the SEC already has the authority under the ‘34 Act to ban mandatory securities arbitration if it concludes it is in the interests of investor protection.” 

Well, I have since learned that SEC staff takes the position that a legislative enactment is necessary for it to have the power to ban pre-dispute arbitration clauses in customer agreements because of the Supreme Court’s seminal decisions in McMahon and Rodriguez.  In those 1987 and 1989 cases, respectively, the Court held that with respect to claims arising under the Securities Exchange Act of 1934 and the Securities Act of 1933, respectively, FAA section 2’s declaration that pre-dispute arbitration agreements are irrevocable and enforceable could only be trumped by clear evidence that Congress did not intend those statutory rights to be arbitrable.   The Court concluded that provisions in those Acts which declare void “[a]ny condition, stipulation, or provision binding any person to waive compliance with any provision of [the Act]” did not constitute clear Congressional intent to ban arbitration of claims arising under these Acts.  Since Congress has not amended the federal securities laws to add any other clear evidence, presumably SEC staffers have concluded that any regulation the SEC could adopt banning pre-dispute arbitration clauses in customer agreements would exceed its statutory authority. 

In other words, unless Congress tells the SEC it has the explicit authority to ban PDAAs in customer agreements, it will not do so, even if it concludes that it furthers its investor protection mission.