Yesterday the House Financial Services Committee voted to recommend that the full House vote on the Investor Protection Act of 2009, H.R. 3817.  While the focus of the bill is to protect investors through enhanced regulations in the securities industry, one provision threatens to eliminate the mandatory arbitration of customer-broker disputes.   Section 201 of the bill would amend the Securities Exchange Act of 1934 by providing that “[t]he [Securities and Exchange] Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute between them arising under the Federal securities laws or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.”  Section 201 would also amend the Investment Advisers Act to similarly authorize the SEC to enact rules prohibiting the mandatory arbitration of customer – investment adviser disputes.   This provision is a compromise between those advocating the amendment of the Federal Arbitration Act to ban mandatory arbitration of, among other types of disputes, customer-broker disputes, and those who believe that securities arbitration is fair to investors and should not be regulated further. 

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.  Thus, the Investor Protection Act does not add any new authority to the SEC with respect to arbitration, and presumably would lead to no change in the status quo.  Is the IPA’s stance on customer-broker arbitration largely a symbolic act of Congress that enables it to trumpet its investor protection bullhorn while in reality punting the political football to the SEC?