Today House and Senate negotiators reached agreement on legislation that redefines federal oversight of the financial services industry. The agreement may have a major effect on arbitration in the financial services industry. Overlawyered reports, “Tucked away in the Obama administration’s proposals for revamping regulation of financial services is a provision that would apparently allow federal regulators to curtail or eliminate the preagreed arbitration of consumer complaints in stockbroker and other financial service disputes, thus shunting more cases as litigation to the civil courts.”
While arbitration may continue, it may also be reformed to be more “consumer-friendly.” Most of the disputes covered by this legislation involve customer claims against broker-dealers in the securities industry.
The conference text for what will soon be known as the Dodd-Frank Wall Street Reform and Consumer Protection Act contains the following final provisions on arbitration, which are taken from the House bill (HR 4173). The full text of those final provisions can be found at the end of this post. Passage of the legislation by both the House and the Senate is now expected to occur before the July 4 Congressional recess.
1. Sec. 531. U.S. Federal preemption of non-domiciliary U.S. state laws related to arbitration of reinsurance disputes.
2. Sec. 921. Authorizing the SEC to restrict or prohibit by rule pre-dispute arbitration agreements between (a) brokers, dealers, municipal securities dealers or investment advisers and (b) their customers or clients for disputes arising under the U.S. Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization. The SEC’s authority in this provision is not limited to disputes involving individuals who are customers or clients – it extends to corporate and financial customers and clients as well. Undoubtedly, the lobbying over whether coverage of any SEC rule is limited to individuals or not will now move to the SEC.
3. Secs. 748 and 922. Prohibiting enforcement of pre-dispute arbitration agreements to the extent covering certain commodities and securities “whistleblower” protections created in the Act.
4. Sec. 964. The Comptroller General will submit periodic reports to Congress evaluating, inter alia, the securities arbitration services of national securities exchanges.
5. Sec. 1028. The Bureau of Consumer Financial Protection will study arbitration and consumer finance. The Bureau is authorized to ban or limit by regulation pre-dispute arbitration agreements between a covered person and a consumer for a consumer financial product or service. The findings of any regulation by the Bureau shall be consistent with the study. The term “covered person” encompasses all financial institutions. Although I have not quoted the legislative language below (because it is too long and complex), the consumer finance protection provisions of the Act (including the arbitration provisions) exclude inter alia certain merchants, retailers and other sellers of nonfinancial goods or services, real estate agents or brokers, agents or brokers for manufactured and modular home transactions, accountants and tax preparers, and lawyers. [If the exclusions are of interest to you, please read the legislation rather than relying on this summary.]
6. Sec. 1414. Prohibiting pre-dispute agreements for arbitration or any other nonjudicial procedure as the method for disputes arising out of residential mortgages or home equity lines of credit. [I do not know whether the reference to “any other nonjudicial procedure” picks up mediation.]
I hope this is useful.
Regards,
MK
MARK KANTOR
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The operative provisions are as follows.
SEC. 531. REGULATION OF CREDIT FOR REINSURANCE AND REINSURANCE AGREEMENTS.
(a) CREDIT FOR REINSURANCE.—****
(b) ADDITIONAL PREEMPTION OF EXTRATERRITORIAL APPLICATION OF STATE LAW.—In addition to the application of subsection (a), all laws, regulations, provisions, or other actions of a State that is not the domiciliary State of the ceding insurer, except those with respect to taxes and assessments on insurance companies or insurance income, are preempted to the extent that they—
(1) restrict or eliminate the rights of the ceding insurer or the assuming insurer to resolve disputes pursuant to contractual arbitration to the extent such contractual provision is not inconsistent with the provisions of title 9, United States Code;
(2) require that a certain State’s law shall govern the reinsurance contract, disputes arising from the reinsurance contract, or requirements of the reinsurance contract;
(3) attempt to enforce a reinsurance contract on terms different than those set forth in the reinsurance contract, to the extent that the terms are not inconsistent with this part; or
(4) otherwise apply the laws of the State to reinsurance agreements of ceding insurers not domiciled in that State.
SEC. 748. COMMODITY WHISTLEBLOWER INCENTIVES AND PROTECTION.
The Commodity Exchange Act (7 U.S.C. 1 et seq.) is amended by adding at the end the following:
‘‘SEC. 23. COMMODITY WHISTLEBLOWER INCENTIVES AND PROTECTION.
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‘‘(n) NONENFORCEABILITY OF CERTAIN PROVISIONS WAIVING RIGHTS AND REMEDIES OR REQUIRING ARBTRATION OF DISPUTES.—
‘‘(1) WAIVER OF RIGHTS AND REMEDIES.—The rights and remedies provided for in this section may not be waived by any agreement, policy form, or condition of employment including by a predispute arbitration agreement.
‘‘(2) PREDISPUTE ARBITRATION AGREEMENTS.—No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.’’.
SEC. 921. AUTHORITY TO RESTRICT MANDATORY PREDISPUTE ARBITRATION.
(a) AMENDMENT TO SECURITIES EXCHANGE ACT OF 1934.—Section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o), as amended by this title, is further amended by adding at the end the following new subsection:
‘‘(o) AUTHORITY TO RESTRICT MANDATORY PREDISPUTE ARBITRATION.—The 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, the rules and regulations thereunder, 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.’’.
(b) AMENDMENT TO INVESTMENT ADVISERS ACT OF 1940.—Section 205 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–5) is amended by adding at the end the following new subsection:
‘‘(f) AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.—The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any investment adviser to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, 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.’’.
SEC. 922. WHISTLEBLOWER PROTECTION.
(a) IN GENERAL.—The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting after section 21E the following:
‘‘SEC. 21F. SECURITIES WHISTLEBLOWER INCENTIVES AND PROTECTION.
****
‘‘(e) NONENFORCEABILITY OF CERTAIN PROVISIONS WAIVING RIGHTS AND REMEDIES OR REQUIRING ARBITRATION OF DISPUTES.—
‘‘(1) WAIVER OF RIGHTS AND REMEDIES.—The rights and remedies provided for in this section may not be waived by any agreement, policy form, or condition of employment, including by a predispute arbitration agreement.
‘‘(2) PREDISPUTE ARBITRATION AGREEMENTS.—No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.’’.
SEC. 964. REPORT ON OVERSIGHT OF NATIONAL SECURITIES ASSOCIATIONS.
(a) REPORT REQUIRED.—Not later than 2 years after the date of enactment of this Act, and every years thereafter, the Comptroller General of the United States shall submit to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives a report that includes an evaluation of the oversight by the Commission of national securities associations registered under section 15A of the Securities Exchange Act of 1934 (15 U.S.C. 78o–3) with respect to—
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(4) the arbitration services provided by the national securities associations;
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SEC. 1028. AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.
(a) STUDY AND REPORT.—The Bureau shall conduct a study of, and shall provide a report to Congress concerning, the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services.
(b) FURTHER AUTHORITY.—The Bureau, by regulation, may prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties, if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers. The findings in such rule shall be consistent with the study conducted under subsection (a).
(c) LIMITATION.—The authority described in subsection (b) may not be construed to prohibit or restrict a consumer from entering into a voluntary arbitration agreement with a covered person after a dispute has arisen.
(d) EFFECTIVE DATE.—Notwithstanding any other provision of law, any regulation prescribed by the Bureau under subsection (b) shall apply, consistent with the terms of the regulation, to any agreement between a consumer and a covered person entered into after the end of the 180-day period beginning on the effective date of the regulation, as established by the Bureau.
[Sec. 1002. Definitions
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(6) COVERED PERSON.—The term ‘‘covered person’’ means—
(A) any person that engages in offering or providing a consumer financial product or service; and
(B) any affiliate of a person described in subparagraph (A) if such affiliate acts as a service provider to such person.]
SEC. 1414. ADDITIONAL STANDARDS AND REQUIREMENTS.
(a) IN GENERAL.—Section 129C of the Truth in Lending Act is amended by inserting after subsection (b) (as added by this title) the following new subsections:
****
‘‘(e) ARBITRATION.—
‘‘(1) IN GENERAL.—No residential mortgage loan and no extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer may include terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.
‘‘(2) POST-CONTROVERSY AGREEMENTS.—Subject to paragraph (3), paragraph (1) shall not be construed as limiting the right of the consumer and the creditor or any assignee to agree to arbitration or any other nonjudicial procedure as the method for resolving any controversy at any time after a dispute or claim under the transaction arises.
‘‘(3) NO WAIVER OF STATUTORY CAUSE OF ACTION.—No provision of any residential mortgage loan or of any extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer, and no other agreement between the consumer and the creditor relating to the residential mortgage loan or extension of credit referred to in paragraph (1), shall be applied or interpreted so as to bar a consumer from bringing an action in an appropriate district court of the United States, or any other court of competent jurisdiction, pursuant to section 130 or any other provision of law, for damages or other relief in connection with any alleged violation of this section, any other provision of this title, or any other Federal law.
For those who want to confirm the exact language of the arbitration provisions of the agreed conference bill, that text should be available on the website of the House of Representatives Committee on Financial Services by about noon today (US East Coast time).
Why would we necessarily assume that if people are not forced to enter into an arbitration agreement before a dispute arises, that they will necessarily choose to bring their claims in court? If arbitration is truly a more advantageous system for both parties, then you would expect that both the financial services provider and the customer would still choose to arbitrate any disputes, even after they have a dispute. And if that doesn’t happen, it can only be because people feel they are better off going to court than being compelled to arbitrate. Why shouldn’t parties have that choice?
I understand that the House and Senate conferees agreed to accept the House of Representatives’ arbitration language (from H.R. 4173) for the final financial reform legislation, rather than the Senate language. The bill will (i) authorize, but not require, the new Consumer Finance Protection Bureau to ban or limit pre-dispute arbitration agreements between consumers and covered financial providers (but not merchants) for consumer finance products and services, (ii) ban pre-dispute arbitration agreements in residential mortgages and home equity lines of credit and (iii) authorize, but not require, the SEC to ban or limit pre-dispute arbitration agreements in securities law disputes involving broker-dealers or investment advisers, on the one hand, and their customers, on the other. The differences from the “base text” language put out by Chairman Frank at the beginning of the conference are very minor.
The text of the consumer finance, residential mortgage and securities law arbitration provisions from the House bill are set out below.
CONSUMER FINANCE PRODUCTS AND SERVICES
AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.
(a) IN GENERAL.—The Director, by regulation, may prohibit or impose conditions or limitations on the use of any agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties if the Director finds that such a prohibition or imposition of conditions or limitations are in the public interest and for the protection of consumers. This authority shall not prohibit or restrict a consumer from entering into a voluntary arbitration agreement with a covered person after a dispute has arisen.
(b) EFFECTIVE DATE.—Notwithstanding any other provision of law, any regulation prescribed by the Director under subsection (a) shall apply, consistent with the terms of the regulation, to any agreement between a consumer and a covered person entered into after the end of the 180-day period beginning on the effective date of the regulation, as established by the Director.
RESIDENTIAL MORTGAGES AND HOME EQUITY LINES OF CREDIT
‘‘(j) ARBITRATION.—
‘‘(1) IN GENERAL.—No residential mortgage loan and no extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer, other than a reverse mortgage, may include terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.
‘‘(2) POST-CONTROVERSY AGREEMENTS.—Subject to paragraph (3), paragraph (1) shall not be construed as limiting the right of the consumer and the creditor, any assignee, or any securitizer to agree to arbitration or any other nonjudicial procedure as the method for resolving any controversy at any time after a dispute or claim under the transaction arises.
‘‘(3) NO WAIVER OF STATUTORY CAUSE OF ACTION.—No provision of any residential mortgage loan or of any extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer (other than a reverse mortgage), and no other agreement between the consumer and the creditor relating to the residential mortgage loan or extension of credit referred to in paragraph (1), shall be applied or interpreted so as to bar a consumer from bringing an action in an appropriate district court of the United States, or any other court of competent jurisdiction, pursuant to section 130 or any other provision of law, for damages or other relief in connection with any alleged violation of this section, any other provision of this title, or any other Federal law.
SECURITIES LAW ARBITRATION
AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.
(a) AMENDMENT TO SECURITIES EXCHANGE ACT OF 1934.—Section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o), as amended by section 7103, is further amended by adding at the end the following new subsection:
‘‘(p) AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.—The 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, the rules and regulations thereunder, 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.’’.
(b) AMENDMENT TO INVESTMENT ADVISERS ACT OF 1940.—Section 205 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–5) is amended by adding at the end the following new subsection:
‘‘(f) AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.—The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any investment adviser to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, 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.’’.
COMPTROLLER GENERAL STUDY TO REVIEW SECURITIES ARBITRATION SYSTEM.
(a) STUDY.—The Comptroller General of the United States shall conduct a study to review—
(1) the costs to parties of an arbitration proceeding using the arbitration system operated by the Financial Industry Regulatory Authority and over1seen by the Securities and Exchange Commission as compared to litigation;
(2) the percentage of recovery of the total amount of a claim in an arbitration proceeding using the arbitration system operated by the Financial Industry Regulatory Authority and overseen by the Securities and Exchange Commission; and
(3) other additional issues as may be raised during the course of the study conducted under this subsection.
(b) REPORT.—Not later than 1 year after the date of enactment of this subtitle, the Comptroller General of the United States shall submit to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate a report on the results of the study required by subsection (a), including in such report recommendations for improvements to the arbitration system referenced in such subsection.