SEC Consumer Advocates Launch Misguided Preemptive Attack on Arbitration Clauses
Having lost the battle to prohibit class action waivers in consumer arbitration agreements, consumer advocates have embarked on a new crusade. Their new crusade is a misguided attempt to persuade the Securities and Exchange Commission (SEC) not to approve initial public offerings by companies whose corporate charters or bylaws require individual arbitration of shareholder disputes. They also argue that the amendment of existing charters or bylaws to add an individual arbitration requirement should not be permitted.
In a letter dated August 21, 2018, to SEC Chairman Jay Clayton, a coalition of 133 public advocacy groups called “Secure Our Savings” (SOS)—spearheaded by Paul Bland, Executive Director of Public Justice, a national nonprofit legal advocacy organization—argued that forcing allegedly defrauded shareholders to arbitrate their claims individually would eliminate the deterrent effect of class action shareholder lawsuits and the opportunity for investors to recover their losses. According to the letter, “the issues in a typical case of financial fraud are too complex, and the costs of discovery and expert testimony are too high, for these claims to be dealt with effectively through individual arbitration.”
Moreover, the letter states, private securities class actions “serve as an essential supplement to Commission action.” At the same time, the Consumer Federation of America, one of the signatories to the SEC letter, issued a report arguing that mandatory shareholder arbitration is against the law and the public interest.
If these arguments sound familiar, it is because they are recycled from the efforts of Public Justice and many of the other SOS participants to persuade the CFPB to prohibit class action waivers in consumer arbitration agreements. Although the CFPB issued a final rule in July 2017 containing such a prohibition, Congress repealed the rule under the Congressional Review Act in October 2017—before the rule’s effective date.
As explained more fully in our legal alert, consumer advocates are likely to fail in this initiative because the securities laws are preempted by the Federal Arbitration Act and the underlying policy arguments made by consumer advocates are flawed. Based on the legal authority we discuss, the SEC would have a solid legal and policy basis for permitting arbitration provisions with class action waivers to be used in corporate charters or bylaws.