By George H. Friedman*
At long last the 2020 elections are behind us [bipartisan cheer], and the Democrats have taken over the White House, Senate[1] and House. What might this mean for arbitration and the financial services worlds? In a word: lots.
- The anti-arbitration bills will be back, this time with enactments
- Repeal of Reg BI and the DOL’s rule are on the table
- A revitalized CFPB – with a new director and a new arbitration rule
- FINRA and SEC staff should invest in good walking shoes
- SCOTUS will remain arbitration-friendly … unless the court is packed
Read on, my friends.
The Anti-arbitration Bills will be Back, this Time with Enactments
The Democrats in the last Congress introduced several anti-arbitration bills that predictably went nowhere, just as they did in past years going back to President Obama and with Barney Frank as Chair of the House Financial Services Committee.[2] The bills will undoubtedly be reintroduced in the new Congress, but the outcomes will be different this time, with the Democrats in charge of Congress and the Oval Office. The Democrats' agenda is clearly anti-mandatory predispute arbitration in the consumer and employment areas,[3] so expect at least some bills to pass and President Biden to sign them.
As to what might be coming, recall that the Forced Arbitration Injustice Repeal (FAIR) Act of 2019 – H.R. 1423 and S. 610 – was the last Congress’ iteration of the dear, departed Arbitration Fairness Act or, as I called it, “The AFA on Steroids.” The bill passed the House but died in the Senate. If enacted, the FAIR Act would have amended the FAA to eliminate mandatory predispute arbitration agreements for disputes involving consumer, investor, civil rights, employment, and antitrust. It also would have: covered brokers and investment advisers; barred class action/collective action waivers in or out of a PDAA; applied to “digital technology” disputes; reserved for court determination any arbitrability or delegation issues “irrespective of whether the agreement purported to delegate such determinations to an arbitrator;” and extended to sexual harassment claims. The FAIR Act would have been retroactive, applying to claims made after the effective date.
My guess is that, rather than again attempt wholesale changes to the Federal Arbitration Act, bills will be introduced targeting specific federal laws protecting parties like consumers, investors, and employees. Why would that in my opinion be a sound strategy? Because the Supreme Court has several times ruled that the FAA will yield to another federal statute specifically banning arbitration.[4] For example, one of the bills introduced in the last Congress was the Investor Choice Act, which would have amended the 1934 Act and the Investment Advisers Act of 1940 to ban mandatory PDAAs in customer and shareholder relationships.[5] Hopefully, the proposed laws will not be retroactive; I continue to think that retroactive nullification of existing PDAAs invites legal challenges based on the Constitution’s Takings Clause.[6]
Repeal of Reg BI and the DOL’s Rule are on the Table
Two relatively new regulations impacting financial services may not be long for this world. The SEC issued its final Reg Best Interest (“Reg BI”) rule package in June 2019, and published the items in the Federal Register on July 12, 2019. Two items were effective immediately on publication: Commission Interpretation Regarding Standard of Conduct for Investment Advisers (84 FR 33669) and Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser (84 FR 33681). Two other items went into effect September 2019 -- specifically Reg BI (84 FR 33318) and Final Rule - Form CRS Relationship Summary and Form ADV Amendments (84 FR 33492). Although Reg BI was effective in September 2019, compliance was not required until June 30, 2020.
Also, the Department of Labor’s (“DOL”) final fiduciary standard rule[7] for those offering retirement investment advice – Improving Investment Advice for Workers & Retirees – was published last December in the Federal Register (Vol. 85, No. 244. P. 82798), and goes into effect on February 16, 2021. The exemption, which is harmonized with the SEC’s Regulation Best Interest, allows Investment Advice Fiduciaries to engage in certain prohibited transactions that would otherwise be disallowed under ERISA and the Internal Revenue Code (see our analysis in SAA 2020-25 (Jul. 8)).
The long-term fate of both rules is unclear at best, but I suspect the Democrats will attempt to jettison and replace both Reg BI and the DOL rule. And indeed it’s already in the offing. On December 4, House Financial Services Committee Chairwoman Maxine Waters (D-CA) wrote to then President-elect Biden, urging that Reg BI and Form CRS be rolled back.[8] How do we know? Among the many areas covered in the 31-page letter is investor protection, where Chair Waters writes: “Trump’s Securities and Exchange Commission (SEC or Commission) has taken several actions
that have eroded shareholder rights, established regulatory barriers to shareholder engagement, increased issuer involvement in the proxy voting advice process and stripped away fundamental investor protections, including safeguards around private markets, where investors have few protections…. It is Wall Street, not main street, who benefits from this decreased oversight and lax enforcement. I know that your team will again put investors first and prioritize holding all bad actors accountable by rescinding these SEC actions and strengthening enforcement.” If there’s any doubt Reg BI is a target, under the heading “Investor Protection and Capital Markets,” appears this one-word recommendation about Reg BI: “Rescind.”[9]
My take is that the Democrats believe neither rule goes far enough[10] – including allowing PDAAs – and that Congress and the regulators need to go back to the drawing board.[11] My recommendation is not to toss these regulations, but to build on them.[12]
A Revitalized CFPB – with a New Director and a New Arbitration Rule
The Consumer Financial Protection Bureau (“CFPB”) under the Obama administration aggressively exercised its authority under Dodd-Frank[13] to restrict, eliminate, or services. This was embodied by a 2017 regulation that would have: 1) permitted predispute arbitration agreements in contracts for consumer financial goods and services; 2) banned class action waivers in PDAAs; and 3) required regulated financial institutions to file customer claims and awards data with the CFPB, which the Bureau intended to publish in redacted form.[14] Later that year, the CFPB’s arbitration rule was retroactively nullified, when President Trump signed into law H.J. Res. 111, a Joint Disapproval and Nullification Resolution (see SAA 2017-41). Congress had exercised its authority under the Congressional Review Act, 5 USC §§ 801 et seq., which allows Congress to legislatively nullify any regulation within 60 legislative/session days of its publication. Without question, the Biden CFPB will resurrect the Rule, perhaps this time taking on PDAAs[15] as well as class action waivers.
My recommendation would be to build on the old rule, rather than to start from scratch.[16]
I say “Biden CFPB” because the President now has the legal authority to terminate the Director at will. In a narrow decision split along ideological lines, SCOTUS held in Seila Law LLC v. Consumer Financial Protection Bureau, 140 S.Ct. 991 (Feb. 14, 2020), that the structure established by Dodd-Frank is unconstitutional as to limits on the President’s power to remove the Director.[17] The issue framed in the Certiorari Petition was: “Whether the vesting of substantial executive authority in the Consumer Financial Protection Bureau, an independent agency led by a single director, violates the separation of powers.” Said Chief Justice Roberts’ majority opinion: “We therefore hold that the structure of the CFPB violates the separation of powers. We go on to hold that the CFPB Director’s removal protection is severable from the other statutory provisions bearing on the CFPB’s authority. The agency may therefore continue to operate, but its Director, in light of our decision, must be removable by the President at will.”
Based on this I was certain President Biden would replace Trump-era Director Kathy Kraninger with his own nominee who will follow the Democrats’ anti-PDAA agenda.[18] Evidently not waiting for the inevitable, Ms. Kraninger on January 20 tweeted that she had resigned at the request of President Biden, and the White House immediately announced that the new President had appointed David Uejio to serve as Acting CFPB Director. Mr. Uejio, who has been at the Bureau since 2012, was the CFPB’s Chief Strategy Officer. There are already several media reports[19] that Mr. Biden intends to nominate Federal Trade Commission member Rohit Chopra as the next Director. Mr. Chopra is viewed as a protégé of Sen. Elizabeth Warren (D-MA) – a founder of the CFPB – who is anti-mandatory PDAA use in the consumer and financial contexts.[20]
FINRA and SEC Staff Should Invest in Good Walking Shoes
Once the COVID-19 vaccines are fully deployed, FINRA and SEC staffers need to invest in good walking shoes. In the meantime, they should take a skills course on Zoom. Why? First, with a plethora of anti-arbitration bills sure to be introduced, both institutions will be hauled before various Congressional committees non-stop. For those keeping score, in the Senate: Sen. Dick Durbin (D-IL) heads up Judiciary and Sherrod Brown (D-OH) chairs Banking, Housing and Urban Affairs. In the House: Rep. Jerrold Nadler (D-NY) heads the Judiciary Committee and Rep. Maxine Waters (D-CA) the Financial Services Committee. Also, look for increased Government Accountability Office examination and oversight activity of FINRA, the SEC, and the financial services industry.
SCOTUS will remain Arbitration-Friendly … Unless the Court is Packed
With a 6-3 conservative majority, and no vacancies anticipated in the conservative wing,[21] I expect SCOTUS to remain pro-arbitration.[22] Newer Justices Gorsuch and Kavanaugh have already authored pro-arbitration opinions,[23] and, as I blogged last fall, based on a very limited sampling, Justice Coney Barrett seems to lean pro-arbitration.[24] And, if a SCOTUS vacancy occurs during the Biden presidency’s first two years, with the slimmest Democrat Senate majority, a vehemently anti-arbitration, anti-business nominee would likely have a rough time being confirmed.[25] But if the Democrats go ahead with packing the Court, all bets are off….
Conclusion
I’m a bit reluctant to make so many bold predictions, given how wrong we all were in 2020. For example, show me anyone who predicted that FINRA for nearly a year would be canceling in-person arbitration and mediation hearings and using videoconferencing instead.[26] On the other hand, my past arbitration predictions over the years have been pretty good,[27] so here are my new ones. We can compare notes in a year.
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*George H. Friedman, Publisher and Editor-in-Chief of the online Securities Arbitration Alert and an ADR consultant, retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. He also serves as non-executive Chairman of the Board of Directors of Arbitration Resolution Services. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President. He is an Adjunct Professor of Law at Fordham Law School, and is also a member of the AAA’s national roster of arbitrators. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional. He is admitted to practice in New Jersey and New York, several U.S. District Courts, and the United States Supreme Court.
ENDNOTES
[1] Back to Civics class. Although the Senate is split 50-50, Vice President Harris got to cast the tie-breaking vote. She didn’t vote for Mitch McConnell as Senate Leader.
[2] For a comprehensive look at the last group of bills introduced in the 116th Congress, see G. Friedman, Surprise! Some of the Anti-Arbitration Bills Introduced in Congress This Year May Actually Become Law (One Already Has), 2019:5 SAC 1 (Sep. 2019).
[3] See, e.g., 2020 Democratic Party Platform, p. 24: “Consumers, workers, students, retirees, and investors who have been mistreated by businesses should never be denied their right to fight for fair treatment under the law. Democrats will support efforts to eliminate the use of forced arbitration clauses in employment and service contracts, which unfairly strip consumers, workers, students, retirees, and investors of their right to their day in court.”
[4] See, e.g., Epic Systems Corp. v. Lewis, 137 S. Ct. 809 (2018).
[5] See my blog post on this topic: The Other Shoe Drops: “Investor Choice Act” Finally Reintroduced in House and Senate. Would Amend 1934 Act and Investment Advisers Act of 1940 To Ban Mandatory Predispute Arbitration Agreements in Customer and Shareholder Relationships, Sec. Arb. Alert Blog (Dec. 13, 2019).
[6] U.S. Const. Art. 5.
[7] The DOL’s old rule was invalidated by the Fifth Circuit in Chamber of Commerce of the United States v. Department of Labor, 885 F.3d 360 (5th Cir.), en banc review denied (2018).
[8] See, Maxine Waters Urges Biden Administration to Overturn Reg BI, InvestmentNews (Dec. 20, 2020).
[9] For more on the Democrats’ concerns about Reg BI see: Warren, Waters Blast SEC Financial Advice Rule as Wall Street Cheers, Politico (June 5, 2019): “Warren blasted the new regulation, claiming it will ‘make it easier for Wall Street to cheat families out of their hard-earned life savings.’ Rep. Maxine Waters, chairwoman of the House Financial Services Committee, urged the agency to rescind the rules, which some critics say are even weaker than the original proposal Clayton offered last year. The conflict-of-interest provisions, they say, are loose and the best interest standard itself isn't clear.”
[10]See, e.g., Sen. Elizabeth Warren’s December 11, 2019 letter to then-Secretary Eugene Scalia urging that the DOL rule not mimic Reg BI.
[11] See, e.g., 2020 Democratic Party Platform, p. 26 : “Democrats believe that when workers are saving for retirement, the financial advisors they consult should be legally obligated to put their client's best interests first. We will take immediate action to reverse the Trump Administration's regulations allowing financial advisors to prioritize their self-interest over their clients' financial wellbeing.”
[12] Apparently, possible SEC Chair nominee Gary Gensler feels the same way. See Biden's Choice to Head the SEC, is Expected to Put Teeth in Reg BI -- Not Overturn It, InvestmentNews (Jan. 20, 2021).
[13] See Dodd-Frank § 1028(b).
[14] Why would the CFPB proceed with an anti-arbitration, seemingly anti-business rule after the pro-arbitration, pro-business Trump administration had taken over in January 2017? At the time, the Director – Obama Administration holdover Richard Cordray – was considered terminable for cause only. This changed later.
[15] This course is being recommended by House Financial Services Committee Chairwoman Maxine Waters (D-CA) who on December 4 wrote to then President-elect Biden stating: “We need CFPB leadership that will quickly reverse harmful rules and replace them with a much stronger set of consumer safeguards relating to … forced arbitration clauses ….”
[16] For a discussion of what a new reg might look like, see G. Friedman, Let’s Not Toss Out the Data-gathering Baby with the CFPB Arbitration Rule Bathwater, Arb. Res. Svcs. Blog (Nov. 1, 2017).
[17] There was also a nasty dispute over the President’s power to name an acting CFPB Director. Director Cordray suddenly announced on November 24, 2017 that he was leaving at the end of the day, and issued a Press Release naming as Deputy Director his Chief of Staff Leandra English. Cordray claimed to be acting under authority of Dodd-Frank section 1011(b)(5)(B) (12 U.S. Code § 5491), which provides that the Deputy Director is appointed by the Director and will “serve as acting Director in the absence or unavailability of the Director.” President Trump via a November 24th Statement named Mick Mulvaney as his own Acting CFPB Director, and both showed up for work. A lengthy, messy court battle ensued, that the President eventually won. For an account of the conflict, see G. Friedman, Richard, Here’s Another Nice Mess You’ve Gotten Us Into, Arb. Res. Svcs. Blog (Nov. 27, 2017).
[18] See 2020 Democratic Party Platform, p. 24.
[19] See, e.g., See Biden taps Warren Ally Chopra to Lead Consumer Bureau, Politico (Jan. 18, 2021).
[20] See, e.g., Wall Street Frets as Elizabeth Warren Ally Takes Consumer Protection Role, Financial Times (Jan. 21, 2021).
[21] Of course, one never knows.
[22] This is significant, given that many landmark arbitration-themed decisions from SCOTUS were decided by 5-4 votes.
[23] Justice Gorsuch authored Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), which held that the FAA permits employers to use arbitration clauses containing class action waivers, notwithstanding the National Labor Relations Act’s protections of workers’ rights to act collectively. In the first Opinion authored by Justice Kavanaugh, the Court in Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272 (2019), held unanimously that there is no delegation carveout for “wholly groundless” assertions of arbitrability under the FAA.
[24] And the two cases involving FINRA’s arbitration forum resulted in wins for the Authority.
[25] The same holds true for agency head nominations, like the open SEC Chair seat and the inevitable CFPB Director vacancy. The razor-thin majority in the Senate would seems to eliminate radical nominees.
[26] And for extra credit, does anyone honestly claim to have heard of Zoom before March 2020?
[27] Not so good last year. In a March 2020 blog post jointly-authored with Rick Ryder, Esq., What’s Past is Prologue – All Over Again. What’s Ahead for Arbitration Filings in the Wake of Recent Volatility, we predicted massive increases in COVID-driven customer case filings. Wrong! Customer claims in 2020 dropped by 12%, although there was a mini-surge in the last few months of the year (this stat had been down 19% through August). We did correctly predict the increase in employment cases and constituents’ embrace of virtual ADR, so it’s not like we were completely off on our predictions. See generally, G. Friedman, A Funny Thing Happened on the Way to a Quiet Year in ADR: How a Pandemic Accelerated Profound, Lasting Changes, 2021:1 Securities Arbitration Alert 1 (Jan. 6, 2021).