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
Posted on Categories Arbitration Agreements, Class Action/Collective Waivers, Legislation, Securities ArbitrationTags , , ,

By George H. Friedman, SAA Editor-in-Chief

It took a while, but joining the slew of anti-arbitration bills pending in Congress is the Investor Choice Act, identical versions of which were introduced in the House and Senate in early December.

We reported in SAA 2019-12 (Mar. 20) that House and Senate Democrats had reintroduced several anti-mandatory arbitration bills in late February and early March, seeking to amend the Federal Arbitration Act (“FAA”), specific statutes like Dodd-Frank, or both. Most were reintroductions of bills that were not enacted by the last Congress. One of the old bills that had not yet been reintroduced was the Investor Choice Act (“ICA”), which would have amended the Securities Exchange Act of 1934 and the Investment Adviser Act of 1940 to ban the use of mandatory predispute arbitration agreements (“PDAA”) by broker-dealers and investment advisers and would have guaranteed class action participation. We later reported in SAA 2019-15 (Apr. 17) that the ICA was reintroduced March 28 in the House. The bill, however, was never formally introduced. That’s no longer the case, because S. 2992 (introduced by Sen. Jeff Merkley (D-OR)), and H.R. 5336 (introduced by Rep. Bill Foster (D-IL)), were introduced within days of each other in early December.

New Bills are Almost Identical to the Old ICA…

The newly-introduced ICA is nearly identical to the old one (H.R. 585). The caption describes the proposed ICA as intending “to amend the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 to prohibit mandatory pre-dispute arbitration agreements, and for other purposes.” Specifically, the bills would declare it unlawful for BDs, funding portals, municipal securities dealers, or investment advisers: “to enter into, modify, or extend an agreement with customers or clients of that entity with respect to a future dispute between the parties that -- (1) mandates arbitration for that dispute; (2) restricts, limits, or conditions the ability of a customer or client of that entity to select or designate a forum for resolution of that dispute; or (3) restricts, limits, or conditions the ability of a customer or client of that entity to pursue a claim relating to that dispute in an individual or representative capacity or on a class action or consolidated basis.”

… But Different

This iteration of the ICA is essentially the same as the one introduced in the 115th Congress, except it adds a section amending the Securities Act of 1933 to state: “A security may not be registered with the Commission if the issuer, in its bylaws, registration statement, or other governing documents mandates arbitration for any disputes between the issuer and the shareholders of the issuer.” The bills also prohibit issuers from including shareholder arbitration agreements in IPO subscription agreements.

Retroactivity with One Exception

If enacted, the changes would be retroactive, rendering void a preexisting non-conforming arbitration agreement, except that pending, ongoing arbitrations would be allowed to continue. Specifically, a PDAA “shall not be void … if arbitration required by that provision was initiated by any party on or before the date of enactment of this Act.” While this carveout would avoid chaos in pending cases, as we’ve said before, we think retroactivity – invalidating existing arbitration agreements – invites challenges as an impermissible taking under the Constitution.

(ed: *The original bills were analyzed by SAC Editor-in-Chief and Fordham Law Professor George H. Friedman, who wrote a guest SAC Blog post we published in March, Democrats Introduce Several Anti-Mandatory Arbitration Bills. What You Need To Know. More recently, the Bates Group on April 25 published a nice analysis, Federal Legislators Target Mandatory Arbitration, focusing on potential impact on the financial services industry and regulators, and how they are reacting. **The added provision barring shareholder PDAAs to us is an effort to address this year’s flap over Johnson & Johnson’s attempt to require arbitration to resolve shareholder disputes. See our coverage in SAA 2019-13 (Apr. 3). ***The forum designation clause is interesting. Of course, FINRA’s Rules already bar class action waivers and permit customers to opt out of arbitration into class actions. ****The non-partisan Website has not yet rated the chances of enactment, but we see them as very low.) (SAC Ref. No. 2019-47-01)

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