Washington, D.C. – U.S. Senators Russ Feingold and Patrick Leahy are urging the Securities and Exchange Commission (“SEC”) to issue regulations to ensure that the use of arbitration in disputes between investors and their securities firms is voluntary. In a letter sent to SEC Chairman Christopher Cox, Feingold and Leahy, the Chairman of the Senate Judiciary Committee, expressed concern that the SEC is not doing enough to protect investors from contracts that strip them of their right to litigate disputes in court. While arbitration is an important dispute resolution alternative, Feingold and Leahy want to make sure that investors are given a real choice in deciding whether their cases should be resolved through arbitration or litigation. The Senators proposed that the SEC institute a rule either banning pre-dispute, mandatory arbitration clauses or requiring that parties are given an explicit choice between traditional judicial process and arbitration.

“Investors are entitled to a real choice when it comes to settling disputes, and the fact that there seems to be a “take-it-or-leave-it” trend in brokerage contracts with investors is very troubling,” Feingold said. “Arbitration can be a fair and efficient way to handle disputes, but only when it is entered into knowingly and voluntarily by both parties.”

“No consumer should be obligated to forfeit their right to a day in court. The fact that Binding Mandatory Arbitration clauses are pervasive in virtually all brokerage contracts means that the rights of investors are being greatly diminished,” said Leahy. “Our economy’s vitality is maintained in part by the availability of competition and choice in the marketplace. I hope the SEC will take these concerns seriously and will act to protect consumers.”

While the SEC has taken some steps to improve the arbitration process, it has not proactively addressed the underlying problem that investors are being forced into arbitration, even in circumstances where the arbitration process may not be well suited to resolve their disputes. Most large securities firms including Fidelity, Schwab, Vanguard, Merrill Lynch, Smith Barney and E*TRADE, impose mandatory arbitration on customers as a non-negotiable term of the standard brokerage or IRA contract. On its own website, the SEC acknowledges that investors no longer have a true choice between arbitration or litigation. The website states: “[I]f you have a brokerage account, you probably signed an agreement that requires you to settle any disputes with your broker through arbitration rather than the courts.”

In light of the prevalence of mandatory arbitration clauses in brokerage contracts, Feingold and Leahy believe the SEC should issue regulations that will adequately protect the rights of investors to choose whether or not to use arbitration.

The Feingold-Leahy letter concerning mandatory arbitration provisions in contracts between investors and securities firms comes on the heels of reports that SEC Chairman Cox is considering proposals to allow publicly traded companies to change their bylaws to require shareholders to submit disputes with management to arbitration. House Banking Committee Chairman Barney Frank expressed strong opposition to that proposal in a letter to Cox last week.

The letter can be read at http://feingold.senate.gov/pdf/ltr_050407_mandarb.pdf.