NASAA Pushes to Abolish Mandatory Arbitration

I really am not picking on them, but one more part of today's NASAA story.

The organization of state securities regulators have also raised the "mandatory arbitration is not fair" refrain again. The NASAA incoming president, Denise Voight Crawford is pushing to end mandatory arbitration in the securities industry. Since mandatory arbitration in the securities industry is a creation of the regulators, it is an interesting position for a regulator to take.

Keep in mind, it is the NASD that created mandatory arbitration in the brokerage industry, without a word of protest from the state regulators for some 30 years that brokers have been forced to arbitrate disputes with customers and their employers. The use of arbitration clauses in customer agreements followed the NASD's lead, and individual brokers, as well as customers, are forced to arbitrate their disputes with the firms and each other.

Various publications are quoting the incoming NASAA president as saying “The harmful effects of mandatory arbitration have been well-documented in numerous studies. Both houses of Congress have responded with legislation that would prohibit the use of mandatory arbitration clauses in a wide range of consumer services, including securities. No further studies are necessary.”

I am not sure what studies she is referring to. Sure, there are plenty of studies about the harmful effects of mandagory arbitration in consumer contracts and credit card contracts, but I am not aware of any study that has shown harmful effects of securities arbitration, which is a completely different and highly regulated process.

But that brings us back around to the original problem. If mandatory arbitration is so awful, why do the securities regulators continue to force brokerage firm employees to arbitrate their disputes with their customers and their employers? Is the NASAA taking the position that the FINRA rule requiring brokers and firms to arbitrate with customers and each other should be abolished?  More>>>

The Power Grab Continues

It seems like everyone is trying to gain power and control using the Madoff Mess as a justification. The North American Securities Administrators Association (the state securities commissioners) is pushing for authority over all investment advisors who manage less than $100 million in assets.

Today they only have authority over those with less than $25 million in assets, and if this power grab is successful, it will be one giant step backwards for the securities industry and the investing public. We spent decades attempting to consolidate regulators so that large national firms did not have to deal with 50 state regulators. The move to divide investment managers into state vs. SEC registrations was part of that consolidation process. The $25 million dollar cut off left the smaller RIAs with the states. Since smaller RIAs only need to register with a handful of states, that division made sense.

By increasing their jurisdiction there will be a significant increase in RIAs who need to be state registered, and those RIAs will have to register in all 50 states, and make filings in all 50 states, and comply with the rules and regulations in all 50 states. Not only do the states have different rules and filing requirements, the cost of maintaining registrations will increase dramatically.

At the same time, the SEC is simply not going to be able to oversee all of the new RIAs if pending legislation passes. The SEC has clearly demonstrated its inability to oversee the regulated entities that it is currently responsible for. If we are going to have meaningful regulation of investment advisers, a new entity needs to be created, similar to FINRA, or the SEC needs significantly more staffing and funding. Turning the regulation over to 50 state regulators will be a nightmare, one that we finally removed years ago.