WASHINGTON (Reuters) - A group of 37 federal lawmakers urged U.S. securities regulators to prohibit Wall Street brokers from forcing customers to sign away their legal right to sue.
"If arbitration offers investors an efficient forum to resolve disputes, as some argue, investors may choose that option - but they should be given the choice," the lawmakers wrote in a letter to Securities and Exchange Commission Chair Mary Jo White on Tuesday.
Brokerages typically require customers to sign pre-dispute arbitration agreements when opening their accounts. Under such agreements, disputes between a brokerage and a customer go to arbitration; customers are prohibited from suing in court.
The agreements have also been widely used by other types of firms, including credit card companies, who say they help reduce legal costs and prevent frivolous litigation.
Critics say the agreements erode customers' legal rights and often result in arbitration rulings against customers.
The 2010 Dodd-Frank Wall Street reform law gives the SEC the authority to scale back or prohibit the use of arbitration agreements, but the agency has not exercised that power.
State securities regulators went to Capitol Hill earlier this month to lobby on the issue and help gather signatures for the letter to White.
The issue came into the spotlight recently after Charles Schwab Corp expanded the mandatory arbitration clauses in its customer contracts to include class action waivers.
The Financial Industry Regulatory Authority tried to fight the Schwab move by filing a disciplinary action, saying the class action waiver violated its rules.
But a hearing panel upheld Schwab's measure in February.
FINRA is appealing the ruling to the National Adjudicatory Council, a FINRA appellate body that reviews disciplinary decisions.
In the letter to White, the lawmakers said they were alarmed by the Schwab case and said it should be a catalyst for the SEC to act.
"We are deeply concerned that the commission's failure to respond to the dangers posed by widespread forced arbitration will weaken existing investor protections," they wrote.
"Given the uncertainty created by the recent FINRA decision, we urge the commission to act quickly to exercise its authority ... to prevent this practice and protect investor rights."
The lawmakers signing the letter, all of them Democrats or Independents, were led by Democratic Senator Al Franken of Minnesota. Whether the letter will carry weight with the SEC remains to be seen. White was sworn in as SEC chair earlier this month and has not yet publicly discussed many of her policy views.
Earlier this month, one SEC commissioner, Luis Aguilar, called for the SEC to take steps to scale back or limit the use of mandatory arbitration agreements.
"We need to support investor choice," Aguilar, a Democrat, said in a speech before the North America Securities Administrators Association, a group of state regulators.
Among the senators signing the letter to White were Massachusetts Democrat Elizabeth Warren and Ohio Democrat Sherrod Brown.
Among the U.S. House members signing it were Democrat Ed Markey of Massachusetts and Democrats John Conyers, Jr. and Chris Van Hollen, both of Maryland.
(Reporting by Sarah N. Lynch; editing by John Wallace)