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Washington, DC - Rep. Barney Frank (D-MA), Chairman of the House Committee on Financial Services, sent a letter Wednesday, to Securities and Exchange Commission (SEC) Chairman Christopher Cox concerning suggestions that the SEC may begin permitting public companies to impose mandatory arbitration requirements on shareholders through the registration process.
The full text of the letter as follows:
April 25, 2007
The Honorable Christopher Cox
Chairman
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Dear Chairman Cox:
I have heard with great concern suggestions that the Commission and its staff may begin permitting public companies to impose mandatory arbitration requirements on their shareholders through the registration process. Allowing such covenants to be included in registration documents would represent a drastic change in shareholder rights and is not one public company should be permitted to impose unilaterally by means of a contract of adhesion.
I understand that consideration also is being given to permitting public companies to use the same mechanism to prohibit future shareholder class action litigation against the company, even in an arbitration forum. To a significant extent, such a prohibition would allow a company to insulate itself from litigation from its shareholders, even where it has engaged in fraud, by making it uneconomic for most individual shareholders to bring suit.
The experience with mandatory arbitration in the context of broker-dealers and their customers is instructive. What was initially characterized as a “choice” quickly became no choice at all, with virtually all brokerage account agreements now requiring mandatory arbitration. Extending mandatory arbitration to the relationship between shareholders and public companies raises even more serious questions. Given the severe limits on the right of appeal available in arbitration, investors would be required to risk losing their rights under federal securities laws in order to invest in our public markets. On a practical level, I have seen no indication that commercial arbitration organizations have provided a satisfactory framework for redress of consumer actions, even in far less complex types of disputes.
Given the potential implications for future shareholders who find themselves cut off from recourse to the judicial system, even voluntary adoption should not be permitted without vigorous open consideration and debate on the impact of such a change on our public securities markets. Congress and this Committee should be a part of that debate, and should have the opportunity to review any such proposals. While I agree that we should consider reasonable measures to improve the efficiency and competitiveness of our financial markets, we should examine the consequences very carefully before we allow public companies to deny shareholders meaningful avenues of redress as the owners of those public companies.
BARNEY FRANK
Chairman
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