AOC Speaks Against Force Arbitration

Michael Volpe

After spending a decade in finance, Michael Volpe has been a freelance investigative journalist since 2009. His work has been published locally in the Chicago Reader, Chicago Crusader, Chicago Heights Patch, and New City. Nationally, Volpe's work has appeared in a wide variety of publications including the Washington Examiner, the Daily Caller, Crime Magazine, the Southern Christian Leadership Conference Newsletter, and Counter Punch. Volpe has been recognized by whistleblowers as leading the charge in getting their stories out. His first book Prosecutors Gone Wild was published in October 2012, his second book The Definitive Dossier of PTSD in Whistleblowers was published in February 2013 and his third book Bullied to Death was published in August 2015.

Democrats and Republicans

AOC Speaks Against Force Arbitration

April 8, 2019

Alexandria Ocasio-Cortez (AOC) thinks forced arbitration is a threat to market integrity.

“If we do nothing about forced arbitration and allow this practice to continue, could this mean that information about how companies are deceiving the public about issues like climate change or any other could remain hidden from the public?” AOC asked during a House Financial Services Committee hearing.

The hearing held on April 3, 2019, was entitled: “Putting Investors First: Reviewing Proposals to Hold Executives Accountable.”

The Subcommittee on Investor Protection, Entrepreneurship and Capital Markets hosted the hearing.

“Do you think this has overall consequences for market integrity?” AOC asked later. AOC is the socialist firebrand who is a Democratic Congresswoman from New York, representing the New York City boroughs of the Bronx and Queens. She shot to superstardom in the political world after defeating ten time incumbent, Joe Crowley, in the Democratic primary in 2018.She has shown media, particularly social media, savvy; several monologues and grilling of committee witnesses have received attention.

As one example, her grilling of Michael Cohen, President Trump’s former lawyer who turned on Trump, received a lot of attention.She also created a stir with another grilling on so-called dark money in politics. She has also shown a tendency with playing fast and loose with facts, saying once, “I think that there’s a lot of people more concerned about being precisely, factually, and semantically correct than about being morally right.”

Alexandria Ocasio-Cortez
Alexandria Ocasio-Cortez

On arbitration clauses, AOC explained that they have been slipped into most consumer and employment agreements.

She then asked, “Arbitration clauses have been used – would you say Mr. Gregg that arbitration clauses have been used to circumvent the courts on a wide range of issues of potential misconduct?”

Mr. Gregg is Remington Gregg to Counsel for Civil Justice and Consumer Rights at Public Citizen, a watchdog group. He was one of four witnesses at the hearing. “That’s correct,” he answered. AOC then referenced William G. Young, a Federal judge, who she quoted as saying, “Business has a good chance of opting out of the legal system altogether and misbehaving without reproach.” She then asked Melanie Lubin, the Maryland Securities Commissioner, who was testifying on behalf of the North American Securities Administrators Association, Inc (NASAA), if she agreed. “I think the way that pre-dispute arbitration agreements have developed in the brokerage business; that’s what’s happened.” Lubin responded.

Arbitration became a hot button issue in the trading world in January 2018 when Bloomberg published an anonymously sourced article which suggested that the SEC implementing forced arbitration on shareholders.

That article stated in part, “But as President Donald Trump’s pro-business agenda sweeps through Washington, the SEC is laying the groundwork for a possible policy shift, said three people familiar with the matter. The agency, according to two of the people, has privately signaled that it’s open to at least considering whether companies should be able to force investors to settle disputes through arbitration, an often closed-door process that can limit the bad publicity and high legal costs triggered by litigation.”

In May 2018, an SEC official challenged the article at House Financial Services Committee hearing, denying the SEC had any such plans.

“This is not something we are not actively looking at- in terms of trying to bring something in and address this issue.” Said William Hinman, the SEC’s Head of Corporate Finance. Hinman was testifying in May 2018, when he was asked about the article.

In January 2019, the issue popped up again. This time a publicly traded company received a shareholder proposal to mandate forced arbitration with shareholders.

SEC Chairman Jay Clayton issued a lengthy statement which stated in part.

“This is a complex matter under both federal and state law, and it has been interpreted differently by the company (arguing that such a clause would violate both state and federal law) and the proponent (arguing that such a clause would not violate state or federal law).  The staff considered in its analysis the arguments made by the company, the proponent and the Attorney General of New Jersey, the state’s chief law enforcement officer and legal advisor.  The staff issued a response stating that it would not recommend enforcement action should the company decide to exclude the proposal on the grounds that it would violate New Jersey state law.  In the context of Rule 14a-8, the staff does not independently adjudicate the legality of any provision of state law, and it is not doing so in this matter.  Here, the parties have each asserted different interpretations of state law, neither party has identified New Jersey case law precedent directly on point, and the Attorney General has provided an opinion that implementation of the proposal would violate state law.  In light of the submissions, and in particular the letter of the Attorney General of New Jersey, I believe the approach taken by the staff—to not recommend enforcement action in this complex matter of state law—is appropriate.

“The staff of the Division of Corporation Finance explicitly noted that it was not expressing a view as to whether the proposal, if implemented, would cause the company to violate federal law.  Since 2012, when this issue was last presented to staff in the Division of Corporation Finance in the context of a shareholder proposal, federal case law regarding mandatory arbitration has continued to evolve.  Further, I am not aware of any circumstances where the Commission has weighed in on the legality of mandatory shareholder arbitration in the context of federal securities law.  In light of the unsettled and complex nature of this issue, as well as its importance, I agree with the approach taken by the staff to not address the legality of mandatory shareholder arbitration in the context of federal securities laws in this matter, and would expect our staff to take a similar approach if the issue were to arise again.  I continue to believe that any SEC policy decision on this subject should be made by the Commission in a measured and deliberative manner.”

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