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SEC open to introduce arbitration April 16, 2007

Posted by Brian Mulligan in Finances.

Companies paid out just shy of 5 million dollars in shareholder’s lawsuits in 2000 and in 2006, US companies shelled out over 17 million dollars in lawsuits ranging from securities fraud and accounting irregularities. The sudden jump in money paid to shareholders and clients involved in disputes between the company and them has sparked the SEC to take action and consider opening the door to arbitration.

Arbitration is defined by Yahoo.com as:

The process by which the parties to a dispute submit their differences to the judgment of an impartial person or group appointed by mutual consent or statutory provision.

This move will allow companies to settle their disputes with the shareholder’s outside of the court room or in non-jury settings. This will mitigate the cost of court fees for the company and the shareholders, but consumer’s are unhappy about the power that this change will give the companies. They feel that the SEC is siding with the companies and taking the power to sue away from the shareholder, but this may have been a long time coming.

In the past, some companies, mainly brokerage firms, have made client side agreement in their contracts that allow for arbitration. The chairman of the SEC is shooting the limit excess securities litigation that has skyrocketed in this country. As mentioned before, the consumer feels that this empowers the company because in a arbitration talk, the company can withhold information and are conducted in private.

The SEC has planned to satisfy the consumer as well. They are considering a radical change to shareholder’s involvement in the actual company. The SEC staff is studying whether corporations should be permitted to amend their bylaws to allow for arbitration, a change that in some cases might require shareholder approval. Also, the SEC is considering whether companies should allow shareholders to vote in ballot on the board of directors, etc.

The SEC’s move has sparked controversy in the financial world. As quoted from an article in the Wall Street Journal titled “SEC Explores Opening Door to Arbitration,”

If the move toward arbitration gathers steam, some consumer groups may worry that by curbing shareholder litigation, the nation will lose a powerful deterrent to corporate wrongdoing. Individual shareholders might also have to incur the expense of hiring a lawyer, rather than simply signing on as a member of a class.

The SEC would then have the challenge of deciding how to protect the shareholder in the arbitration process. This change was very interesting to see how the SEC is trying to change how clients, shareholders and companies interact. Do you think that SEC should continue pursuing this? Any recommendations for other changes that can be made by the SEC to help lower settlement costs for the company?



1. collage9 - April 17, 2007

I’m not sure whether or not I would like to see the SEC continue to pursue arbitration. I think it’s a good thing that it would keep disputes out of the courtroom which would also allow companies to cut costs, but I wonder if they’ll be able to get away with too much in arbitration. As you said, companies will be able to withhold information at arbitration where as they could not do that in a courtroom. I makes me wonder what kind of information they would withhold and if they could possibly get away with some illegal activity as a result of going to arbitration instead of settling the issue in the courtroom.

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