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Investors Must Have Access to the Courts to Prevent Corporate Wrongdoing

July 30, 2014

In America, workers are the foundation of a sustainable and thriving economy and financial system. The hard-earned money of America’s families invested in retirement accounts, union pension funds and their children’s education powers our financial markets.

Financial institutions that violate their obligations to investors must be held accountable

For America’s workers to invest with confidence in the securities markets, there must be a meaningful way to hold financial institutions accountable when they commit fraud or violate financial or fiduciary obligations to their shareholders. Without sufficient protections, investor confidence diminishes and market participation suffers, hurting investors, the institutions they invest in and the American economy.

Forced arbitration threatens investor confidence and America’s financial markets

The ability of America’s workers to invest with confidence is threatened by the increasing use of pre-dispute, forced arbitration clauses in investment-advisor contracts and corporate bylaws. These clauses prevent Americans from exercising their constitutional right to bring their claims before a jury, and instead force all shareholder disputes into private arbitrations. These private arbitrations are controlled by the very same corporations against which the claims are being brought. These forced arbitration clauses also typically require shareholders to waive their rights to participate in any collective or class action, thereby rendering investors who lost smaller amounts of money powerless to join together with other investors to enforce their rights.

The combination of forced arbitration clauses and class-action waivers in corporate bylaws or investor-advisor agreements can have the practical effect of preventing shareholders from pursuing legal remedies altogether when they have been defrauded.

Corporate bylaws on forum selection and fee shifting are bad corporate governance

Companies should not adopt restrictive bylaws that are intended to deprive investors from legal remedies through the courts for corporate wrongdoing. Judicial forum selection bylaws improperly restrict the venue that investors may bring lawsuits in by circumventing the established legal process for determining jurisdiction. Fee shifting bylaws deter investors from filing lawsuits by overriding the American rule that each party to a lawsuit is responsible for paying its own attorney’s fees. These bylaws are bad corporate governance and undermine the ability of investors to enforce their legal rights.

Government enforcement is not enough. Private litigation is necessary to protect investors

Recent history has shown that when corporate malfeasance causes financial scandals, the victims are not the ultrawealthy; they are the hardworking employees contributing to their 401(k) accounts and relying on income from their pension funds. When such scandals occur, workers must be able to band together to hold Wall Street accountable through private litigation—in particular, through class-action litigation.

Vigorous enforcement of the nation’s investor-protection laws by the Securities and Exchange Commission (SEC) is vital but insufficient alone. Requiring the government to bear the expense of prosecuting every investor dispute would place an enormous additional burden on already-strained budgets. Moreover, history has demonstrated that private class actions are necessary to provide adequate recompense to individual investors injured by corporate fraud. For example, in the financial scandals engulfing Enron, WorldCom, Tyco, Bank of America and Global Crossing, SEC enforcement actions netted penalties and fees of $1.75 billion. Private enforcement returned more than $19.4 billion to investors.

SEC action is needed to protect workers and their retirements

The AFL-CIO believes companies should not be permitted to force shareholders into any system that limits their rights or their ability to participate in a class action to recover their losses. The AFL-CIO urges the SEC to act to preserve the ability of workers to protect their retirement and pension funds through private litigation and to prevent corporations from exempting themselves from the civil justice system through forced arbitration clauses and class-action bans.

The AFL-CIO urges the SEC to exercise its congressionally granted authority under Section 921 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to restrict mandatory pre-dispute arbitration provisions in agreements between investors and brokers, dealers and investment advisers.

Additionally, the AFL-CIO urges the SEC to formalize its longstanding policy that mandatory pre-dispute provisions requiring arbitration of investor disputes in the bylaws and governing documents of publicly traded corporations are harmful to capital markets, contrary to public policy and could be subject to enforcement action.

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