Investment Management

Posted on Friday, July 14 2017 at 12:01 pm by John Sanders

Broker-Dealers and Investment Advisers Exempted from CFPB’s Arbitration Agreement Rule

By Paul Foley and John I. Sanders

The Consumer Financial Protection Bureau (the “CFPB”) issued a final rule on July 10, 2017 that has received widespread attention.[1]  The rule, promulgated pursuant to section 1028(b) of the Dodd-Frank Act, generally regulates “arbitration agreements in contracts for specified consumer financial products and services.”[2]  More specifically, the rule prohibits the use of arbitration agreements by providers of certain financial products and services “to bar the consumer from filing or participating in a class action.”[3]  Despite the apparent wide sweep of the rule, it includes important exemptions for broker-dealers and investment advisers.

First, the rule expressly exempts from its prohibitions “broker-dealers and investment advisers, as well as their employees, agents, and contractors, to the extent regulated by the SEC.”[4]  Also, the rule exempts those “regulated by a State securities commissioner as a broker-dealer or investment adviser.”[5]  As a result of these exemptions, the use of arbitration agreements by broker-dealers and investment advisers will continue to be regulated by the SEC and state regulators.  So far, the SEC has not exercised its authority under section 921 of the Dodd-Frank Act to restrict the use of arbitration agreements as the CFPB has done, and there is no indication it will do so soon.[6]

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices.  John I. Sanders is an associate based in the firm’s Winston-Salem office.

[1] See e.g., Megan Leonhardt, Money Magazine, CFPB Just Issued a New Rule That Would Protect Consumers From Predatory Fine Print (July 11, 2017), available at http://time.com/money/4852123/cfpb-mandatory-arbitration-rule/; Maria LaMagna, MarketWatch, CFPB Announces Rule That Could Help Consumers Sue Financial Firms for Millions (July 11, 2017), available at http://time.com/money/4852123/cfpb-mandatory-arbitration-rule/; and Jessica Silver-Greenberg and Michael Corkery, The New York Times, U.S. Agency Moves to Allow Class-Action Lawsuits Against Financial Firms (July 10, 2017), available at https://www.nytimes.com/2017/07/10/business/dealbook/class-action-lawsuits-finance-banks.html.

[2] CFPB, Final Rule: Arbitration Agreements (July 10, 2017), available at https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/arbitration-agreements/ (hereinafter “Arbitration Rule”).

[3] Id. at p. 1.

[4] Id. at p. 478.

[5] Id. at p. 479.

[6] 15 U.S.C. 78o(o) (authorizing the SEC to regulate broker-dealer arbitration agreements) and 15 U.S.C. 80b-5(f) (authorizing the SEC to regulate investment adviser arbitration agreements).




Leave a Reply

Subscribe to Kilpatrick Townsend's Legal Alerts to help you stay current of new and noteworthy legal issues that may affect your business.