SEC Commissioner Luis Aguilar in a speech this week before state securities regulators called for an end to mandatory arbitration clauses.

Such clauses, which are found in most contracts between brokerage firms and their clients—and increasingly are surfacing in the investment advisory industry—require clients to settle any claims of losses in an arbitration forum rather than the courts.

“By adding such provisions, brokerage and advisory firms are essentially requiring their clients to give up their legal rights before the client even knows about the nature of a dispute, and before the client has had the opportunity to consider whether giving up those rights would be in their interest,” Aguilar said in prepared remarks at the North American Securities Administrators Association's annual public policy conference in Washington. “The inclusion of such provisions in brokerage and advisory contracts diminishes investor protection.”

Aguilar went on to say that “a client's right to go to court to recover monetary damages is an important right that should be preserved and kept in the client's toolkit.”

In fiscal year 2012, he noted, the SEC brought 147 investment adviser-related cases—the largest category of enforcement cases during the fiscal year, making up roughly 20 percent of all enforcement cases. Of these enforcement cases, approximately 88 out of 147 cases (60 percent) involved allegations of fraud under the Exchange Act, Aguilar stated.

Similarly, the SEC brought 134 broker-dealer cases in fiscal year 2012—the second largest category of enforcement cases during that fiscal year, making up roughly 18 percent of all enforcement cases. Out of these 134 broker-dealer enforcement cases, roughly 95 cases (71 percent) involved allegations of fraud under the Securities Exchange Act.

“In many of these cases, clients may be able to pursue claims against their advisers and brokers for fraud,” said Aguilar. “However, if the clients had signed a pre-dispute mandatory arbitration agreement at the inception of the relationship, the clients' ability to pursue claims through the judicial process is extinguished.”

“My point is simply this: by providing investors with the ability to choose the forum in which to bring their legal claims and protect their legal rights, we enhance investor protection and add more teeth to our federal securities laws.”

In his speech, Aguilar noted that Congress recognized the need to protect investors from abusive practices in the financial services industry by authorizing the SEC through the Dodd-Frank Act to prohibit or restrict mandatory arbitration requirements in contracts between broker-dealers, investment advisers, and their clients.

The SEC, however, has yet to take any action on this issue. Concluded Aguilar: “I believe the Commission needs to be proactive in this important area.”