Minnesota stares down an arbitration giant -- and the giant blinks

Lori Swanson is my hero. Swanson is the first female attorney general in the history of Minnesota, and she has set a very high bar, which I hope her colleagues in other states -- and at the Securities and Exchange Commission -- will follow. But I'm an admirer for a different reason: Swanson had the courage to take on the National Arbitration Forum, one of the largest arbitration administrators in the U.S.

The NAF processed hundreds of thousands of consumer debt claims brought mainly by collectors. Consumers with credit disputes had no choice in the matter; they had to sign a "mandatory arbitration clause" designating the Forum the sole arbitrator of all conflicts with their creditors. The NAF conducted these arbitrations much like an impartial court system.But far from being impartial, the NAF was closely aligned with the debt-collection industry. A hedge fund invested $42 million in the NAF and took control of it. Then the hedge fund acquired the assets of a large debt-collection law firm, which filed 125,000 arbitration claims with -- you guessed it -- the NAF.

The Forum solicited other creditors to use its services by explaining that "you [the creditor] have all the leverage [in arbitration] and the customer really has no choice but to take care of the account." Does that sound impartial to you?

It didn't sound impartial to Swanson, who filed a suit against the NAF that set forth these allegations. And this week, the Forum caved, signing a settlement agreement in which it promised to get out of the business of arbitrating credit-card and other consumer-collection disputes. In fact, it will no longer participate in processing or administering any new consumer arbitrations. (For more about this settlement, read DailyFinance's story "Arbitration: No longer an easy out for credit card companies?")

This is a stunning victory for which Swanson should receive great credit, but the decision does little for consumers who were compelled to participate in arbitrations run by the NAF in the past.

My hope is that Swanson's courageous and innovative lawsuit will encourage state attorneys general and Congress to take a hard look at the arbitration system run by the Financial Industry Regulatory Authority (FINRA), the "self-regulatory" trade association of brokers.

All investors who deal with brokers are required to submit to mandatory arbitration run by FINRA. There is ample evidence that this system -- like the NAF -- is biased and rigged against investors. It should be abolished, and investors should be given the right to an impartial arbitration forum or access to the Courts, or both. In the interim, I salute Attorney General Swanson. She is my hero.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read and The Smartest 401(k) Book You'll Ever Read. His new book, The Smartest Retirement Book You'll Ever Read, will be published September 1, 2009. Visit his website at Smartestinvestmentbook.com.
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