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SEC report cites prevalence of mandatory arbitration clauses in RIA agreements

On Behalf of | Jul 6, 2023 | Financial News

A report to Congress by the Securities and Exchange Commission found that the majority of registered investment advisors require that disputes go to mandatory arbitration, AdvisorHub reports.

The SEC’s study, delivered to the House Committee on Appropriations, concluded that about 61% of RIAs have mandatory arbitration clauses in their investment advisory agreements with clients. It said that these clauses have become more prevalent as the number of SEC-registered advisors and their clients have grown in the past decade. According to the findings, an RIA “may designate the dispute resolution forum of their choosing in a mandatory arbitration clause, and may invoke the application of specific forum rules.” 83% of the clauses designated the American Arbitration Association as the preferred forum.

But the report also pointed out how little is known about RIA arbitration, as the lack of disclosure requirements makes it difficult to ascertain the frequency with which advisors include the clauses. The lack of information makes it difficult for SEC staff to collect accurate data and determine the effect mandatory arbitration has had on investors harmed by an advisor’s conduct, the commission said. In addition, arbitration venues do not track advisor arbitrations or report individual case results.

The SEC found that mandatory arbitration clauses can potentially limit the ability of clients to pursue legal remedies in the event of a dispute and can discourage clients who may be seeking restitution. The commission said the industry trade groups and regulators it interviewed agreed that mandatory arbitration clauses benefitted advisors and put clients at a disadvantage. The report cited a need for further evaluation to make sure arbitration is an accessible and affordable means of dispute resolution for clients. The SEC also said it could not estimate how often arbitration claims are not paid by advisors.

Last December, the House Appropriations Committee directed the SEC to study the issue after expressing concerns about the prevalence of mandatory arbitration clauses among RIAs.

At Lewitas Hyman, our attorneys have handled hundreds of arbitrations before FINRA, , the Chicago Board Options Exchange, the Chicago Board of Trade, JAMS, the American Arbitration Association and other self-regulatory organizations nationwide. We have also appeared in courts throughout the United States in various types of securities-related matters. For more information about our arbitration and litigation services, please contact us at (888) 655-6002 or through our online contact form.