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Lawyers trade association calls on SEC to reform RIA arbitration system

On Behalf of | Aug 2, 2023 | Securities and Compliance

The Public Investors Advocate Bar Association has called on the Securities and Exchange Commission to reform the process for resolving advisor-client disputes, according to AdvisorHub.

The PIABA is an international bar association whose members represent investors in disputes with the securities industry. The organization issued its response to the SEC ‘s recent report to Congress, which found that the majority of registered investment advisors require that disputes go to mandatory arbitration.

The SEC’s report found that around 61% of RIA firms included some kind of arbitration clause in contracts and that doing so could limit clients’ chances of getting damages when they allege wrongdoing.

At a news conference held to highlight its response, the PIABA said the arbitration system was “broken” and called for more transparency from RIAs with regards to client complaints.

The association presented two examples of how investors were harmed by RIA misconduct and the mandatory arbitration process. In one case, the RIA’s client complaint procedure initially imposed costs of nearly 90% of losses on investor Rita Berardelli of California, who used arbitration to pursue a claim against her advisor. In the other case, Michael Phillips of Guam was awarded over $4 million in a FINRA arbitration dispute against an investment management firm but has yet to receive the funds.

“For years, PIABA has been sounding the alarm on the unfair and outdated laws surrounding registered investment advisors that both dissuade and prevent wronged investors from seeking restitution against their RIA’s for fraudulent or inappropriate management of funds,” said PIABA President Hugh Berkson. “For many wronged investors like Ms. Berardelli, this is their life savings and retirement nest egg.”

Berkson said RIAs use mandatory arbitration clauses “to shield themselves from liability for their misconduct” because they know the forum fees are too costly for most clients.

He said investors should have the option of using the court system to address claims as opposed to the arbitration process, adding that the SEC should also make arbitrations more affordable and convenient for investors.

The PIABA said that if the SEC does not take action to change the system, it will pressure Congress to do so.

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.