A recent recommendation to temporarily suspend mandatory arbitration clauses in RIA advisory agreements has drawn the support of the Public Investor Advocate Bar Association, (PIABA) WealthManagement reports.
The Securities and Exchange Commission’s Office of the Investor Advocate made the proposal as part of its report for the fiscal year 2023, saying the SEC should suspend the clauses until further exploration of the associated costs and benefits to advisory clients is undertaken. The report expressed concern that a number of characteristics of these clauses are not in the best interest of retail investors.
The PIABA has long been concerned about the use of the mandatory arbitration clauses and has called on the SEC to reform the process for resolving advisor-client disputes. The organization has said mandatory arbitration dissuades investors from seeking restitution against their RIA’s for fraudulent or inappropriate management of funds, and has said RIAs use mandatory arbitration clauses to shield themselves from liability for their misconduct because they know the arbitration forum fees are too costly for most clients.
In an interview last week with WealthManagement.com, PIABA President Joseph Peiffer said, “I’m glad the Investor Advocate has recognized that making it so that investors who lost their life savings due to fraud can’t recover money from the RIAs due to forced arbitration contracts is a big deal, and a total conflict with advisors’ fiduciary duty.”
He said the utilization of mandatory arbitration has increased as the number of SEC-registered RIAs has risen by an estimated 44% over the past decade.
In its report, the Office of the Investor Advocate said advisors who use contract clauses to force client disputes into arbitration could be violating their fiduciary duty to look out for their customers’ best interests.
“We believe precluding advisers from using restrictive terms in mandatory arbitration clauses that negatively affect investors would help create a fairer, more balanced framework for arbitrations between advisers and their retail clients,” the report concluded. “We further believe that establishing arbitration-related disclosure requirements for SEC-registered advisers would better enable investors and regulators to evaluate advisers’ prior conduct, and to prevent recidivist adviser misconduct.”
Peiffer said the PIABA is hoping the SEC will follow the recommendation of the Investor Advocate and change the system, noting the clear danger posed by the mandatory arbitration clauses. “So this issue needs sunshine, he said. “I appreciate the Investor Advocate doing its part. But now it’s the commission’s turn.” The PIABA has said previously that if the SEC does not take action on this matter, it will pressure Congress to do so.
The PIABA has 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.
In a report to Congress earlier this year, the SEC 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 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.
