A committee has recommended that the Securities and Exchange Commission limit the use of mandatory arbitration clauses by registered investment advisors in disputes with customers, according to AdvisorHub.
The SEC’s Investor Advisory Committee approved a four-step proposal to the agency aimed at reforming the process, including not allowing advisors to include clauses limiting or contracting “the rules of any self-regulatory organization,” limiting parties to file any claim in arbitration or file claims in court permitted under the rules of the forum where the arbitration is taking place or limiting the award arbitrators can mandate.
The recommendations were based on a 2023 study conducted by the SEC and reported to Congress, which found that the majority of registered investment advisors require that disputes go to mandatory arbitration.
The SEC’s study 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. The study of advisory agreements found that 61% included mandatory arbitration clauses and many included potentially concerning terms, including requiring customers to cover the costs of arbitration.
The investor committee called on the SEC to harmonize its rules regarding mandatory arbitration clauses between investment advisors and broker/dealers. It said that in disputes with a firm or investment professional, investors should be entitled to a fair and transparent dispute resolution process.
The committee made the following recommendations involving the use of predispute arbitration clauses by RIAs:
-The SEC should prohibit the use of specific types of restrictive clauses within predispute arbitration clauses and require similar investor protections available through FINRA Dispute Resolution to harmonize the scope and content of predispute arbitration clauses used by registered investment advisers and brokerage firms;
-The SEC should require notice and disclosure of predispute arbitration clauses and arbitration awards in a manner consistent with disclosures made by brokerage firms under FINRA rules;
-The SEC should continue to gather and assess data regarding the use of predispute clauses by investment advisers and the outcomes of client-involved arbitrations; and
-The SEC should develop investor education materials that explain arbitration and provide investors with suggested questions to ask their investment adviser or broker.
The committee also suggested that the SEC prohibit the use of specific types of restrictive clauses within predispute arbitration clauses and require similar investor protections available through FINRA Dispute Resolution to align the clauses used by registered investment advisers and brokerage firms.
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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.
