Regulator wants SEC to consider banning pre-dispute agreements

Massachusetts' top securities cop says clients of RIAs shouldn't be precluded from going to court

Feb 12, 2013 @ 4:23 pm

By Dan Jamieson

Massachusetts' top securities regulator is concerned about RIAs' using pre-dispute arbitration agreements with clients.

In a letter sent today to the Securities and Exchange Commission, Massachusetts Secretary of the Commonwealth William Galvin urged the agency to consider banning the use of such agreements by registered investment advisers.

“At a minimum, the commission should commence a study of the issues raised by these provisions,” he wrote. “It is my opinion that they are inconsistent with the fiduciary duty that investment advisers owe to their clients.”

In an interview, Mr. Galvin said he is worried that advisers increasingly may be using pre-dispute arbitration agreements to the detriment of their clients.

His concern is based on an adviser survey conducted last month by the Massachusetts Securities Division. The state found that 45.5% of 323 responding firms use pre-dispute agreements, and of those, 65% designate a particular arbitrator or forum.

Of this latter group, 60% designate the American Arbitration Association as the forum, and 15% the Financial Industry Regulatory Authority Inc.

Most broker-dealers have long required pre-dispute agreements with customers.

“There's a distinction” between brokers and advisers, Mr. Galvin told InvestmentNews. “There tends to be a very personal relationship between an investment adviser and clients, and the facts [in a dispute] are very important” and tend to “turn on statements made. So an investor shouldn't be precluded from court.”

In an e-mail, SEC spokesman John Nester wrote: “We look forward to receiving the letter and hearing [Mr. Galvin's] views.”

In November, Finra opened up its arbitration system to RIAs and their clients, but only if both parties signed an agreement to arbitrate after a dispute arose.

Any pre-dispute agreements RIAs use have “no relevance to the Finra forum,” said Finra spokeswoman Michelle Ong in in email.

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