Mass. regulator: Ban pre-dispute arb pacts

Massachusetts Secretary of the Commonwealth William Galvin urges SEC to consider banning the use of such agreements by registered investment advisers

Feb 17, 2013 @ 12:01 am

By Dan Jamieson

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

In a letter sent last week 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.”

DETRIMENT OF CLIENTS

In an interview, Mr. Galvin said he is worried that advisers 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.

Mr. Galvin said that there is a distinction between brokers and advisers.

“There tends to be a very personal relationship between an investment adviser and clients, and the facts [in a dispute] are very important,” tending to “turn on statements made,” he said. “So an investor shouldn't be precluded from court.”

In an e-mail, SEC spokes-man 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,” a spokeswoman for the regulator, Michelle Ong, wrote in an e-mail.

djamieson@investmentnews.com Twitter: @dvjamieson

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

What's next for adviser consolidation?

After a strong start to M&A activity in 2017, the year stalled in the third quarter. What's ahead? M&A Expert David Devoe explains.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

RIAs struggle to keep clients grounded amid stock market euphoria

With equities at record levels, financial advisers are confronted with realities of greed and fear.

Regulators showing renewed interest in cracking down on investment fees

SEC, Finra targeting high-fee share classes, 12b-1 fees and failure to give sales load discounts and waivers to investors.

Complexity of new indexed annuities causing concern

Insurers are using 'hybrid' indices as a way to differentiate themselves, but critics contend the products are less transparent, more confusing and don't add financial benefit.

Critics say regulation hasn't curbed overly rosy projections for indexed universal life insurance

They say rule didn't go far enough and more stringent measures may be necessary.

House and Senate reach tentative compromise for tax overhaul

Lawmakers still need to get a cost analysis of their agreement, so it's not yet definite, according to a source.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print