Virginia poised to ban mandatory arbitration clauses for state-registered advisers

State regulator said limitation is 'contrary to fiduciary duty.'

Sep 9, 2019 @ 2:30 pm

By Mark Schoeff Jr.

Investment advisers registered in Virginia will soon not be able to force clients into arbitration to settle disputes.

A new state rule will go into effect on Sept. 16 that bans mandatory arbitration clauses in client contracts, according to Ron Thomas, director of the Virginia Division of Securities and Retail Franchising.

"It's totally contrary to the fiduciary duty of an investment adviser to take away a right someone has to pursue the forum of their choice if they have a disagreement with an investment adviser," Mr. Thomas said in an interview at the North American Securities Administrators Association annual conference in Austin, Tex.

Mr. Thomas and NASAA officials say Virginia is the first state to ban mandatory arbitration for advisers.

The issue of mandatory arbitration usually centers on brokers, who include such clauses in nearly every customer contract. But many advisers also use them. Broker arbitration is handled by the Financial Industry Regulatory Authority Inc., while adviser clients usually use other arbitration systems.

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The Dodd-Frank financial reform law gave the Securities and Exchange Commission the authority to ban mandatory arbitration for brokers, but the agency has not acted.

The Virginia rule emanated from adviser exams that state regulators conducted, according to Mr. Thomas. When they saw advisers using mandatory arbitration, they asked them to remove the clauses from client agreements.

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"We never had anyone refuse to take it out of their contract, so I thought it was time to codify it in a rule," Mr. Thomas said.

The rule was proposed in late June with a comment deadline of Aug. 9. Mr. Thomas said he didn't receive any adviser opposition during the rulemaking process and no one requested a hearing.

He said he is not opposed to arbitration for dispute resolution, if that's the venue that a client selects.

"If they want to do it, fine," Mr. Thomas said. "I could care less, if they have a choice."

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