Consumer groups call for SEC probe of RIAs’ use of mandatory arbitration
RIAs aren't adequately disclosing arbitration clauses in client contracts and are forcing clients into expensive dispute forums, the groups said.
Many investment advisory firms put mandatory arbitration clauses in their clients’ contracts without telling them and force them into costly arbitration forums that could discourage them from pursuing their claims, a coalition of consumer and investor advocacy groups said Wednesday.
The coalition called on the Securities and Exchange Commission to investigate the use of arbitration among registered investment advisers.
The groups “are concerned that RIAs are not adequately disclosing their use of pre-dispute arbitration clauses, and may be disadvantaging investors by designating expensive forums, and otherwise limiting investors’ rights to pursue their claims,” the coalition wrote in a May 17 letter to SEC Chairman Gary Gensler.
They added: “The unchecked use of pre-dispute arbitration clauses by RIAs has created significant and unfair barriers for investors seeking nothing more than to exercise their legal rights after a dispute with their financial professional. We question whether the use of clauses that raise these concerns is consistent with an adviser’s fiduciary duty.”
The SEC did not respond to a request for comment.
The left-leaning organizations signing the letter include the Public Investors Advocate Bar Association, the Consumer Federation of America, the Center for American Progress and labor unions, among other groups.
A push to illuminate RIAs’ use of mandatory arbitration is a priority for PIABA President Michael Edmiston. The group is a frequent critic of the Financial Industry Regulatory Authority Inc.’s dispute resolution forum for brokerages, registered representatives and their customers. The broker-dealer self-regulator, however, rarely adjudicates RIA customer complaints.
Instead, RIAs use private arbitration forums such as the American Arbitration Association and JAMS, which tend to charge tens of thousands of dollars more than the Finra system to hear an arbitration case.
The coalition cited not only costs but also the lack of public information about RIA arbitration.
“In addition to not uniformly disclosing the use of a pre-dispute arbitration clause, RIAs do not uniformly disclose investor complaints or their outcome,” the letter states. “Therefore, it is virtually impossible to know how many investor complaints have been made against an RIA, whether the complaint resulted in an arbitration, and the outcome of the arbitration including whether any arbitration award has been paid. As a result, there is no clear picture on whether investors doing business with RIAs actually have access to justice.”
The coalition requested that the SEC collect arbitration information during RIA exams that includes the arbitration venues they designate to hear cases, whether they allow class actions and whether there are limitations on the types of claims, among other items.
The coalition noted the significant migration of brokers to the RIA sector. There are about 14,000 RIAs and 17,000 state-registered investment advisers, compared to about 3,400 brokerage firms.
The SEC must get its arms around the mandatory arbitration issue, the coalition said.
“The SEC can and should take the first steps in gathering information in its examinations of SEC-registered firms regarding their use of arbitration clauses and providers to determine the scope of the issues,” the letter states.
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