SEC urged to revise strategic plan to address RIA arbitration, threats to senior investors

The SEC should address investment advisers’ use of mandatory arbitration to settle client disputes and recognize threats to older investors in its regulatory agenda for the next four years, organizations told the agency in comments on its strategic plan.

In August, the Securities and Exchange Commission released a draft strategic plan to guide the agency’s oversight from fiscal 2022 to 2026. The public input it received was not particularly voluminous compared to the response it’s gotten on individual rulemaking proposals, but it does reflect the priorities of the groups that replied.

The Public Investors Advocate Bar Association, for instance, said the SEC should increase its oversight of how advisers registered with the agency are forcing their clients to use expensive private arbitration forums to hear complaints against them.

“Our members are seeing RIAs take advantage of the lack of oversight and impose oppressive pre-dispute arbitration clauses that prevent their clients from seeking redress,” PIABA President Michael Edmiston wrote in a Sept. 29 comment letter. “Following the lead of the brokerage industry, RIAs now regularly include forced pre-dispute arbitration clauses in their account agreements.”

The AARP was startled that the SEC’s draft agenda overlooked older investors.

“[I]t fails to make any reference to older investors, much less contemplate policies or programs targeted toward the protection of older Americans,” David Certner, legislative counsel and legislative policy director at AARP, wrote in a Sept. 30 letter. “This is an unfortunate and striking omission, which should be remedied.”

An action step AARP recommends is for the SEC to consider an advisory committee dedicated to exploring issues impacting older investors.

The SEC highlighted the importance of enforcement in its draft plan. But that emphasis drew some pushback from the U.S. Chamber of Commerce, which raised concerns about what the financial industry has criticized as rulemaking by enforcement.

“The SEC must provide clear ‘rules of the road’ for businesses — particularly small and startup businesses - and not use enforcement as a vehicle to establish de facto rules,” Tom Quaadman, Chamber executive vice president, wrote in a Sept. 29 letter.

The group also called on the agency to allow ample opportunity for alleged rule violators to defend themselves, including taking their cases out of the SEC’s in-house adjudicatory system and trying them in federal courts.

“The certainty of clear rules of the road also means that SEC enforcement should have a fair process for all to ensure that the rights of the accused are preserved while allowing the process to achieve its goals of finding the truth, punishing the wrongdoers, and preventing future harm,” Quaadman wrote.

There were differences of opinion about how the SEC should make a priority of adjusting rules for investing in private markets. The Chamber wants the agency to elevate “capital formation” in part by making it easier for ordinary investors to buy private shares.

But AARP and the Securities Arbitration Clinic at St. John’s University School of Law want the SEC to increase the income and net-worth thresholds the SEC uses to determine who’s an accredited investor eligible to participate in private markets.