February 21, 2024



Brokers have less stringent duties than fiduciary advisors, but their arbitration process is more client-friendly than fiduciary advisors. some registered investment advisory firmsAccording to the SEC.

An estimated 61% of RIAs serve retail customers Use of Mandatory Arbitration Clause The SEC said their consulting agreements sometimes included restrictive clauses, imposed higher costs and enforced terms “not permitted in agreements between brokers and their clients.” Report to Congressional Committees, June 27. December 2022 government appropriations law Include language to guide regulators Examining the “proliferation” of mandatory arbitration clauses in SEC-registered RIAs.

The “opacity” of RIA arbitration has prevented regulator staff from collecting a lot of data, but SEC officials spoke with FINRA, client attorneys, and trade and advocacy groups and compiled a sample of 579 advisory agreements. Each stakeholder agrees, to varying degrees, that RIAs “should always require the disclosure of more complete information about client arbitrations and outstanding awards,” the report said. Not surprisingly, they are divided on whether mandatory arbitration clauses are as beneficial to clients as RIAs.

“For many consulting clients, the use of mandatory arbitration clauses in consulting agreements means that arbitration is the only avenue for redress for financial losses they (RIAs) inflict,” the study said. “Further evaluation may be required to help ensure that Arbitration becomes an available and affordable method of dispute resolution for consulting clients.”

main findings
The SEC staff compared the mandatory arbitration procedure for RIA advisor clients to FINRA’s client complaint procedure for broker-dealers and broker-dealers.

RIAs must abide by their fiduciary duties to their clients and put their interests first. Brokers, by contrast, base their recommendations on lower standards, requiring them to act in the best interest of their clients.This distinction represents the most important divide in the industry, but most financial advisors acting in two capacities Dual Registration with Brokerage Firm and RIA.

Greater public disclosure, lower costs and, in some cases, less restrictive clauses have led “experienced attorneys” to opt for FINRA arbitration when litigating dual-registered advisors, a stakeholder told the SEC, Not an arbitrator of the RIA.

At least 92 percent of mandatory arbitration clauses used by RIAs designate specific customer complaint forums. Only 10% of these faced client claims in FINRA arbitration, compared with 83% of clients filing claims with the American Arbitration Association, 6% using JAMS, and 1% filing claims in other forums.

A small percentage of clauses contain restrictive clauses that are not allowed under FINRA rules, with 11 percent limiting the types of damages clients may seek, 6 percent waiving clients’ right to class action, and 5 percent limiting the types of claims clients can assert against an RIA.

Furthermore, 60% of arbitration clauses mandated that the seat of arbitration be at a specific location, while almost all arbitration clauses (97%) “disregarded” any facility for the client. Another difference from FINRA, which uses the location closest to a client’s residence as the default location, is another difference, the report said, and the rules “may result in clients incurring travel and lodging expenses while participating in the remote hearing in person.”

“The lack of clear, uniform disclosure requirements for RIAs” also distinguishes its mandatory arbitration from that of brokerage firms, the SEC staff wrote in its conclusion.

“While (RIA) representatives are required to disclose certain arbitration information, the opacity of (RIA) arbitration and the difficulty of obtaining information on advisor arbitration raises concerns about the ability of regulators to assess (RIA) conduct in the context of client disputes,” the report said. doubts.” “Under the current disclosure regime, investors generally do not have access to arbitration information registered with the SEC (RIA).”

questions about the future
Advisory Center first reported The SEC study was one of the stakeholders discussing the issue with the regulator, which the client attorney group referred to as Public Investor Advocacy Lawyers Association (PIABA), released to the media. Other groups include: FINRA, North American Securities Administrators Association, Securities Industry and Financial Markets Association, Financial Services Association, Association of Investment Advisers, American Individual Investors and Better Markets Association.

Former PIABA Chairman Michael Edmiston said the SEC should conduct a “thorough, thorough investigation” of RIAs because the report “categorically acknowledges that it does not have sufficient data to understand the extent of this investor protection issue.” scope”.Law Firm in Studio City, CA Jonathan Evans and colleagues, said in an email. He said the report showed the need for “stronger and more thorough regulation” of RIAs.

“No one knows how many RIAs use arbitration clauses and private arbitration provider fees as shields for their claims, the number of arbitration claims submitted, or their outcomes,” Edmiston said. “By contrast, this report acknowledges all of this information Both are available from FINRA, the broker-dealer industry regulator. The use of forced arbitration, its prohibitive costs, and improper and unlawful limitations on claims, remedies, and outcomes are all strategies employed by fiduciaries. They should never be used.”

Other stakeholders expressed more support for the current system, the report said, although advocates acknowledged that greater public disclosure of cases “would create a competitive advantage for honest (RIAs) and promote a fairer marketplace”. An unidentified stakeholder claimed that the lower number of arbitration cases disclosed by RIAs may be “because they comply with fiduciary duties and do not routinely engage in misconduct,” the study said.

“Stakeholders agree that the benefits of a mandatory arbitration clause (RIA) include streamlining the dispute resolution process with limited discovery and no right of appeal, maximizing privacy during and after arbitration, and improving predictability through the appointment of arbitrators sex and efficiency. Known venues and familiar rules,” the report said. “Proponents of mandatory arbitration further claim that clients – such as consultants – experience the same benefits.”

SEC staff identified areas of “majority” agreement, or agreement among “a majority of stakeholders.” They told regulators that opting to go to RIA courts would help them “in some circumstances,” while not being able to appeal “could be problematic,” the study showed.

“A majority of stakeholders believe (RIAs) benefit from mandatory arbitration at the expense of their clients,” the study said. “These stakeholders frequently expressed concern that the forum, rules, and other arbitration clauses chosen by advisors would increase client costs And in favor of (RIA).”