Groups Want Probe of RIAs Over Mandatory Arbitration, By Alex Padalka

Financial Advisor IQ (May 19, 2022) - Registered investment advisor firms often force customers into forced arbitration that is costly and non-transparent, according to the groups.

Several investor protection groups and unions are urging the Securities and Exchange Commission to investigate how registered investment advisor firms use mandatory arbitration arrangements.

RIA firms, taking a lead from broker-dealers, now regularly include such arbitration clauses as part of the contract agreements, the groups wrote in a letter to SEC chair Gary Gensler.

Better Markets, the Consumer Federation of America and the Public Investors Advocate Bar Association, as well as the American Federation of Labor and Congress of Industrial Organizations and the American Federation of State, County and Municipal Employees, among other groups, signed on to the letter.

Unlike the brokerage firms — which must offer the Financial Industry Regulatory Authority dispute resolution services unit as an available forum for the arbitration — the RIAs aren’t required to provide access to a publicly run forum and instead include in their arbitration clauses privately run forums such as the American Arbitration Association or JAMS (previously known as Judicial Arbitration and Mediation Services), according to the groups.

Such forums, the groups claim, are far more expensive with a single arbitrator on JAMS could cost upward of $64,000 for five days of hearings and three days of pre- and post-hearing work.

Moreover, the groups say that RIA firms don’t uniformly disclose their arbitration clauses, while no public information on the arbitrations exists.

“Presently, the undersigned 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 groups wrote, adding that they’d like the SEC to publish data on forums, rules, venues, the use of class action waivers, if any, and past history of arbitrations.