AdvisorHub (February 1, 2024) By Miriam Rozen

A coalition of investor advocates on Thursday sounded the alarm once again about registered investment advisory firms’ widespread use of forced arbitration clauses in client agreements. 

Some of the advocacy groups also sent a letter this week to Securities and Exchange Commission Chair Gary Gensler seeking a ban on those contractual terms. The advocates, including plaintiff lawyers and investor non-profits, are pushing for reforms based on issues raised in an SEC staff report issued last summer. 

That report, issued by the SEC’s Office of the Investor Advocate,  concluded that as many as 61% of RIAs serving retail investors rely on mandatory arbitration clauses, which means little is publicly disclosed regarding how often disputes are filed or their resolution. The Commission, however, “expressed no view regarding the analysis, findings, or conclusions” in the staff report. 

The SEC’s apparent inaction on the issue since that report’s release prompted the new campaign by the coalition, which includes the Public Investors Bar Association, American Association for Justice, Americans for Financial Reform, Better Markets, Consumer Federation of America,  and Public Citizen.

“We have yet to see concrete actions to remedy the issue,” said Joe Peiffer, president of PIABA, told reporters at a Thursday conference. “Right now. It’s just a report without rule reforms,” Peiffer added, a situation allowing for “business as usual for these fake fiduciaries.”

A spokesperson for the SEC told AdvisorHub: “The Commission takes seriously the issues raised in the Office of the Investor Advocate Report and welcomes input from investor advocates.”

As a group, the advocates want either the SEC or Congress to act, issuing regulatory or legislative reforms respectively. “We would strongly support an SEC regulation or a law passed by Congress that would secure investors’ right to choose how to pursue complaints,” said Christine Hines, legislative director of the National Association of Consumer Advocates, a nonprofit which has also joined the coalition.

NACA and several other organizations, including Better Markets and Public Citizen, signed the letter pushing for an outright ban. 

The investor advocates stressed on Thursday that unlike brokerage firms, which must designate the Financial Industry Regulatory Authority, as the forum where complaints are heard, RIAs often require clients to file arbitration claims with private forums including the American Arbitration Association or JAMS, where arbitrators set their own fees and decisions are not reported. 

Costs for an investor can exceed $64,000 in a private forum if a hearing runs five days or more, according to the advocates. Some of those costs must be set aside by the client before the case begins, they said. 

A “forced arbitration clause hidden away in an obscure provision” of an RIA clients’ contract can “price American investors out of justice,” Peiffer said. 

Brokerage firms, unlike RIAs, also are prohibited by Finra from blocking customers from bringing class action claims.

“It’s important to recognize meaningful differences between FINRA arbitration for broker dealers and investment advisor arbitration,” said Micah Hauptman, director of Investor Protection for Consumer Federation of America. 

The SEC staff had issued its findings after the House Committee on Appropriations in December 2022 “expressed concerns about the proliferation of mandatory arbitration clauses,” its report said.  

The staff concluded that “further evaluation” may be needed to ensure that arbitration is an “accessible and affordable means of dispute resolution” for their customers and to determine whether to implement uniform disclosure requirements.