MondoVisione (February 2, 2024) 

Formation Of Investor Advocacy Coalition Follows Increasing Complaints From Wronged Investors, Scathing SEC OIA Report That Found Rias In ‘Violation Of The Fiduciary Duty’; Groups Calling For Reforms To Industry-Favored Forced Arbitration Practices.

A coalition of investor advocacy groups, including the Public Investors Advocate Bar Association (PIABA), the American Association for Justice (AAJ), Americans for Financial Reform (AFR), Better Markets, Consumer Federation of America (CFA), the National Association of Consumer Advocates (NACA), and Public Citizen, formally announced a new campaign aimed at reforming Securities & Exchange Commission (SEC) rules for registered investor advisers (RIA) during a press conference held at the National Press Club in Washington, D.C.

Speaking at the press event, PIABA President Joe Peiffer, said: “PIABA will continue to fight forced arbitration clauses inserted into investor contracts by unscrupulous RIAs. These fake fiduciaries use their boilerplate agreements to stack the deck against investors. It’s time that either the SEC or Congress put an end to this nonsense.”

The formation of the investor advocacy coalition follows a December report by the SEC’s Office of the Investor Advocate (OIA), which found many RIA forced arbitration agreements may be in “violation of the [advisers’] fiduciary duty.” The report also found that approximately 61% of SEC-registered advisers serving retail investor clients incorporated forced arbitration clauses into their investment advisory agreements. The OIA report echoed what PIABA previously had described as an “untenable” system for aggrieved investors who seek restitution for improper investment practices by their RIA, which can often dissuade wronged investors from seeking compensatory damages for losses they’ve suffered.

Micah Hauptman, director of Investor Protection at the Consumer Federation of America, said: “Advisers should not be able to use forced arbitration clauses to immunize themselves from accountability for their misconduct. If an adviser uses forced arbitrations in ways that effectively deny a client’s ability to pursue justice and recover for losses they’ve suffered, the adviser is placing their interests ahead of the client’s, in violation of the adviser’s fiduciary duty. No reasonable investor would consent to the use of such a clause.

Martha Perez-Pedemonti, civil justice & consumer rights Counsel at Public Citizen, said: “This is an issue affecting a diverse group of investors, not just the wealthy investors. Middle-class investors, who’ve worked their entire lives saving bit by bit so that one day they can finally retire, find themselves in an untenable situation where there is little to no recourse if they fall victim to fraud or mismanagement by their ‘trusted’ investment advisors. We support those investors – and that’s why we’re calling on the SEC and Congress to fix this.”

 “We agree with our colleagues that the use of forced arbitration directly conflicts with prohibitions on advisor self-dealing and self-serving misconduct that risks harm to investors,” said Christine Hines, legislative director for the National Association of Consumer Advocates (NACA). “The SEC must act or Congress must pass a law to ensure that arbitration is truly voluntary and chosen after the dispute arises, not tucked away in an obscure provision of the initial contract.”

Brady Williams, legal counsel at Better Markets, said: “Better Markets and others believe that the financial services industry should simply not be allowed to force their clients into arbitration. But at a minimum, the SEC should have more information about the use of these clauses in the world of investment advisers, where the abuses appear to be most egregious.” 

The concerns of the newly formed investor advocacy coalition strongly echo complaints made by investment fraud victims, represented by PIABA member attorneys, during a press conference held in July. The investor fraud victims described two primary issues that were confirmed in recent SEC report: fiduciary RIAs using arbitration provisions as a shield against liability; and RIAs failing to pay the awards issued against them.

Marykay Dragovich, the conservator for her cousin Rita Berardelli, described the process of forced arbitration after their trusted RIA lost over $228,000 in principal investments, money that Berardelli had saved as a registered nurse before suffering two life-altering brain aneurisms that left her incapacitated. When Dragovich investigated recovering the losses for her cousin, she learned it would cost up to $202,000 to pay the upfront costs of an arbitration hearing. So even if Berardelli got all her money back, she would have to pay as much as 90% of it to the arbitrators as prescribed by the overlooked forced arbitration clause in the agreement with her RIA.

A second investment fraud victim, Michael Phillips recounted what he described as a “cruel lesson” after he was awarded over $4 million in a FINRA arbitration dispute against an investment management firm but has yet to receive the funds. The investment management firm, Asia Pacific, instead of paying their owed restitution to Mr. Phillips, filed bankruptcy in bad faith to escape the financial responsibility of paying the award – a surprisingly legal evasion tactic that was also spelled out as one of the primary issues identified in the December SEC OIA report. 

Unlike brokerage firms, which must designate FINRA as the arbitration forum, RIAs most commonly require clients to file arbitration claims with privately run dispute resolution forums such as the American Arbitration Association or JAMS, where arbitrators set their own fees – unlike the FINRA forum, where FINRA sets the arbitrators’ rates. According to arbitration attorneys, it is not uncommon for an AAA or JAMS arbitrator to charge $8,000 or more for a day’s work. Total arbitration costs can easily exceed $64,000 for five days of hearings and three days of pre-hearing and post-hearing work. The costs can triple if there are three arbitrators hearing the dispute.

Under many RIA-investor agreements, the privately run forums require the expected fees to be deposited prior to the case proceeding. This means that an investor may have to deposit tens of thousands of dollars just to have their claim move forward. RIAs, knowing the forum fees are cost-prohibitive for most clients, use these types of forced arbitration clauses to shield themselves from liability for their misconduct.