AdvisorHub (July 25, 2023) - A trade group representing plaintiffs’ lawyers on Tuesday called for the Securities and Exchange Commission to end a “broken” arbitration system for investors bringing claims against registered investment advisors and to force RIAs to be more transparent about customer complaints.
The Public Investors Advocate Bar Association made its case in a presentation that included testimonials from two customers of RIAs who had difficulty recouping losses due to the high costs or lack of accountability in arbitration.
In one case, Rita Beradelli from California expended more than $200,000 in legal costs—more than what she allegedly lost—to pursue a claim against her advisor. Another investor, Michael Phillips from Guam said he won $4 million but does not anticipate receiving the funds as the RIA has filed a lawsuit to vacate the award and will file for bankruptcy.
“RIAs, knowing the forum fees are cost prohibitive for most clients, use these types of arbitration clauses to shield themselves from liability for their misconduct,” outgoing PIABA President Hugh Berkson said. “These are real people who are suffering real-world effects of a broken RIA arbitration system.”
PIABA’s advocacy campaign follows an SEC report to Congress last month that raised concerns about RIAs’ use of mandatory arbitration clauses, which force investors to attend hearings far from home, get less in damages and accept bans against class action claims.
PIABA leaders also said investors are unable to properly vet RIAs because investment advisors overseen by the SEC do not have to disclose the existence and resolution of claims. In contrast, brokers must report customer complaints and litigation to the Financial Industry Regulatory Authority, which discloses the information through public BrokerCheck reports, Berkson said.
The number of RIAs has swelled over the past decade, but investors are finding there are fewer protections than if they worked with a Finra-registered broker, Berkson said. The recent SEC report should be “the first step in ensuring that at a minimum, someone who experiences a problem with an RIA, gets his fair shake,” he said.
PIABA said it is pressuring the SEC to mandate RIAs disclose customer claims and make that information easily accessible for investors.
PIABA wants investors to have the option to use the court system. Or, at least, the SEC should set minimum standards for arbitrations so they are affordable, allow for convenient hearings and reasonable discovery, Berkson said.
Incoming PIABA President Joseph Peiffer said the organization would pressure Congress to address the issue if the SEC does not act. But he expressed optimism based on the interest that the SEC’s Office of the Investor Advocate has already shown.
The PIABA leaders also said they would garner support for more specific actions by working with organizations like state securities regulator group North American Securities Administrators Association and investor advocate Consumer Federation of America among others.
The SEC report estimated approximately 61% of RIAs working with retail investors used mandatory arbitration clauses, although the lack of publicly available information makes this exact figure difficult to determine.
The use of arbitration clauses have “increased steadily” over the last decade and almost all of them designate a specific forum for the arbitration, the SEC report said. Many do not consider the client’s location or place of business, and industry trade groups and regulators interviewed by SEC staff agreed that mandatory arbitration benefitted advisors, the report showed. However, not all parties agreed that investors would be better off solving disputes in a public court, according to the report.