Investment Executive (February 2, 2024) By James Langton

Firms use forced arbitration to discourage clients from pursuing complaints.

U.S. investor and consumer advocates are teaming up to escalate their fight for fair dispute resolution for advisory clients who are currently forced into costly arbitration procedures.

Citing growing complaints from investors and a recent report from the U.S. Securities and Exchange Commission’s (SEC) Office of the Investor Advocate (OIA) that criticized the practice of mandated arbitration, a new coalition of advocacy groups is calling for the SEC — or, failing that, Congress — to put an end to registered investment advisers requiring their clients to resolve disputes with their advisors in private arbitration.

Among other things, the OIA report found that over half (61%) of registered investment advisers (RIAs) have mandatory arbitration clauses in their client agreements and that some of these agreements contain provisions designed to discourage investors from pursuing disputes. It suggested that these kinds of clauses may violate advisers’ fiduciary duties to their clients.

The advocacy groups said that, while brokerage firms are required to use the arbitration process run by the industry self-regulatory organization — the U.S. Financial Industry Regulatory Authority — RIAs typically require clients to use private arbitrators, which set their own fees, making it too expensive for many investors.

“Total arbitration costs can easily exceed US$64,000 for five days of hearings and three days of pre-hearing and post-hearing work,” the groups noted, adding that private arbitrators typically require their expected fees to be deposited upfront.

“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,” they argued.

The OIA report also concluded that certain provisions, including clauses that preclude clients from participating in class action lawsuits, impose costly fees and designate arbitration venues without regard to a client’s physical location, are likely intended to increase “the cost and inconvenience of arbitration for advisory clients.”

“These fake fiduciaries use their boilerplate agreements to stack the deck against investors,” said Joe Peiffer, president of the Public Investors Advocate Bar Association (PIABA), in a release. “It’s time that either the SEC or Congress put an end to this nonsense.”

The PIABA is joined by an array of other groups, including the American Association for Justice, Americans for Financial Reform, Better Markets, Consumer Federation of America, the National Association of Consumer Advocates, and Public Citizen, in the new campaign against forced arbitration.

“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,” said Micah Hauptman, director of investor protection with the Consumer Federation of America. “No reasonable investor would consent to the use of such a clause.”

Access to a fair, robust dispute resolution system is also a perennial concern for investor advocates in Canada.

While securities dealers and portfolio managers are currently required to use the Ombudsman for Banking Services and Investments (OBSI), the Canadian Securities Administrators are currently consulting on proposals that would beef up OBSI’s powers by giving it binding authority to enforce its investor compensation recommendations.

Those proposals are out for comment until Feb. 28.