FOR IMMEDIATE RELEASE

PIABA: NEW SEC ANNUAL REPORT VALIDATES WRONGED INVESTORS, RIA-MANDATED ARBITRATION MUST GO

SEC Office of Investor Advocate Report Finds RIAs in ‘Violation of the Fiduciary Duty’, Confirms Systemic Favoritism


WASHINGTON, D.C. – December 5, 2023 – Victims of investment misconduct perpetrated by their registered investment advisers (RIAs) came one step closer to justice today when the SEC’s Office of the Investor Advocate (OIA) released its annual report, finding that many forced arbitration clauses are in breach of RIAs’ fiduciary duty to individual investors. The conclusions and recommendations included in the report strongly echo the concerns brought by PIABA on behalf of wrong-investors in recent years.
In response to the SEC OIA report findings, PIABA president Joseph Peiffer said, “The new SEC OIA report is yet another important reminder that forced-arbitration clauses used by RIAs are not in the best interest of individual investors. But it seems like now, the SEC may finally be willing to do something about it. For far too long, RIAs have utilized (and lobbied for) industry-favored rules that have tilted the scale of justice away from wronged investors.

“The SEC must act. The SEC must protect individual investors from harm as they’ve highlighted definitively in the Investor Advocate’s new report. I’m proud that PIABA has sounded the alarm on this issue for so long– now it’s time for the SEC to push it over the finish line and finally protect investors from the harms of RIA-mandated arbitration practices.”

Key SEC OIA report findings:

  • Approximately 61% of SEC-registered advisers serving retail investor clients incorporated mandatory arbitration clauses into their investment advisory agreements.
  • Of the 60% of mandatory arbitration clauses that designated a venue for the arbitration hearing, 97% designated a location that disregarded the client’s location.
  • 6% of SEC-registered advisory agreements with mandatory arbitration clauses included class action waivers, 5% of agreements limited the types of claims that could be asserted, and 11% limited the types of damages that a client may seek in the arbitration.

Key SEC OIA report recommendations and conclusions:

  • If an adviser includes language in an advisory agreement preemptively limiting the damages available to clients in arbitration, or limiting the types of claims that clients may assert against the adviser in an arbitration, such limiting language might mislead retail clients into not exercising their legal rights and would constitute a breach of the adviser’s fiduciary duty in violation of the antifraud provisions of the Advisers Act.
  • Contractual provisions precluding clients from participating in class action lawsuits, designating an arbitration venue without regard to a client’s physical location, invoking commercial arbitration rules intended for business-to-business disputes, and/or imposing fee shifting provisions that unilaterally impose the costs and fees of an arbitration on the client have the obvious and likely intended effect of increasing the cost and inconvenience of arbitration for advisory clients.
  • Where such provisions are included in an advisory agreement, absent evidence the adviser has made effort to gauge whether the client understands these provisions and the client has provided informed consent, the adviser is placing its interests ahead of the client’s interests in violation of the fiduciary duty.
  • (The SEC OIA) recommends that the commission consider temporarily suspending the use of mandatory arbitration clauses in advisory agreements until further exploration of the associated costs and benefits to advisory clients is undertaken.

The SEC OIA’s report echoed what PIABA describes 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 the breach of fiduciary duty.

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. 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 arbitration clauses to shield themselves from liability for their misconduct.

ABOUT PIABA

Public Investors Advocate Bar Association is an international, not-for-profit, voluntary bar association of lawyers who represent claimants in securities and commodities arbitration proceedings and securities litigation. The mission of PIABA is to promote the interests of the public investor in securities and commodities arbitration, by seeking to protect such investors from abuses in the arbitration process, by seeking to make securities arbitration as just and fair as systemically possible, and by educating investors concerning their rights. For more information, go to www.piaba.org.

MEDIA CONTACT: Alex Frank at (703) 276-3264, afrank@hastingsgroupmedia.com