PIABA and Congressman Call for SEC Action on Financially Burdensome Arbitration Clauses in RIA Agreements

The Public Investor Advocate Bar Associatoin (PIABA) with the assistance of Congressman Cartwright, has been working tirelessly to address the transition of registered representatives/stockbrokers transition to a Registered Investment Advisor (RIA) model which includes arbitration clauses that are financially unviable for the average individual investor. As such, PIABA and other investor advocates are recommending that the Securities & Exchange Commission (SEC) look at suspending all mandatory arb clauses in RIA agreements until the issue can be further investigated and vetted.

Excerpts from the SEC’s recent report appear below. This would be a huge victory for individual investors should these onerous mandatory RIA arbitration clauses be prohibited and investors still have access to economic and time-efficient forums to adjudicate disputes.

“The Commission has made clear that, while an adviser’s fiduciary duty may be shaped by agreement, the duty may not be waived. The Commission has additionally stated that, where certain clauses in retail advisory agreements purport to relieve an adviser from liability for nonwaivable claims, such clauses are likely to mislead retail clients into not exercising their legal rights in violation of the Advisers Act antifraud provisions. Recently, the Commission found that an adviser willfully violated the Advisers Act antifraud provisions by including such a “hedge” clause in its advisory agreement. In so finding, the Commission noted the adviser had no policies and procedures to assess a client’s sophistication in the law or to explain the meaning of the clause, provided no enhanced disclosures regarding when a client may retain a right of action, and offered no evidence that the clause would be understood by retail clients.”

“In similar manner, it is the view of the Office of the Investor Advocate that 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.99 We further believe that 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. It is therefore also our view that, 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.”