SEC Raises Concerns Over Arbitration Clauses in Investment Advisory Agreements
From the desk of Jim Eccleston at Eccleston Law
A cautionary note has been sounded by an investor advocacy group operating within the Securities and Exchange Commission (SEC), signaling potential fiduciary duty violations by registered investment advisers employing contract clauses to steer client disputes into arbitration.
The clauses mandate the resolution of advisor-client disputes in private venues outside the public court system. According to a report from the SEC's Office of the Investor Advocate, 61 percent of adviser agreements among 579 RIAs surveyed contained mandatory arbitration clauses.
According to FinancialPlanning.com, critics argue that mandatory arbitration, commonly utilized by advisors, can impose substantial costs on clients and potentially shield advisors from revealing wrongdoing. In response to those concerns, the Office of the Investor Advocate recommends temporarily ceasing mandatory arbitration use, citing congressional authority. The office's report particularly recommends restricting or eliminating certain terms within arbitration clauses, such as damage limitations and class-action waivers.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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