SEC Report Highlights Concerns Over Mandatory Arbitration Clauses In RIA Practices

Posted on June 30th, 2023 at 1:05 PM
SEC Report Highlights Concerns Over Mandatory Arbitration Clauses In RIA Practices

From the desk of Jim Eccleston at Eccleston Law 

A recent report from the Securities and Exchange Commission (SEC) to Congress has expressed concerns regarding using mandatory arbitration clauses in retail customer agreements by registered investment advisory (RIA) firms. The report questions the adequacy of current disclosure requirements and raises considerations about the potential impact on investors.

According to the staff report, approximately 61 percent of RIA firms that cater to retail investors include mandatory arbitration clauses in their investment advisory agreements. However, determining the exact prevalence of these clauses is challenging due to limited publicly available information.

The report also highlights a stark contrast in disclosure requirements between investment advisor representatives and brokers registered with the Financial Industry Regulatory Authority (FINRA). Investment advisor representatives' disclosures regarding arbitrations were found to be significantly less comprehensive compared to the obligations placed on FINRA-registered brokers, who must disclose pending complaints, hearing outcomes, and settlement details. According to AdvisorHub, the report's findings indicate a need for closer examination and potential revisions to the disclosure requirements surrounding mandatory arbitration clauses in RIA agreements.

 

Eccleston Law LLC represents investors, investment advisers, and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.

 

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