Massachusetts Calls On SEC To Prohibit RIAs From Using Mandatory Arbitration Clauses, Saying It Is "Troubling," Widespread And Not Consistent With Fiduciary Practice

Wednesday, February 13, 2013 07:48
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Massachusetts Calls On SEC To Prohibit RIAs From Using Mandatory Arbitration Clauses, Saying It Is

Tags: compliance | Dodd-Frank | fiduciaries | RIA compliance | RIAs | sec

The Secretary of the Commonwealth of Massachusetts, in a public letter, is calling on the U.S. Securities and Exchange Commission to prohibit Registered Investment Advisers from inserting mandatory arbitration clauses in their contracts, saying such clauses are widespread, not always in the best interest of consumers, and inconsistent with fiduciary practice.

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William Galvin, secretary of state of Massachusetts, revealed in the letter to the SEC that the Massachusetts Securities Division recently surveyed 710 state-registered Massachusetts investment advisers about their contracts and about half of them responded to the voluntary questionnaire. Of the approximately 350 responses, nearly half of the RIAs reported that their contracts contained a clause binding clients to arbitration of disputes.
 
“Such widespread use of mandatory pre-dispute arbitration clauses in advisory contracts is troubling and a cause for regulatory concern,” Galvin said in the letter. “By law, investment advisers are required to act as fiduciaries for their clients, with an obligation to act in their best interests. While arbitration may be appropriate in some cases, a clause binding an investor to arbitration before the circumstances are known may not be in the client's best interest nor consistent with an investment adviser's fiduciary duty.”
 
Galvin asks the Commission to ban pre-dispute arbitration clauses, saying he believed such a clause is “inconsistent” with an investment advisor’s fiduciary duty.
 
You can bet we have not heard the last of this, and for good reason. Mandatory arbitration for years has been a contentious part of brokerage firm account-opening applications. BDs won’t open an account unless you sign an arbitration clause. Dodd Frank legislation empowered the SEC in July 2010 to eliminate the practice by BDs but the SEC has not acted on this. Still, the mandatory arbitration clause has long been regarded as a heavy handed practice by BDs that consumer groups have opposed and the fact that many RIAs are inserting a clause like this in their contracts has to be a disappointment to pro-consumer fiduciaries who have long derided BDs for their sales practices.
 

 

Massachusetts Asks SEC To Ban RIAs From Using Mandatory Arbitration Clauses

 

 

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