More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
The Secretary of the Commonwealth of Massachusetts told the SEC on Wednesday to ban the use of mandatory pre-dispute arbitration clauses (MPDAC) in the contracts of RIAs, saying that such clauses may not be in the best interests of clients and that they may even be “inconsistent with the fiduciary duty that advisors owe their customers.”
In the letter, William Galvin described a survey conducted by the Massachusetts Securities Division. The survey went to 710 Massachusetts RIAs asking about their contracts. Among the approximately 350 respondents, about half indicated that their contracts did indeed carry such clauses, with many specifying the arbitrator and also the location where the proceedings would be held.
In his letter, Galvin told the SEC, “Such widespread use of mandatory pre-dispute arbitration clauses in advisory contracts is troubling and a cause for regulatory concern.” He added, “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.”
He then urged the SEC “to use its authority under Section 921 of the Dodd-Frank Financial Reform Act” to further investigate the practice. Further, since Section 921 “authorizes and delegates to the commission the responsibility to reform or prohibit pre-dispute arbitration requirements if the commission finds that such changes are in the public interest and for the protection of investors.”
Galvin didn’t stop there, however; he asked the SEC to ban such clauses. It’s difficult, if not impossible, to open an account at a brokerage firm without agreeing to such a clause, and BDs have come under heavy fire from consumer groups for requiring them. The fact that RIAs are using them as well is likely to make them a target of consumer advocates, who will no doubt pressure the SEC to comply with Galvin’s request.