More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Sen. Al Franken, D-Minn., told the new Securities and Exchange Commission chairwoman, Mary Jo White, in a Tuesday letter to act now in preventing Wall Street brokerage firms from forcing investors into “unfair” arbitration agreements.
“Minnesotans planning for retirement or saving for their children’s college funds rely on the advice of their brokers to help them make smart investment choices," Franken said in the letter, which was also signed by 36 other senators and House colleagues. "However, when brokers engage in fraudulent or illegal behaviors that lose investors’ savings, mandatory arbitration clauses limit investors’ ability to protect their rights under the law.”
Franken and the other lawmakers urged the SEC to use its existing authority under Section 921 of the Dodd-Frank Act to prevent mandatory arbitration clauses in broker-investor contracts.
“We are deeply concerned that the commission’s failure to respond to the dangers posed by widespread forced arbitration will weaken existing investor protections,” wrote Franken and his colleagues. “We urge the commission to act quickly to exercise its authority…to prevent this practice and protect investor rights.”
SEC spokesman John Nester said the agency declined to comment "in advance of our response to the senator, but as a general matter we share his interest in this issue."
The lawmakers said the need for the SEC to act increased after Charles Schwab recently expanded its mandatory arbitration clauses.
“We were alarmed to see further attempts to erode investor rights when Charles Schwab, one of the country’s largest brokers, expanded the mandatory arbitration clauses in its customer agreements to include a mandatory class-action waiver clause,” the lawmakers wrote in their letter. “In this instance, Schwab argued that, in response to the Supreme Court’s interpretation of the Federal Arbitration Act (FAA) in AT&T Mobility v. Concepcion, it could include a waiver of class-action and class arbitration rights in its customer agreements.”
The lawmakers then cited FINRA’s disciplinary action against Schwab for violation of FINRA rules barring class-action waivers. In February, however, a FINRA hearing panel ruled that although Schwab’s actions did in fact violate FINRA rules, those rules could not be enforced under Concepcion.
“While the Supreme Court in Concepcion did find that the FAA pre-empts state actions that would restrict the use of arbitration, the facts in the Schwab case are notably distinguishable—not least because FINRA is a membership organization seeking to enforce its own rules. However, the ambiguity created by the panel’s ruling underscores the urgency with which the commission should adopt rules under Section 921.”
SEC Commissioner Luis Aguilar also said in a recent speech that he objects to predispute mandatory arbitration as “it denies investors the right to choose between arbitration and the traditional judicial process at the very beginning of their relationship with their brokers and advisors.”
These clauses, Abshure continued, “have become even more troubling” in light of the Schwab decision. “That’s wrong on the merits and bad public policy. Forced arbitration should not be the sole forum available to aggrieved investors, especially those investing small amounts.”
The lawmakers also pressed the SEC to track the number of brokerage firms that are inserting mandatory arbitration agreements and class-action waivers into consumer contracts “so that they can closely monitor the growing use of this abusive practice.”
Read Schwab Dodges FINRA Action on Arbitration Waivers on AdvisorOne.