More On Legal & Compliancefrom The Advisor's Professional Library
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
- 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.
One of the most encouraging developments that I’ve seen so far in the nearly four-year debate over advisor reregulation is the flurry of calls to end mandatory arbitration for brokerage clients. It seems that the current attack on broker arbitration ironically was caused by Charles Schwab & Co.’s recent victory over FINRA’s challenge of the brokerage’s expanded mandatory arbitration clause, which now also precludes its clients from participating in class actions against the firm. The backlash may be worse than FINRA’s initial decision.
As reported by Melanie Waddell on AdvisorOne, a group of some 37 U.S. Senators and Congressmen led by Senator Al Franken (D-Minn.) sent a letter to the SEC that same day, which read in part: “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… …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.”
Schwab’s “victory” also appeared to be the impetus behind SEC Commissioner Luis Aguilar’s anti-arbitration clause remarks to an April 16th meeting of the North American Securities Administrators Association. “Investors should not have their option of choosing between arbitration and the traditional judicial process taken away from them at the very beginning of their relationship with their brokers and advisers,” Mr. Aguilar said in his prepared statement (reporters were not allowed into the NASAA session). “A client's right to go to court to recover monetary damages is an important right that should be preserved and kept in the client's toolkit,” he said, before concluding: “I believe the Commission needs to be proactive in this important area. We need to support investor choice.”
Commissioner Aguilar’s comments seem to have hit home with the state securities regulators. On May 3, NASAA sent its own letter to the SEC also urging the agency to “insure that investors have meaningful remedies and a choice of forums" in which to resolve disputes with brokerages,” wrote A. Heath Abshure, president of NASAA (Mr. Abshure also blogs regularly for AdvisorOne). "It has been our longstanding position that the 'take it or leave it' approach represented by these mandatory clauses is harmful to investors." “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.”
Sure looks as if Schwab—and the securities industry—might have been a lot better off if the San Francisco retail giant would have just taken one for the team and accepted FINRA’s judgment against its class action clause. Of course, SIFMA is already in full damage control, reiterating its well-worn claims that arbitration is so much cheaper for all concerned, of which I have no reason to doubt, nor have I heard anyone challenge. Still, if that is in fact true, you’d think that given the choice, the majority of investors would choose arbitration anyway. So what’s SIFMA so worried about?
What’s more, does it bother anyone else that one of SIFMA’s (and NAIFA’s) key arguments against a broker fiduciary standard is that it will limit investor choice? However, when it comes to investors’ claims against their brokers, apparently “choice” loses its vital importance. Hopefully, client advocates—including professional financial advisors—will continue to urge the SEC to use its authority under Dodd-Frank to expand investors’ choices. Then we’d see if people really do prefer arbitration over the courts, or a broker over a fiduciary advisor.
Of course, if our experience with the Dodd-Frank rereg debates has taught us anything, it’s that we simply can’t predict whether today’s hot issue will ever find its way into actual regulations. Maybe this time it really will be different.