More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
(Editor's Note: This commentary was written before it was reported that Charles Schwab had temporarily removed language in contracts that banned customers from filing class-action lawsuits.)
Forced arbitration has reemerged as a hot-button issue in recent weeks with calls for its demise coming from members of Congress, an SEC commissioner, a far-ranging band of consumer advocates and public interest groups, state securities regulators and others.
And for good reason. For too long, investors have been forced into a ‘take it or leave it’ scenario by mandatory pre-dispute arbitration clauses in customer agreements with their broker-dealers, and more recently their investment advisors. The time for this denial of investor rights to end is now.
That’s why NASAA supports the Arbitration Fairness Act, legislation reintroduced last week by Sen. Al Franken (D-Minn.) and Rep. Hank Johnson (D-Ga.) to eliminate forced arbitration clauses in employment, consumer, civil rights and antitrust cases. NASAA, along with Sen. Franken and 36 of his colleagues in the House and Senate, and consumer organizations ranging from AARP to the Consumer Federation of America and Public Citizen, recently called upon the SEC to use its authority under the Dodd-Frank Act to ban or limit forced arbitrations.
SEC Commissioner Luis Aguilar agrees that the time has come to end what he calls “the denial of investor choice.”
At our annual NASAA/SEC 19(d) meeting last month, Commissioner Aguilar said “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.” State securities regulators could not agree more.
Why this flurry of arbitration-related activity after months, if not years, of relative quiet on the arbitration front? Just that: the sound of silence. It has been nearly three years since Dodd-Frank Section 921 gave the SEC the authority to end forced arbitration, yet noting has been done. Within this vacuum of inaction, some have taken aggressive steps to expand the reach of forced arbitration.
For example, states have seen the emergence of forced arbitration clauses in contracts between state-registered investment advisors and their clients, despite the fiduciary duty imposed upon investment advisors.
These clauses have become that much more troubling to NASAA in light of a decision by Charles Schwab & Co. to include class action waivers in the arbitration provisions of its customer contracts—an obvious attempt by Schwab to insulate itself from liability to its own clients.
Schwab’s action is yet another example of the pernicious effects of forced arbitration clauses. It would essentially allow broker-dealers and investment advisors to prohibit participation in class actions against them by their customers.
The virtual elimination of litigation as a dispute resolution option through mandatory arbitration clauses, coupled with increasing procedural and evidentiary burdens, will have profound effects on investors and their confidence in investment products and markets.
Earlier this month, NASAA filed an amicus brief with the National Adjudicatory Council supporting FINRA’s efforts to overturn a decision by a FINRA hearing panel that allowed Schwab to prevent its customers from participating in class-action lawsuits. The Public Investors Arbitration Bar Association (PIABA), AARP, the National Consumer Law Center and Public Justice weighed in with similar concerns.
As a FINRA member firm since Oct. 13, 1970, Schwab is required to have full knowledge of FINRA rules and is bound to follow them if the firm seeks to maintain its membership—by unilaterally incorporating the waiver into its customer contracts,
Schwab chose to defy its own agreement with FINRA.
Schwab’s decision to flaunt FINRA rules prohibiting the use of such clauses, coupled with the decision by a FINRA hearing panel not to enforce those rules, highlights the importance of Section 921.
Now, more than ever, it is essential that the SEC use its authority to ensure that investors have meaningful remedies and a choice of forums in which to resolve disputes with broker-dealers and investment advisers.
At a minimum, the SEC should not hesitate to use the authority Congress granted it under Section 15(o) of the Securities Exchange Act of 1934 to take the steps necessary to prevent the use of class-action waivers that deprive investors of the right to recover from harms they suffer. Preferably, the SEC should ban the use of mandatory pre-dispute arbitration agreements altogether so that investors have a choice when it comes to the forum they want to decide their claims.
Whether the forum is a civil proceeding in court or an arbitral proceeding, investors should be free to choose.