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.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
State securities regulators are up in arms over the Supreme Court’s recent decision upholding American Express’ right to bar customer class-action suits and are pressing Congress to stop forced arbitrations.
The Supreme Court on June 20 issued its opinion in American Express Co. v. Italian Colors Restaurant, which held that a group of merchants were bound by individual arbitration agreements with American Express "even if a class action is the only way to make the claim economically viable," NASAA says.
According to The Washington Post, a group of California restaurants led by Italian Colors had a dispute with American Express, over fees and other matters, from which each restaurant hoped to recover $40,000 or less. But the analysis necessary to prove their case would have cost the restaurants up to $1 million.
“The Supreme Court’s ruling effectively invites large corporations to use arbitration agreements to disregard effective vindication of consumer claims through class actions,” said Heath Abshure (right), NASAA President and Arkansas securities commissioner, in a statement.
“It is disappointing that the Supreme Court would turn a blind eye to the injustice of allowing large corporate interests to deny small businesses and individuals their day in court,” Abshure said. “It is now up to Congress to restore some vestige of consumer protection by prompt remedial legislation to restore the scales of justice to balance.”
In a 5-3 opinion by Justice Antonin Scalia, the Court held that a contractual provision mandating individual arbitration by means of a class-action waiver is enforceable under the Federal Arbitration Act (FAA), even if the costs of individual arbitration outweigh the potential recovery, according to attorneys Michael Miller and Adam Hunt of the law firm Morrison Foerster.
“Plaintiffs had argued that the costs of individual arbitration were so high that they would not be able to ‘effectively vindicate’ their federal statutory rights under the antitrust laws,” the two lawyers say. “But the Supreme Court shut the door on plaintiffs’ repeated efforts to push for the application of this ‘effective vindication’ exception that had been crafted by lower courts (including those in the Second Circuit).”
NASAA notes that it has been urging Congress to explore amending federal law to ensure that all investors, especially those investing small amounts, have a reasonable avenue to seek recovery.
“Arbitration should not be the sole forum available to aggrieved investors," Abshure said. "They should be able to seek relief in any forum and not be forced into an expensive arbitration that could foreclose the ability to obtain relief.”
Check out Schwab Backs Off on Class-Action Ban—for Now on AdvisorOne.