The Securities and Exchange Commission’s Investor Advisory Committee convened Tuesday to debate the pros and cons of mandatory arbitration agreements in the RIA industry.
Building on a June 2023 report from the SEC’s Office of the Investor Advocate and the Office of the Ombuds, the panel discussed the broad use and scope of mandatory arbitration clauses by RIAs and examined the impact of such clauses.
According to the panel, some 61% of RIAs that serve retail investors incorporate mandatory arbitration clauses into their investment advisory agreements. But, as emphasized by a number of speakers, that figure itself is up for debate.
This is because, due to the lack of publicly available information about SEC-registered advisor arbitration, SEC staff can neither review industrywide advisor arbitration data nor identify a representative sample of advisory clients to determine the effect of such contracts on investors that are harmed by the conduct of advisors.
As the panel explored, unlike broker-dealers subject to the oversight of the Financial Industry Regulatory Authority, RIAs are not required to register with a self-regulatory organization and do not have a dedicated forum for dispute resolution. Further, an RIA may designate the dispute resolution forum of its choosing in a mandatory arbitration clause — and the RIA may even invoke the application of specific forum rules.
The result is a messy and confusing picture with respect to the role that mandatory arbitration plays in the dispute resolution process in the RIA industry, the panel concluded, but that doesn’t mean that arbitration itself should be viewed as inherently negative or unfair.
As such, in addition to discussing the lack of available data on RIAs’ use of mandatory arbitration clauses, the panel also examined arguments both for and against their use. In doing so, they examined how arbitration cases have played out among both RIAs and broker-dealers.
See the accompanying slideshow for a review of eight arguments for and against the fairness and utility of mandatory arbitration, drawn from the panel discussion and the SEC's extensive 2023 report.
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