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Mandatory RIA Arbitration Raising Concerns Among Consumer Advocates

Tuesday, October, 8, 2013


While brokers have long used arbitration clauses to protect their reputation in the wake of failed investments and unhappy investors, investment advisers are now following suit, sparking a wave of controversy from consumer advocates.  According to speakers at the North American Securities Administrators Association’s annual conference, such actions by RIAs are questionable, as it is their responsibility to be fiduciaries. 


Steven Thomas, director of Lexington Compliance, a division of RIA in a Box LLC, put it like this: “How can a mandatory arbitration clause fit that definition? How can that be in the best interests of the client?”  Despite these concerns voiced by Thomas and others, John Cronin, the securities director for the Vermont Department of Financial Regulation, reiterates that there is evidence of a proliferation of such clauses within RIA contracts.  His department has also stated that state governments could receive the blowback from allowing this to happen, because federal courts, including the Supreme Court, have leaned toward upholding arbitration and arbitration clauses. 


Ira Hammerman, senior managing director and general counsel at the Securities Industry and Financial Markets Association, creditsFINRA arbitration with helping investors by giving them a low-cost alternative to litigation.  “There's no way you can do that in the federal court system, given the demand on judges,” Hammerman states.  “Customers get their proverbial day in court a lot faster through arbitration.”  He also claims that customers should not be given the option of opting out of arbitration because “choice for its own sake doesn’t always result in a benefit.”