The Securities and Exchange Commission has no way to track the number of registered investment advisor arbitrations or unpaid arbitration awards, according to a just-released report.
Last year, the House Appropriations Committee expressed concerns about the proliferation of mandatory arbitration clauses among SEC-registered investment advisors and directed the SEC to study the issue.
In its just-released report, the commission estimates that 61% of RIAs that serve retail investors incorporate mandatory arbitration clauses into their investment advisory agreements.
According to the report, "due to the lack of publicly available information about SEC-registered adviser arbitration, [SEC] Staff could neither review adviser arbitration data nor identify a representative sample of advisory clients to determine the 'effect such contracts with mandatory arbitration clauses have on investors that are harmed by the conduct of advisers.'"
Instead, as a proxy for the perspectives of advisory clients, the SEC report states that its staff "interviewed eight external stakeholder groups identified as having information relevant to the issue of mandatory arbitration, and/or as having publicly expressed opinion" on the issue of mandatory arbitration.
As the report notes, unlike brokers, RIAs "are not required to register with an SRO and do not have a dedicated forum for dispute resolution."
Further, an RIA "may designate the dispute resolution forum of their choosing in a mandatory arbitration clause, and may invoke the application of specific forum rules."
Broker arbitration disputes, on the other hand, are heard via the Financial Industry Regulatory Authority's Dispute Resolution Forum. Brokers are also required to file a Form U4 with FINRA that includes information about arbitrations. This info is then made public via BrokerCheck.
The commission, according to the report, "previously considered whether to require advisers to disclose arbitration information in their Forms ADV, but determined not to require disclosure, as arbitration settlements or awards may not actually reflect a finding that the adviser violated the law, and disclosure might cause unwarranted reputational harm to the adviser."
Hugh Berkson, president of the Public Investors Advocate Bar Association, or PIABA, said Thursday in a statement that "while we appreciate the SEC's attempt to address the problem of investment advisors failing to pay investors after losing their money, we find it frustrating that the SEC ran into the same problem we did: there is no source of hard data on the subject."
