Page 50 - Investment Advisor September 2021

THE COMPLIANCE COACH

By Thomas D. Giachetti

RIA Arbitration Numbers Have Increased;

Make Sure You’re Represented

Customer complaints should be taken seriously and reported to your

errors and omissions carrier right away.

t can be unsettling to receive a let- their customers contain a provision man-
ter of complaint from a customer dating that any dispute be submitted to
Ior be served with an arbitration fil- the AAA for resolution.
ing. For direction on how advisors should Arbitration is an alternative to a more
address these matters, I spoke to my part- traditional state or federal court law-
ner, and chair of our Securities Arbitration suit. Arbitration is less expensive and
Group, Brian Carlis. He and his team less time-consuming than litigating in
have successfully defended advisory firms a court of law. In many court systems
throughout the country in securities arbi- throughout the United States, it can take
tration and other types of regulatory mat- two or more years to get to trial from the
ters for decades. In addition, when called time of the filing of a complaint. Parties
upon by an RIA, Brian has also successful- in arbitration very rarely wait that long
ly prosecuted damages claims on behalf of to get to a hearing.
an RIA’s client against rogue brokers and response should be carefully considered. Typically, arbitration hearings are
other investment professionals. If these less formal customer com- scheduled for three or four days, several
The good news is that many such plaints cannot be amicably resolved, or months in advance. They are conducted
complaints lack merit, Brian advised. if the customer simply proceeds to a for- very much like a court trial. There are
Still, regardless of your assessment of the mal arbitration filing, the advisory firm opening and closing statements, intro-
merit, or lack thereof, any complaint you will find itself named as a respondent duction of evidence and examination
receive should immediately be reported in a securities arbitration proceeding. and cross-examination of witnesses.
to your errors and omissions carrier. If the RIA’s business model is a hybrid, Arbitrators are permitted to question
Failure to report a customer complaint it is quite possible that the RIA, or the witnesses as well and often do. Rules of
or arbitration filing in a timely manner investment advisor representative, will evidence apply in arbitrations but are
can lead to a denial of coverage. be subject to mandatory FINRA juris- usually not strictly enforced. Arbitrators
Also, most policies permit insureds diction for arbitration of the dispute. commonly will admit evidence over
to request appointment of legal counsel, objection, rather than exclude it. Awards
who can assist in dealing with any cus- MORE RIA ARBITRATIONS usually are written and signed by the
tomer complaint you might experience. One major change we’ve seen since the arbitrators. Absent agreement by the
In recent years, we have seen a growing 2008 financial crisis is that American parties, arbitrators do not have to pro-
trend in customers sending less formal Arbitration Association arbitrations have vide a reason for their decision.
letters of complaint, seeking a pre-filing, become far more prevalent with the RIA Remember that a securities arbitration
amicable resolution, before commencing business model. One reason most likely is is significantly different than litigating in
a formal securities arbitration proceeding. that since 2008, a significant amount of a court of law, and RIAs faced with secu-
Still, RIAs should seek assistance in customer investment assets have moved rities arbitration claims should be certain
responding to these less formal com- from the traditional, commission-based that they are represented by experienced
plaint letters. There will be circum- broker-dealer model, to the fee-based securities arbitration counsel.
stances where a “less is more” approach investment advisory model. For this rea- theispot.com/Dan Page Collection
will be the best method of responding. son, we anticipate that the volume of AAA Thomas D. Giachetti is chairman of the
But in certain circumstances, a substan- arbitrations involving advisory firms will Investment Management and Securities
tially detailed response may be war- increase substantially. Most Investment Practice Group of Stark & Stark. He can be
ranted. Regardless, the wording of any Advisory Agreements between RIA’s and reached at [email protected].

48 INVESTMENT ADVISOR SEPTEMBER 2021 | ThinkAdvisor.com