In the finance world, the balance between investor protection and business ripples across many beaches. The expansion of Registered Investment Advisors (RIAs) has brought about scrutiny over the years, with a particular concern chiming around the ingrained mandatory arbitration clause guarding their transactions. A recent plea from the Public Investors Advocate Bar Association (PIABA) to the Securities and Exchange Commission (SEC) is one such ripple making headlines.
The Issue with Mandatory Arbitration
In the labyrinth of the finance world, arbitration comes across as a quick way to settle disputes. However, critics argue it is heavily skewed in favor of the corporations. RIAs’ mandatory arbitration clause forces aggrieved investors to forego a court trial, accept possible low levels of damages, and most worryingly, attend hearings remotely from home. This last point hits harder in the case of expatriates, such as Michael Phillips from Guam, who despite winning a $4 million lawsuit, tells of the uphill battle to recoup his losses due to legal opposition and bankruptcy threats by the RIA.
Moreover, arbitration proceedings lack the transparency of a court trial. Lawyers argue the high costs and a lack of accountability make the process increasingly unbearable for investors. The case of Rita Beradelli, a Californian who allegedly forked out more in legal costs than her investment, is a sad testament.
Lack of Transparency
The PIABA is less than pleased with RIAs’ transparency. Investors cannot adequately vet prospective RIAs as advisors regulated by the SEC don’t have to disclose issues related to client claims. This is in stark contrast with brokers who are obligated to report client complaints to the Financial Industry Regulatory Authority (FINRA), thereby offering potential investors a fair chance of risk assessment. A lack of a similar registry or database for RIAs leads investors into uncharted territory, often with costly consequences.
According to a recent SEC report, approximately 61% of RIAs working with retail investors deploy the mandatory arbitration clause – a staggering ratio that obeys no transparency or accountability.
The Battle Ahead
There’s a battle brewing in the finance world. The PIABA, vouching for the everyday investor, is pressurizing SEC to enforce RIAs’ disclosure of client disputes and ensure this information is easily accessible to potential investors.
In the ideal scenario, the PIABA wants investors to be granted the option to take claims to court. And if arbitration is to persist, it should at least adhere to minimal standards of convenience, affordability, and reasonable evidence discovery.
In the face of staunch resistance by the RIAs, the battle isn’t going to be a cakewalk. However, the increased attention and concern from the likes of North American Securities Administrators Association and the Consumer Federation of America means this issue is coming to a head.
How this dramatic tussle pans out remains to be seen. But for the everyday investor, any movement towards increased transparency, either through conservative RIAs or proactive regulatory bodies, is a welcome respite.