SEC report on RIA mandatory arbitration leaves many questions about potential investor harm

investmentnews.com:

An SEC report showing more than half of investment advisors use mandatory arbitration clauses in client agreements still leaves much unknown about potential investor harm, lawyers and an advisor said Thursday.

The study by the Securities and Exchange Commissionfound that about 61% of advisors registered with the agency force their clients to go to arbitration to settle disputes. The vast majority of advisors use private arbitration forums, such as the American Arbitration Association, to hear claims.

Those venues don’t track advisor cases, which meant SEC staff “could not obtain reliable data about the frequency of SEC-registered adviser arbitration,” the agency said in the report, which was delivered Wednesday to the House Committee on Appropriations.

“I’m surprised it’s only 61%,” said Michael Hansen, co-founder of Frontier Wealth Strategies.

Forcing customer claims into arbitration helps mitigate legal risk for RIAs because there’s a better chance the forums will be more favorable to them than a court jury might be, said Hansen, who has served as an expert witness in brokerage arbitration cases in the Financial Industry Regulatory Authority Inc.’s dispute resolution system.

“If I was a legal advisor to RIAs, I would definitely [encourage them] to have an arbitration clause in there,” he said. “There’s more upside to the [investment advisor] than to the investing public.”

The SEC said some provisions in arbitration clauses can work against investors, such banning class action waivers and limiting damages. The SEC also said it could not estimate how often arbitration claims are not paid by advisors.

“I’m very happy [the SEC] took the first step in studying the problem,” said Michael Edmiston, a former president of the