SEC Seems to be Facing a Late June Deadline to Report to Congress on Investor Adviser Arbitration
Posted on Categories Arbitration Agreements, Class Action/Collective Waivers, FINRA Code of Arbitration, News, piaba, Regulation, SECTags , , , ,

By George H. Friedman, SAA Publisher & Editor-in-Chief

By our reckoning, the SEC may be facing a looming late June deadline to report to Congress on investment adviser arbitration.

We reported in SAA 2023-01 (Jan. 5) that, buried in the 1,600+ page appropriations bill, the Consolidated Appropriations Act of 2023 (H.R. 2617), signed into law December 29, 2022, was language that bars companies with federal defense contracts valued at over $1 million from mandating or enforcing arbitration of Title VII or sexual harassment or assault claims. Really buried is what appears to be a mandate to the SEC that it gather data and report to Congress on investment adviser arbitration. Specifically, H.R. 8254 -- the bill making appropriations for Financial Services and General Government -- which we assume was rolled up in the aforementioned Consolidated Appropriations Act, was accompanied by House Appropriations Committee Report 117-393, submitted June 28, 2022.

Committee Report to SEC: Provide Info on RIA Use of PDAAs

The report, which was issued when the Democrats controlled the House in the 117th Congress, reads (ed: we added the bulleted format):

Pre-Dispute Arbitration Contracts.—The Committee is concerned about proliferation of mandatory pre-dispute arbitration contracts by SEC-registered investment advisers. The Committee directs the SEC as follows:

  • Gather detailed information about how such contracts are used by SEC-registered investment advisers and the effect such contracts have on investors who are harmed by the conduct of advisers.
  • When such contracts are used, the SEC shall gather information about whether a dispute resolution forum has been designated; whether particular forum rules are designated; whether a venue is designated; whether a class action waiver is included; whether there are limitations on claims that may be asserted or damages that may be awarded; whether the contract includes any fee shifting provision; whether any complaints have been filed against the advisor in accordance with the contract; and whether the firm has any arbitration awards or unpaid arbitration awards in the last five years.
  • The SEC is directed to provide a report to the Committee and to the House Financial Services Committee within 180 days of enactment of this Act.


PIABA: What About RIA Arbitration?

The SEC in August 2022 issued a notice requesting comments on its draft Strategic Plan for Fiscal Years 2022-2026. The SEC notice included solicitation of comments from the public: “to gain the benefit of additional outside perspectives.” As reported in SAA 2022-38 (Oct. 13), among the several comments received was one dated September 29, 2022 from PIABA that focused on RIA use of mandatory predispute arbitration agreements (“PDAA”). Said the letter: “Since the SEC is tasked with protecting the investing public and overseeing more than 14,000 SEC-registered RIAs, the Strategic Plan should call for the SEC to make efforts to control RIAs’ use of pre-dispute clauses and require, among other things, standardized pre-dispute clauses, shifting of the majority of arbitration fees to the RIAs using such clauses, increased transparency of the scope and implications of the dispute process, as well as the mandatory disclosure of information regarding an RIA’s dispute history so the SEC and investing public may be better informed.” As reported in SAA 2022-45 (Dec. 10) the final Plan, announced in a November 23, 2022 press release, made no references to arbitration, mediation, or dispute resolution.

(ed: *Our comment in 2022-45 was: “Of course, this doesn’t mean RIA PDAA use will not be on the Commission’s agenda. Recall that Dodd-Frank section 921 gives the SEC authority to limit or bar PDAA use, or set conditions for their use, but it has not done so. This includes clients of any broker, dealer, or municipal securities dealer, or investment advisers.” **The 180 days would appear to translate to about June 29. We’ll certainly track this one!)