The Expert's Examiner

The four-page May 17 letter was sent to Chairman Gary Gensler by: American Federation of Labor and Congress of Industrial Organizations (AFL-CIO); American Federation of State, County and Municipal Employees (AFSCME); Americans for Financial Reform Education Fund; American Association for Justice; Better Markets; Center for American Progress; Consumer Action; Consumer Federation of America; Public Citizen; Public Investors Advocate Bar Association; Revolving Door Project; and 20/20 Vision.

Concerns About RIA PDAAs Calling for Non-FINRA Arbitration
The letter notes that use of PDAAs calling for non-SRO fora is prevalent among RIAs, and carries with it increased costs and fewer investor protections compared with FINRA’s arbitration forum. How expensive can these other ADR institutions be? The letter states: “For example, it is not uncommon for a single arbitrator in JAMS (where arbitrators set their own fees in addition to what the forum charges for its administrative fees) to charge $8,000 or more for a single day’s work. The arbitrator’s fees alone can easily exceed $64,000 for five days of hearings and three days of pre-hearing and post-hearing work.”

FINRA Arbitration Forum Offers Great Investor Protections
The letter notes that, for individuals asserting claims against brokers, the FINRA Dispute Resolution forum offers greater investor protections: “FINRA rules mandate that FINRA-registered firms use the forum if requested by the investor, regardless of other forum selection language in an investor account agreement. FINRA rules provide certain protections and prohibitions regarding dispute resolution provisions. For example, FINRA member firms must provide clear, prominent disclosures about the presence and terms of the arbitration clause. FINRA rules also specifically prohibit the use of class action waivers, thereby allowing investors to ban together should they so choose, to vindicate their rights. FINRA firms are also prohibited from specifying a hearing location for any claims, limiting the ability of an arbitrator to award damages, including any waiver of FINRA or SEC rules, and utilizing class action waivers. Earlier this year, FINRA issued a ‘Regulatory Notice’ to its members reminding them to abide by these standards.[] FINRA member firms also subsidize the bulk of FINRA arbitration forum fees by paying various fees and surcharges.”

SEC Should Investigate
The coalition calls on the SEC to: “gather and publish data about RIAs’ use of pre-dispute arbitration clauses, and their key terms including:

• What dispute resolution forum has been designated;
• Whether particular procedural rules have been designated;
• Whether a venue is designated, and if so, whether the venue is the same as the investor’s residence or principal place of business;
• Whether a class action waiver is included;
• Whether there are limitations on the type of claims that may be asserted or damages that may be awarded;
• Whether there are any fee shifting provisions;
• Whether any claims have been filed against the RIA subject to the clause;
• Whether the firm has been found liable in any arbitration claims in the last five years; and
• Whether the firm has failed to pay any arbitration awards in the last five years.”

(ed: *Interesting that the FINRA arbitration program is suddenly viewed as superior in terms of investor protection. See Groups Want Probe of RIAs Over Mandatory Arbitration, in the May 19 Financial Advisor IQ Blog. Of course, with proper safeguards, non-SRO arbitration can work as well. **We will certainly track this one!)