Registered Investment Advisors (RIAs) are firms that, among other things, can provide investment advice to retail customers regarding investments, investment strategies, financial planning, etc. Depending on their size, RIAs can be regulated by either the U.S. Securities and Exchange Commission (SEC), or by state securities regulators.
Many RIAs include in their contracts and advisory agreements a mandatory arbitration clause which requires a harmed customer to bring any legal claims against the RIA in arbitration. Arbitration is an alternate dispute resolution forum versus going to court. Although the SEC has recently begun studying the issue of mandatory RIA arbitration, it so far has been unable to assemble detailed statistics on the practice due to the lack of mandatory disclosures from RIAs on arbitration, and the fact that most RIA arbitrations occur in private forums. Unlike in FINRA arbitration (required for FINRA brokers often known as stockbrokers), no database exists which tracks RIA arbitrations and their results.
Arbitration is often touted as being a faster means of resolving disputes versus court, but the costs of arbitration may be significantly higher for customers depending on the mandated arbitration forum. The two most common private arbitration forums are the American Arbitration Association (AAA) and JAMS. Although the AAA Consumer Arbitration Rules strictly limit the amount of fees a customer/consumer has to pay, some RIA agreements require use of AAA Commercial Arbitration which can result in extraordinary fees to be paid by the customer which may even exceed the amount of damages at issue. JAMS also may charge significant fees for customers/consumers which can limit customer access to relief for wrongful RIA conduct.
Because RIAs and their representatives are fiduciaries, they are required to act in the best interest of their customers. Mandating expensive arbitration for customer disputes may seriously call into question the RIA’s motives and duties since the RIA may be able to afford the arbitration fees while a customer may not.
Unlike most states, Virginia’s securities regulations actually prohibit the use of arbitration clauses by Registered Investment Advisors. 21 VAC 5-80-200 (Dishonest or unethical practices) states: “For purposes of this section, any mandatory arbitration provision in an advisory contract shall be prohibited.”
No matter the forum, arbitration typically involves less discovery than a court case, and depositions are generally not allowed. Although the parties may exchange document requests, Interrogatories (written questions) are also generally not allowed.
Unlike in court where a customer can seek a jury trial to decide the case, arbitration does not use juries. Instead, the arbitration will usually be decided by one or three neutral arbitrators. Arbitrators are typically, but not always, attorneys.
If you are a customer of an RIA and you believe you may have lost money as a result of breaches of fiduciary duty, investment fraud, negligence, malpractice, or advisor theft, you should contact the Virginia securities fraud attorneys of Greco & Greco who have been representing customers in investment related arbitration around the country for decades. Please contact Scott Greco for a free attorney consultation about your potential case.