The trade group is also "continuing to talk with NASAA senior leadership about RIA arbitratoin issues," he added.
Solving the problem is not easy because of the fragmented regulatory system governing RIAs, he said. SEC regulates advisors with assets under management in excess of $100 million, while individual states regulate those with under $100 million.
There are more than 14,000 SEC-registered advisors and more than 17,000 state-registered advisors. For any uniform solution to be implemented to solve the forced arbitration problem, the SEC and the states must act in concert, Edmiston said.
At the same time, neither the SEC nor the states have a handle on any cost or outcome data for RIA arbitration, so PIABA is also asking regulators to begin to study the topic.
The need to act is critical as more assets shift from the brokerage side of the industry to the advisory side and more RIAs use forced arbitration clauses, Edmiston said. Unlike Finra cases, with RIA arbitrations the privately run forums require the expected fees to be deposited prior to the case proceeding. This means that an investor may have to deposit tens of thousands of dollars just to have their claim move forward, he added.
Edmiston and his team of attorneys at PIABA are presenting the SEC and NASAA with three possible solutions. The first involves prohibiting RIAs from using forced arbitration clauses in their account agreements, which gives harmed clients the opportunity to file a lawsuit in court.
The state of Virginia has already prohibited RIAs from using forced arbitration clauses by RIAs in a regulation that called such pricey, forced agreements “dishonest or unethical business practices.”
Second, RIAs can also be required to pay all the costs of the forum they have designated in their arbitration clause, except for a nominal filing fee. “This puts the cost burden on the more sophisticated party that forced arbitration, as opposed to the consumer or employee, who was forced to waive their right to pursue a claim in any other forum,” Edmiston said.
Finra also permits claims against RIAs to proceed in its forum, so long as both sides agree, and the firm agrees to bear a significant portion of the forum fees. However, few RIAs agree to proceed using Finra, he said.
Finally, the RIA client should be permitted to choose between court and arbitration after the dispute arises, so that the investor can make a decision that fits his or her needs best, he said.
The Investor Choice Act, which was introduced in the U.S. House by Rep. Bill Foster (D-Ill.) in 2021 with seven co-sponsors, would give investors that right.
“Without reform, a rapidly growing number of investors will not have the opportunity to purse fair and accessible right of action to pursue recovery of funds lost because of the misconduct of a trusted advisor,” Edmiston said.