The Public Investors Advocate Bar Association (PIABA) says it has begun lobbying the SEC to either do away with the forced arbitration clauses RIAs foist upon clients or require the industry to pick 80% to 90% of the tab for investors' arbitration costs.
Right now, an investor filing an arbitration claim against an RIA would need to advance more than $30,000 to cover their anticipated private arbitration forum fees upfront, according to the PIABA.
That’s compared with an average of $2,300 in upfront fees a brokerage investor would need to pay to use the Financial Industry Regulatory Association’s (Finra’s) arbitration forum, which also allows investors to settle their fees after their arbitration claim is decided, the organization said. Moreover, Finra-registered firms are required to pay most of the cost for arbitration themselves.
Regulators should either do away with forced RIA arbitration or “firms should pay 80% to 90% of arbitration fees, like Finra firms do,” PIABA President Michael Edmiston said in an interview.
Forced arbitration “works out well for the RIA industry,” Edmiston said. “I can’t tell you how many times I’ve had to say, ‘I see you have a JAMS clause in your RIA contract so you’ll need to advance $30,000."
The American Arbitration Association (AAA) and JAMS are the two leading national forums that most RIAs with arbitration clauses use and arbitrators set their own rates, said Edmiston, a former arbitration forum executive himself in the early 2000s.
“AAA and JAMS charge the rates they can because their bread-and-butter business is really meant to be arbitration between Fortune 500 companies, but when individual investors who have already lost money are asked to use the forums, they’re usually in no position to pay that,” Edmiston said.
The private arbitration forum arbitrators can charge $8,000 or more for a day’s work. Arbitration costs can easily exceed $64,000 for five days of hearings and three days of pre-hearing and post-hearing work. Triple that amount if there are three arbitrators hearing the dispute, he said.
“What happens is you have retiree who have lost their retirement savings because of a bad actor and they literally cannot afford to get their money back in arbitration,” he said.
“We hear ‘God, I could lose more money” or ‘Oh my God, I don’t have any money left to pay for this,’” said Edmiston, an attorney with the law firm Jonathan W. Evans & Associates in Studio City, Calif.
The veteran investor advocate attorney said he knows getting both the Securities and Exchange Commission and state regulators to change the RIA arbitration landscape will be an uphill, but necessary battle.
“It’s going to be a long project, but we had to start the process. We’re going to start pushing the SEC and NASAA [the North American Securities Administrators Association]. We have ongoing conversations with the SEC right now and we understand that this issue is a point of interest for them,” the PIABA president said.