In a letter dated February 12, 2013, William Galvin, chief securities regulator in Massachusetts urged the Securities and Exchange Commission (SEC) to examine mandatory arbitration clauses, arguing that they are not consistent with the fiduciary duty owed by investment advisors to their clients. According to the letter (found online at scribd.com), The Massachusetts Securities Division sent surveys to 710 registered investment advisors in the state, asking about contracts investors signed with their advisors. Of the surveys received, nearly half confirmed their client contracts include a binding pre-dispute arbitration case.
Galvin notes in his letter that Section 921 of the Dodd-Frank Act (7/21/10) allows the SEC to change or ban pre-dispute arbitration clauses if such clauses are not in the public interest. Investment advisors have a fiduciary duty to act in the best interests of their clients.
“While arbitration may be appropriate in some cases, a clause binding an investor to arbitration before the circumstances are known may not be in the client’s best interest nor consistent with an investment adviser’s fiduciary duty,” Galvin writes. He also refers to the widespread use of mandatory arbitration as “troubling and a cause for regulatory concern.”
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But critics say investors should have the choice of either FINRA arbitration or the courts to resolve a dispute with their investment advisor, and forcing them into FINRA arbitration - when the dispute would be better handled by the courts - violates investors’ rights and the advisor’s duty to act in their best interest.