Proposal for SEC to Study Use Mandatory Arbitration Clauses in Investment Advisory Agreements

June 20, 2009

As noted in the proposal, “Financial Regulatory Reform: A New Foundation,” released by the U.S. Treasury Department earlier this week, the Obama Administration is calling for legislation to be passed giving the U.S. Securities and Exchange Commission (“SEC”) clear authority to prohibit the use of mandatory arbitration clauses by broker-dealers and registered investment advisers with retail customers.

The Obama Administration explains that the legislation should provide that before the SEC may exercise such authority, the SEC be required to study “whether investors are harmed by being unable to obtain effective redress of legitimate grievances, as well as whether changes to arbitration are appropriate.”

Since many federally registered investment advisers utilize arbitration clauses in their client agreements and legislation on this topic has already been introduced in Congress, registered investment advisers will need to monitor the progress of this proposal to prohibit mandatory arbitration clauses and be prepared to make comments to lawmakers.

Posted by Bryan Hill
Labels: Arbitration