In Public Policies

On December 29, 2022, Congress enacted the Consolidated Appropriations Act, 2023, attaching House Report 117-393. In the House Report, the Committee on Appropriations expressed concerns about the proliferation of mandatory arbitration clauses among SEC-registered investment advisers. Accordingly, the Committee directed the U.S. Securities and Exchange Commission to:

“[G]ather detailed information about how such contracts are used by SEC-registered
investment advisers and the effect such contracts have on investors who are harmed by
the conduct of advisers. When such contracts are used, the SEC shall gather information
about whether a dispute resolution forum has been designated; whether particular forum
rules are designated; whether a venue is designated; whether a class action waiver is
included; whether there are limitations on claims that may be asserted or damages that
may be awarded; whether the contract includes any fee shifting provision; whether any
complaints have been filed against the advisor [sic] in accordance with the contract; and
whether the firm has any arbitration awards or unpaid arbitration awards in the last five
years. The SEC is directed to provide a report to the Committee and to the House
Financial Services Committee within 180 days of enactment of this Act.”

In response to this directive, staff of the Commission reviewed a sample of investment advisory agreements and compiled data regarding the occurrence of mandatory arbitration clauses, as well as the occurrence of terms listed in the House Report, such as designation of forum and inclusion of class action waiver. Due to the lack of publicly available information about SEC-registered adviser arbitration, Staff could neither review adviser arbitration data nor identify a representative sample of advisory clients to determine the “effect such contracts with mandatory arbitration clauses have on investors that are harmed by the conduct of advisers.” Instead, as a proxy for the perspectives of advisory clients, Staff interviewed eight external stakeholder groups identified as having information relevant to the issue of mandatory arbitration, and/or as having publicly expressed opinion on the issue of mandatory arbitration. Their views, while anecdotal, provided insight into the potential harms and benefits of mandatory arbitration clauses for advisory clients.

The SEC transmitted its 36-page report to Congress on June 28, 2023.  You can read it here.

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