February 13, 2013
Massachusetts Securities Division Calls on SEC to Study Use of PDAAs by Investment Advisers
Massachusetts Securities Division filed a letter with the SEC, requesting the SEC to address what the Division calls a "key investor protection issue:" investment advisers including mandatory pre-dispute arbitration provisions in the advisory contracts (PDAAs). It urges the SEC to use its authority under Dodd-Frank section 921 to commence a study of investment advisers requiring pre-dispute arbitration, "a practice that appears to be inconsistent with the fiduciary duty that advisers owe their customers."
The Division recently sent 710 state-registered Massachusetts advisers surveys that requested specific information about arbitration. Responses were voluntary, and the response rate was 50%. Nearly half of the advisers who responded to the survey reported that they include a PDAA in their advisory contract.
There has never been a study of how many investment advisers require PDAAs, what forum those advisers requiring PDAAs use for resolving the disputes, and what the outcomes are in those disputes. An SEC study of this issue would provide important information for addressing the question of whether customers of advisory clients receive fairer outcomes in court or in arbitration. Without information, we can only speculate.
The Securities Division letter to the SEC and the survey results are posted on its website.
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