FINRA Lawyer Blog
New Rule
Virginia recently added Section F to 21 VAC5-80-200 (Dishonest or Unethical Practices), which provides: “For purposes of this section, any mandatory arbitration provision in an advisory contract shall be prohibited.”
Background
On June 27, 2019, Virginia issued a proposal to amend certain regulations administered by the Virginia Division of Securities. The State Corporation Commission noted:
“[S]tate-covered investment advisors are now including boilerplate mandatory arbitration provisions in their clients’ contracts. The Division believes, as do many other states, that these “take-it-or-leave-it” clauses in client contracts is inherently unfair to investors. It is particularly unfair when an investment advisor is required by law to act in the best interests of their clients. An investment advisor should not be allowed to force clients to bring any disputes to a forum of the investment advisor’s choosing by contract.
Therefore, the Division proposes to add a new subsection F to the Dishonest or Unethical Practices section of Chapter 80 to prohibit mandatory arbitration clauses in investment advisory contracts. There is nothing to prevent the investment advisor and their client from agreeing to arbitrated disputes after negotiation and discussion between each. To require mandatory arbitration in standard investment advisor contracts is contrary to the investment advisors mandate to act in the best interest of their clients.”
NASAA’s Position
Position statements of the North American Securities Administrators Association can often be viewed as predictive of future legislation by states. On August 9, 2019, NASAA made their views clearly known in a public comment. In supporting Virginia’s proposed amendment, NASAA stated: “Forced arbitration at the demand of an investment adviser is inimical to the basic fiduciary nature of an investment advisory relationship.” NASAA also made an interesting statutory argument concerning Va. Code. Ann. § 13.1-522(F):
“Although the issue has not been extensively litigated, a mandatory arbitration provision arguably would require an investment advisory customer to lose substantive rights under the Virginia Securities Act, namely the right to pursue a claim under the Act in state court, rendering the arbitration provision per se void under Section 522(F).”
Although NASAA’s argument is clever, it does seem to run counter to Virginia’s Division of Securities’ interpretation of its own code (“There is nothing to prevent the investment advisor and their client from agreeing to arbitrated disputes after negotiation and discussion between each.”).
Herskovits PLLC has a nationwide practice representing investment advisors in regulatory investigations, arbitration and litigation. Feel free to consult with us at 212-897-5410.