Over the past years, brokers have shifted their association from brokerage firms regulated by FINRA to investment advisory firms that are not regulated by FINRA. Their business model has changed from commission-based transactions (after speaking with you to get your approval) to a fee-based formula (giving them discretionary authority without the need to speak with you). This means that your financial advisor is now your fiduciary and must always have your best interest in trading on a discretionary basis.
The rise of Registered Investment Advisors (RIAs) has left alleged victims of their wrongdoing with a jurisdictional issue. Since RIAs are not affiliated with FINRA, they have no obligation to arbitrate at FINRA. Customer agreements with RIAs usually contain an arbitration clause setting the jurisdiction at the American Arbitration Association (AAA) or JAMS.
Let’s start with this truth – Neither of these forums are customer-friendly since both are very expensive, dwarfing the cost of arbitrating at FINRA. However, from our experience and observations, the quality of AAA arbitrators is consistently higher than those at FINRA. Whereas JAMS arbitrators tend to be retired judges who are not familiar with the securities industry
Starting an arbitration at AAA or JAMS is a similar process: filing a Demand for Arbitration (AAA) or Notice of the Claim (JAMS) and paying the requisite filing fee. One significant difference between the forums is that JAMS excludes investment-related disputes from its “Consumer Arbitration Minimum Standards.” More specifically:
These [consumer arbitration] standards do not apply to the use of arbitration in resolving disputes arising from commercial transactions between a lender and commercial borrowers or a company and commercial customers, other financial services such as investment transactions, real estate transactions, or to matters involving underinsured motorists.” (highlighting added).[1]
This JAMS rule is in stark contrast to the AAA where, in the words of an AAA official:
“Arbitration claims brought by individuals against RIAs in the AAA are generally given consumer treatment, without regard to any choice of rules clause.[2] The AAA defines a consumer agreement as an agreement between an individual consumer and a business where the business has a standardized, systematic application of arbitration clauses with customers and where the terms and conditions of the purchase of standardized, consumable goods or services are non-negotiable or primarily non-negotiable in most or all of its terms, conditions, features, or choices. The product or service must be for personal or household use.”
“However, the RIA can bring a motion to the arbitrator, once appointed, to move the case out of consumer treatment. The consequence of AAA applying its Consumer Arbitration Rules is meaningful in terms of the fees assessed, arbitrator appointment, discovery, and hearing length.”
Regardless of the forum, an investor who believes she or he has been wronged by an RIA will need experienced, professional counsel to represent them. If you believe you have suffered financial losses as a result of improper practices by your RIA, contact Kaufmann Gildin & Robbins LLP for a complimentary consultation.
[1] https://www.jamsadr.com/consumer-minimum-standards/
[2] AAA Consumer Arbitration Rules, R-1(a)(4)