Virginia Bans Mandatory Arbitration Clauses in Investment Advisory Contracts

Financial Institutions Law Alert

September 13, 2019

Sarah K. Yates

Sarah K. Yates

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On September 16, 2019, a new rule goes into effect in Virginia prohibiting mandatory arbitration clauses in investment advisory contracts. In proposing the rule in late June, the State Corporation Commission—Virginia’s security regulator—stated that boilerplate mandatory arbitration provisions are “inherently unfair,” particularly in the investment advisory context, when an adviser is required to act in the best interests of his or her clients. At the 2019 North American Securities Administrators Association annual conference, Ron Thomas, director of the State Corporation Commission’s Division of Securities and Retail Franchising, commented in an interview that taking away an investor’s right to choose a forum for dispute resolution is “contrary to the fiduciary duty of an investment adviser.”

The State Corporation Commission also stated in the rule proposal that many investors are unaware they will be compelled to mandatory arbitration, and unlike the broker-dealer context, where investors have no choice other than to arbitrate in the FINRA forum, clients of investment advisers should not be subject to a “take-it-or-leave-it” arbitration clause. However, the Commission noted that nothing in the new rule will prevent an investment adviser and client from agreeing to arbitrate a dispute. The rule will only ban pre-dispute mandatory arbitration clauses in “standard investment adviser contracts.”

The new rule will be added to the Dishonest or Unethical Practices section of the chapter regulating investment advisers in the Virginia Administrative Code (21 Va. Admin. Code § 5-80-200).