Mandatory Arbitration 

among SEC-Registered 

Investment Advisers 

OFFICE OF THE OMBUDS

Email: ombudsman@sec.gov

Phone: 202.551.3330

OFFICE OF THE INVESTOR ADVOCATE

Email: investoradvocate@sec.gov

Phone: 202.551.3302

June 2023

2 

OVERVIEW

In January 2023, the Securities and Exchange Commission (“SEC”) Office of the Ombuds, in 

collaboration with staff from the Office of the Investor Advocate, (together collectively, “Staff”) 

conducted a study to evaluate: (1) the occurrence of mandatory arbitration clauses in SEC-registered 

investment adviser agreements; (2) the occurrence of certain restrictive terms in mandatory arbitration 

clauses, such as damage limitations and class action waivers; (3) the frequency of SEC-registered adviser 

arbitration; (4) the frequency of unpaid arbitration awards among SEC-registered advisers; and (5) the 

effects of mandatory arbitration clauses on clients harmed by their advisers.

Staff reviewed a sample of investment advisory agreements and compiled data regarding the occurrence 

of mandatory arbitration clauses, as well as the occurrence of various restrictive terms. To correct any 

potential non-representativeness of this sample, Staff used inverse probability weighting to generate this 

data. 

Due to the lack of publicly available information about SEC-registered adviser arbitration, Staff could 

neither determine the frequency of adviser arbitration nor the frequency of unpaid adviser awards. Staff 

also could not identify a representative sample of advisory clients to determine the effects of mandatory 

arbitration clauses. 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.

ACKNOWLEDGEMENTS

We wish to thank the American Association of Individual Investors (AAII); Better Markets, Inc.; 

Financial Industry Regulatory Authority Dispute Resolution Services (FINRA DRS); Financial 

Services Institute, Inc. (FSI); Investment Adviser Association (IAA); North American Securities 

Administrators Association (NASAA); Public Investors Advocate Bar Association (PIABA); 

Securities Industry and Financial Markets Association (SIFMA), the American Arbitration 

Association (AAA); and JAMS ADR for contributing information and views on the issues addressed 

in this study. The SEC Division of Investment Management, Division of Trading and Markets, 

Division of Examinations, Division of Economic and Risk Analysis, and the Office of the General 

Counsel also contributed to the contents of this study.

DISCLAIMER: The Commission has expressed no view regarding the data, analyses, findings, and conclusions contained in this report. The report 

does not necessarily reflect the views of the Commission, the Commissioners, or staff of the Commission. This report is being published by the 

Office of the Investor Advocate, which is tasked with studying a broad range of issues relevant to the Commission’s mission. Its publication is 

intended to stimulate discussion and critical comment and does not indicate a Commission determination to take any particular action.
3 

SUMMARY OF FINDINGS

 Occurrence of Mandatory Arbitration Clauses and Other Arbitration Terms

Based on the sample of 579 advisory agreements reviewed, Staff estimated that approximately 61 

percent0F

1 of SEC-registered advisers serving retail investor clients incorporated mandatory arbitration 

clauses into their investment advisory agreements. 

Of the agreements that contained mandatory arbitration clauses, Staff estimated the frequency with which 

advisers1F

2

 incorporated the specific terms below as follows:

TABLE: FREQUENCY OF SPECIFIC PROVISIONS IN MANDATORY ARBITRATION CLAUSES

Agreement designates a specific dispute resolution forum: 92%

When designating a forum, advisers designated the following fora:

American Arbitration Association (“AAA”) 83%

Financial Industry Regulatory Authority (FINRA) Dispute Resolution

Services (“FINRA DRS”)

10%

JAMS 6%

Other 1%

Agreement designates specific forum rules: 37%

When designating forum rules, advisers selected the following rules:

AAA Commercial Rules 83%

JAMS Streamlined Rules and Procedures 3%

JAMS Comprehensive Rules and Procedures 2%

AAA Securities Arbitration Supplementary Procedures 1%

Agreement designates the arbitration venue: 60%

When designating arbitration venue, percent of agreements that did not consider client’s 

location or place of business:

97%

Agreement precludes participation in class action 6%

Agreement limits claims the client may assert 5%

Agreement limits damages that may be awarded 11%

Agreement includes fee-shifting provision 18%

 Frequency of Adviser Arbitration, Unpaid Awards

State-registered advisers, investment adviser representatives, and SEC-registered advisers are not 

uniformly required to disclose information about arbitrations with their clients.2F

3

 Moreover, SECregistered advisers’ preferred dispute resolution fora do not track the number of adviser arbitrations. For 

these reasons, Staff could not obtain data about the frequency of arbitration or unpaid awards among 

SEC-registered advisers.

As a related point, private arbitrators lack jurisdiction over the parties after an award is issued. Parties to 

an arbitration are expected to abide by the terms of the arbitrator’s award.3F

4

 However, when a party fails 

to comply with an arbitration award, the other party may need to enforce the award through the court 

system and litigate a dispute over an unpaid award. A survey of federal and state case law did not yield 
4 

results upon which to reliably estimate the frequency of litigation involving unpaid arbitration awards 

among advisers. 

 Stakeholder Perspectives4F

5

Stakeholders unanimously agreed that mandatory arbitration clauses benefited advisers by, among other 

things, simplifying the dispute resolution process through limited discovery5F

6 eliminating the right to 

appeal,6F

7

 maximizing privacy during and after the arbitration, and increasing both predictability and 

efficiency through the designation of a known arbitration forum with familiar rules. Proponents of 

mandatory arbitration further asserted that advisory clients – like their advisers – experienced these same 

benefits.

In contrast, critics of mandatory arbitration argued that advisers experienced these benefits at the expense 

of clients. Because advisers unilaterally draft their advisory agreements, critics believed advisers often 

selected the forum, the rules, and the venue that would likely increase costs for the client and favor the 

adviser. They also asserted that the limited ability to exchange information during discovery might 

prevent clients from obtaining evidence to prove their claims, and the inability to appeal would likely 

preclude review of an arbitrator’s decision. Critics also asserted the lack of uniform disclosure 

requirements for adviser arbitration information might allow recidivist advisers to conceal client

allegations of wrongdoing from regulators and prospective clients. 

Stakeholders agreed, to varying degrees, that advisers should consistently be required to disclose more 

complete information about customer arbitrations and unpaid awards. Proponents of mandatory 

arbitration argued that, while disclosure of all customer allegations might subject advisers to unwarranted 

reputational harm, full and fair disclosure of allegations the adviser deems material would create a 

competitive advantage for honest advisers and promote fairer markets. Critics of mandatory arbitration 

more broadly argued that advisers’ fiduciary duty necessitated disclosure of customer arbitration 

information, irrespective of whether the adviser deemed the information material. 

Several stakeholders also stated that differences between the adviser and broker7F

8

 arbitration regimes 

disadvantaged advisory clients. For instance, some stated that certain provisions permissible in advisory 

agreements, such as class action waivers, damage limitations and claim limitations, are impermissible in 

agreements between brokers and their customers. These stakeholders further argued that such limiting 

terms negatively affect arbitral outcomes for advisory clients. Others stated that the costs associated with 

private adviser arbitration significantly exceed the costs associated with broker arbitration, and, in some 

instances, the high costs could preclude advisory clients from filing arbitration claims at all.

 Comparison with Broker Arbitration 

A comparison of relevant rules in the FINRA Code of Arbitration Procedure for Customer Disputes 

(“FINRA Code”) supported stakeholder concerns about the use of restrictive terms in advisory agreement 

mandatory arbitration clauses. While the FINRA Code applies uniformly to disputes between customers 

and their brokers and governs contractual provisions relating to mandatory arbitration,8F

9 advisers may 

choose the terms of their respective mandatory arbitration clauses. 

As noted above, 6 percent of SEC-registered advisory agreements with mandatory arbitration clauses 
5 

included class action waivers, 5 percent of agreements limited the types of claims that could be asserted, 

and 11 percent limited the types of damages that a client may seek in the arbitration. In contrast, the 

FINRA Code prohibits usage of class action waivers,9F

10 prohibits language that limits a party’s ability to 

file “any claim” in arbitration,10F

11 and prohibits language that limits the ability of arbitrators to make “any 

award.”11F

12 

Of the 60 percent of mandatory arbitration clauses that designated a venue for the arbitration hearing, 97 

percent designated a location that disregarded the client’s location. In practice, clients could be required 

to participate in an arbitration far from their place of residence, incurring travel and lodging expenses to 

attend in-person hearings. Under the FINRA Code, the default location for the arbitration venue is 

generally the hearing location nearest the customer’s residence at the time of the events leading to the 

dispute.12F

13 

A notable percentage of advisory agreements with mandatory arbitration clauses also imposed 

requirements on the type and/or number of arbitrators – e.g., requiring a panel of three arbitrators, or 

requiring arbitrators affiliated with the securities industry. Because each arbitrator is compensated 

separately, a panel of three arbitrators would predictably increase the cost associated with the arbitration. 

Several stakeholders also suggested that arbitrators with securities industry ties might be biased in favor 

of advisers. By comparison, the FINRA rules require panels to consist of a single arbitrator, unless the 

claim amount exceeds $100,000, or the parties jointly agree to a three-arbitrator panel.13F

14 In cases with 

one arbitrator, the FINRA Code requires the selection of a public arbitrator, unaffiliated with the 

securities industry, to preside over the dispute.14F

15 In cases with three arbitrators, the FINRA Code 

guarantees parties the ability to select a panel of all public arbitrators.15F

16 

Although arbitrators in FINRA DRS are not required to write opinions or provide explanations for an 

award, arbitrator awards must be in writing.16F

17 In contrast, many advisory agreements included provisions 

that prohibited arbitrators from providing written awards.

Staff’s review also supported the notion that costs of adviser arbitration generally exceed those of broker 

arbitration. For instance, the frequent designation of commercial, or business-to-business, arbitration 

rules result in higher initial filing fees and other expenses for clients, potentially making the filing of a 

claim cost-prohibitive. Conversely, as noted above, the FINRA Code of Arbitration Procedure for 

Customer Disputes governs all disputes between brokers and their customers. In FINRA DRS, initial 

filings fees range from $50 (for matters valued up to $1,000) to a maximum of $2,300 (for matters valued 

over $5,000,000).17F

18 Under the AAA Commercial Arbitration Rules, clients bringing a matter valued at 

$75,000 or less must pay an initial filing fee of $925 if the panel consists of one arbitrator.18F

19 AAA 

commercial arbitrations with three or more arbitrators are subject to a minimum initial filing fee of 

$4,400.19F

20

CONCLUSIONS

Based on Staff estimates, most investment advisory agreements contain mandatory arbitration clauses, 

and some contain restrictive terms that could negatively affect the arbitration process or outcome for 

clients. The Table above reflects the approximate frequency with which such terms are included in 

advisory agreements. As stated by stakeholders, some of these restrictive terms are impermissible in 

agreements between brokers and their customers (such as terms prohibiting class actions or specifying 
6

certain forum locations). Stakeholder views regarding the potentially negative impact of these terms on 

advisory clients merits further exploration. 

Given the absence of publicly available information about adviser arbitration or the number of unpaid 

awards, a quantitative evaluation of the “effects” of mandatory arbitration clauses would also require 

further inquiry. Establishing uniform disclosure requirements for adviser arbitration information could, as 

some stakeholders suggested, increase public access to this information, as well as regulatory and investor 

insight into the conduct of SEC-registered advisers. 
7 

1 The margin of error for a 95% confidence interval on these estimates varies but is no greater than +/- 6 percentage points.

2 Unless otherwise noted, the term “investment adviser” or “adviser” generally refers to investment advisers that provide financial 

services to retail customers and are registered with the SEC. 

3 State-registered advisers and investment adviser representatives are required to disclose certain information about arbitrations

with clients. See Uniform Application for Investment Adviser Registration, Form ADV Part 1B, Item 2.E (applicable to stateregistered advisers); Uniform Application for Securities Industry Regulation or Transfer, Form U4, Item 14.I (applicable to 

individual adviser representatives). By comparison, SEC-registered advisers are not specifically required to disclose information

about arbitrations with clients, but they must disclose “all material facts relating to the advisory relationship.” See Uniform 

Application for Investment Adviser Registration, Form ADV Part 2, Uniform Requirements for the Investment Adviser Brochure 

and Brochure Supplements, General Instruction 3. 

4 See AAA, “What Happens after the Arbitrator Issues an Award,” at 1 (“Many parties will voluntarily follow the arbitrator’s 

decision; however, the AAA and the arbitrator do not have the authority to actually make a party do what the award says.”), 

https://www.adr.org/sites/default/files/document_repository/AAA229_After_Award_Issued.pdf (last visited September 15, 

2023).

5 The stakeholders interviewed for purposes of this study include American Association of Individual Investors; Better Markets, 

Inc.; Financial Industry Regulatory Authority Dispute Resolution Services; Financial Services Institute, Inc.; Investment Adviser 

Association; North American Securities Administrators Association; Public Investors Advocate Bar Association; and Securities 

Industry and Financial Markets Association. 

6 See, e.g., FINRA, The Neutral Corner, Vol. 2-2011 (2011), at 1, 

https://www.finra.org/sites/default/files/Publication/p123535.pdf (“Discovery in FINRA arbitration is more limited than 

discovery under the Federal Rules of Civil Procedure or state discovery rules.”)

7 See supra note 4, “What Happens after the Arbitrator Issues an Award,” at 2, (“There is no right to appeal in arbitration like 

there is in court”). 

8 The term “broker” as used in this report refers to broker-dealers required to register with the SEC and with FINRA, along with 

their associated persons, as the term “associated person” is defined under FINRA Rule 1011(b). 

9 FINRA Rule 12101.

10 FINRA Rule 12204(a).

11 FINRA Rule 2268(d)(2).

12 FINRA Rule 2268(d)(4).

13 FINRA Rule 12213.

14 FINRA Rule 12401. To note, claims of $50,000 or less must be adjudicated by one arbitrator. 

15 FINRA Rule 12402(a). For the definition of a “public arbitrator,” see FINRA Rule 12100(aa).

16 FINRA Rule 12403.

17 See FINRA, Decision and Award, https://www.finra.org/arbitration-mediation/decisionaward#:~:text=Arbitration%20Award,date%20the%20record%20is%20closed. 

18 FINRA Rule 12900. 

19 AAA, Commercial Arbitration Rules and Mediation Procedures, Administrative Fee Schedules, at 1 (Amended and Effective 

May 1, 2018), https://www.adr.org/sites/default/files/Commercial_Arbitration_Fee_Schedule_1.pdf (last visited September 15, 

2023).

20 Id. at 2.