The Hidden Clause.
How a Quiet SEC Recommendation Could Upend the RIA Industry
On June 5, 2025, the SEC’s Investor Advisory Committee (IAC) formally recommended a significant policy shift that could reshape how Registered Investment Advisers (RIAs) resolve disputes with their clients.
THE RULES IN QUESTION:
The Committee called for new SEC rules that would mirror FINRA Rules 2268, 12213, and 12800, directly targeting the use of mandatory pre-dispute arbitration clauses in advisory agreements.
Their core message was simple, yet far-reaching: clients of RIAs deserve the same protections as clients of brokerage firms when it comes to arbitration.
The Committee’s written recommendation noted that these clauses “may violate an investment adviser’s fiduciary duties owed to their clients,” particularly when they include restrictions like venue selection far from the client, fee-shifting provisions, or limits on damages. The proposed reforms would “harmonize the scope and content of predispute arbitration clauses used by registered investment advisers and brokerage firms.”
While this recommendation does not carry the force of law, it signals that the SEC may soon begin closing one of the last remaining gaps between broker-dealer and RIA regulation.
II. The Panel Behind the Push
The groundwork for this recommendation was laid during a December 10, 2024, panel convened by the IAC and chaired by the Office of the Investor Advocate. The speakers represented a cross-section of regulators, investor advocates, and industry voices:
Stacy A. Puente, Assistant Director in the SEC’s Office of the Investor Advocate, presented findings from a 2023 study. She revealed that 61% of RIA advisory agreements included mandatory arbitration clauses. Of those, 92% designated a specific arbitration forum, most often the American Arbitration Association (AAA) using its commercial rules, a framework built for business disputes, not consumer complaints.
Adam Gana, President of the Public Investors Advocate Bar Association (PIABA), described how many of these clauses are drafted to benefit advisers by including limitations on claims, damages, or requiring arbitration in far-off venues. He called attention to how such practices run counter to an adviser’s fiduciary obligation to act in the best interest of their client.
Stephen Brey, from the Michigan Department of Licensing and Regulatory Affairs and representing NASAA, discussed the inconsistent state treatment of arbitration clauses. Some states prohibit them altogether, while others scrutinize specific provisions for fairness. He suggested that unless the SEC steps in, a patchwork of standards will continue to erode investor protection.
Kevin Carroll (SIFMA) and Robin Traxler (FSI) provided industry perspectives, defending arbitration’s efficiency but acknowledging the need for better disclosures and investor awareness.
III. The Core Concerns
At the heart of the IAC’s recommendation is the concern that arbitration, as currently used by RIAs, often lacks the basic investor protections that have long been embedded in FINRA’s dispute resolution system. The Committee pointed out that:
Arbitration clauses often omit important consumer safeguards, such as specifying a hearing venue close to the client, limiting discovery, or shifting costs inappropriately.
Unlike broker-dealers, RIAs are not required to disclose arbitration clauses or outcomes in their Form ADV or elsewhere, meaning investors may have no idea that a firm has faced repeated disputes or that an arbitration clause exists at all.
Clients are also frequently locked out of class actions or meaningful appeals. Some clauses even limit the types of claims a client may bring.
As the recommendation notes, “[the] restrictive clauses included in investment adviser arbitration clauses may violate an investment adviser’s fiduciary duties owed to their clients.”
IV. The Recommendations: Four Steps Toward Reform
The IAC outlined four specific recommendations:
Adopt Rules Analogous to FINRA Arbitration Protections The SEC should prohibit restrictive clauses and adopt rules ensuring investors receive the same dispute resolution rights as brokerage customers. These include the right to file claims in a fair forum, close to their residence, with simplified procedures for claims under $50,000.
Mandate Enhanced Disclosure RIAs should be required to disclose the existence and terms of arbitration clauses in their Form ADV. In addition, any arbitration award should be publicly reported in a centralized database, similar to FINRA’s BrokerCheck.
Continue Data Collection The SEC should use its exam program to regularly collect data on arbitration clauses and outcomes. This would allow it to “assess any issues with such provisions, as well as the merits of predispute arbitration provisions.”
Investor Education The SEC should develop plain-language educational materials explaining arbitration, the rights clients may waive, and questions to ask an adviser before signing an agreement.
V. What This Means for Clients
If these recommendations are implemented, the landscape for investors working with RIAs could change in meaningful ways.
Benefits for Clients:
Increased transparency into how disputes are handled and whether an adviser has a history of arbitration.
Greater procedural fairness, with venues closer to home and better protections for small claims.
More informed decision-making thanks to education initiatives and disclosures.
Potential Trade-offs:
Loss of privacy that arbitration traditionally offers.
Longer timelines if more disputes are litigated in court rather than settled through streamlined arbitration.
Puente noted that many of the arbitration clauses used by RIAs designate venues without considering client geography. If an adviser is based in Alaska and the client in Florida, the client might have to travel cross-country to pursue a dispute, something the proposed changes aim to eliminate.
VI. What RIAs Need to Prepare For
If the SEC moves forward with the IAC’s recommendations, RIAs may need to undertake a substantial compliance overhaul.
Challenges for Firms:
Revising advisory contracts, Form ADV disclosures, and internal compliance policies.
Reevaluating venue, fee, and damages provisions that might run afoul of new rules.
Greater exposure to litigation, especially if predispute clauses are banned or weakened.
Opportunities:
Firms that embrace transparency early may build client trust and stand out in a more scrutinized environment.
Adapting to these changes could reinforce a firm’s fiduciary brand, rather than weaken it.
The Committee was careful to note that these reforms are consistent with an adviser’s fiduciary duty to act in their client’s best interest and not place their own interests ahead of the client’s.
VII. What’s Next? Rulemaking or Risk Alerts
The IAC’s recommendation now goes to the full SEC. The Commission is under no obligation to act—but it has the authority under Section 921 of the Dodd-Frank Act to prohibit or limit arbitration clauses that are not in the public interest or that harm investors.
Possible next steps include:
Formal Rulemaking: The most impactful but time-consuming route, requiring public comment and full Commission approval.
Informal Action: The SEC could issue Risk Alerts, revise Form ADV instructions, or update inspection priorities actions that wouldn’t require new regulations but could strongly influence adviser behavior.
While the current Commission has been wary of adding to the regulatory burden post-Gensler, pressure from investor advocates, state regulators, and the IAC could push the agency to act, especially if data continues to show systemic problems with arbitration outcomes or unpaid awards.
VIII. Final Thought: The End of Arbitration-as-Boilerplate?
Arbitration clauses have long flown under the radar in investment advisory agreements. For years, they’ve been considered standard legal boilerplate—rarely questioned, seldom negotiated, and almost never understood by the clients signing them.
That may soon change.
The IAC’s recommendation frames this as a fairness issue, not just a legal one. By elevating arbitration reform into the SEC’s regulatory spotlight, the Committee is forcing a deeper conversation about what fiduciary duty means in practice—not just theory.
As with many quiet shifts in financial regulation, the effects may take months or years to be fully felt. But the message from the IAC is unmistakable: investor trust begins where the fine print ends.
Sources:
SEC Investor Advisory Committee Recommendation on RIA Arbitration (June 2025) https://www.sec.gov/files/investment/approved-investment-adviser-arbitration-recommendation-060525.pdf
SEC Office of the Ombuds and Investor Advocate, Mandatory Arbitration among SEC-Registered Investment Advisers (2023) https://www.sec.gov/files/2023-oiad-ria-mandatory-arbitration-report.pdf
Panel Testimonies, SEC IAC Meeting Webcast (Dec 10, 2024) https://www.youtube.com/watch?v=Kjhjyd6ve4Y
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