SEC Investor Advocate Highlights Research on Mandatory Arbitration and RILAs in Annual Report

In its Annual Report, the SEC Office of Investor Advocate ("OIA") detailed its Fiscal Year 2023 efforts on investor outreach, responding to investor inquiries, and engaging in substantive research on (i) registered index-linked annuities ("RILAs") and (ii) mandatory arbitration clauses in investment advisory agreements.

In the Report, the OIA touted that the Office: participated in 142 investor-related meetings, responded to 873 investor inquiries, reviewed 38 rule makings and 127 SRO filings, and completed 11 research projects.

As to its research on mandatory arbitration clauses in investment advisory agreements, the OIA asserted that "a number of characteristics of these clauses in advisory agreements are not in the best interest of retail investors." The OIA made a number of recommendations to "create a fairer, more balanced framework for arbitrations between advisers and their retail clients." These include, among others; (i) precluding advisers from using restrictive terms in mandatory arbitration clauses that negatively affect investors, (ii) establishing arbitration-related disclosure requirements for SEC-registered advisers to better enable investors and regulators to evaluate advisers' prior conduct, and to prevent recidivist adviser misconduct; and (iii) temporarily suspending the use of mandatory arbitration clauses in advisory agreements until further exploration of the associated costs and benefits to advisory clients is undertaken. The OIA "strongly encourage[d] investors to learn about the differences between arbitration and litigation, and to ask appropriate questions of their advisers where mandatory arbitration clauses are included in advisory agreements."

As to its research on RILAs, the OIA concluded that (i) RILAs are complex instruments and challenging for consumers to understand, (ii) purchasers' choices of insurance features can significantly impact returns (and in some cases increase investor risk), (iii) the timing of RILA purchases affect investors' chances of losing money, and (iv) improved disclosure, reduced jargon, greater transparency and practical guidance can improve comprehension of RILAs and should inform future rule making. The OIA also stated that the "Commission’s historical disclosure-based regulatory regime alone may prove inadequate not just for RILAs, but for many highly complex financial products."