Skip to main content

Outmanned and Outgunned: Fighting on Behalf of Investors Despite Efforts to Weaken Investor Protections

Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

North American Securities Administrators Association, Annual NASAA/SEC 19(d) Conference, Washington, D.C.

April 16, 2013

Good morning. Thank you for inviting me to deliver the opening remarks of today’s North American Securities Administrators Association (“NASAA”) and the U.S. Securities and Exchange Commission’s (“SEC”) 19(d) Conference. Before I begin, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the SEC, my fellow Commissioners, or members of the staff.

This Annual Conference is an important opportunity for representatives of NASAA and the SEC to come together to discuss how best to accomplish our common goal of protecting investors. These annual conferences provide an opportunity to increase collaboration, communication, and cooperation for the benefit of investors, and to promote fair and orderly markets. I have been honored to have served as the SEC’s liaison to NASAA for the past four years. I know and appreciate NASAA’s mission of protecting main street investors and the critical role that state securities regulators play in the enforcement of the securities laws. You are often the first to receive complaints from investors and identify the latest scams devised to steal from investors.

I want to take this opportunity to highlight some of the recent achievements of NASAA’s members. According to the latest statistics, as of October 2012:1

  • State securities regulators conducted 6,121 investigations;
  • The states reported filing more than 2,600 administrative, civil, and criminal enforcement actions involving nearly 3,700 respondents and defendants;
  • The states reported criminal actions that resulted in 1,662 years of incarceration, which is a 47% increase over the previous year;
  • The states imposed more than $2.2 billion in investor restitution orders and levied fines or penalties and collected costs in excess of $290 million; and
  • A total of nearly 2,800 licenses were withdrawn due to state action, and 774 licenses were denied, revoked, suspended, or conditioned.

These statistics are impressive – particularly given the lack of resources faced by many state securities regulators.2 Just as the SEC has struggled without adequate resources, state regulators have had to deal with the challenges of doing more with less.

And, as NASAA knows well, in meeting our challenges, we also need to be a voice for pro-investor legislation and rulemaking. Today, I want to focus my remarks on (1) certain efforts that I believe have weakened investor protection; and (2) legislative and rulemaking initiatives that I believe are critical to strengthening investor protection. In particular, I would like to highlight the importance of:

  • Listening to the voices of investors and regulators – with a particular focus on the recent SEC proposal to allow heretofore private offerings to be mass-marketed;
  • Moving forward to implement rulemaking that would disqualify felons and other bad actors from Rule 506 offerings;
  • Strengthening private remedies for victims of fraud; and
  • Prohibiting or limiting pre-dispute mandatory arbitration.

Efforts to Weaken Investor Protection

As many of you know, the Jumpstart Our Business Startups Act (the “JOBS Act”) requires the SEC to amend Rule 5063 to eliminate a ban on the general advertising of private securities offerings.4 Companies using the Rule 506 exemption can raise an unlimited amount of money without registering the offering with the SEC, as long as they meet certain standards.5 Rule 506 has allowed many legitimate companies to raise money and prosper. At the same time, however, the Rule 506 exemption has resulted in significant fraudulent activities. Reports from state and federal securities regulators have shown that Rule 506 offerings are frequently the subject of enforcement investigations and actions.6 In fact, just in 2011, state regulators and the SEC, collectively, filed more than 324 enforcement actions related specifically to Rule 506 offerings.7

The removal of the ban on “general solicitation” has resulted in widespread fear that offerings mass-marketed under Rule 506 will expose investors to even greater risk of fraud and abuse.8 Yet, to my profound disappointment, when the removal of the ban was proposed by the Commission, a majority of the SEC’s Commissioners proactively excluded from discussion many of the practical and cost-effective suggestions made by investors and other regulators, including comments from NASAA, that could serve to reduce the anticipated harm to investors.

The Commission received comments, both before and after the proposal, urging that we consider various amendments, alternatives, and recommendations to better align the mass-marketing provisions with investor protection.9 Yet, in a departure from the Commission’s standard practice of allowing proposals to include a fulsome discussion of reasonable alternatives, the proposing release did not request comment on any of those recommendations and, contrary to the Commission staff’s own guidance for economic analysis, the proposing release did not consider whether including any of the recommendations would be a reasonable alternative to the approach in the proposed rule.10 In addition, some may argue that under the Administrative Procedures Act this failure may prevent the Commission from even considering any of those suggestions unless there is a re-proposal.11 In all my time at the Commission, I’ve never seen a more aggressive effort to exclude pro-investor initiatives.

Because of the decision to ignore the recommendations by investors and other regulators, I consider the Commission’s proposal to be fatally flawed. I was left with no choice but to vote “no” on the proposal. In my view, the only viable alternative is for it to be re-proposed so that we can provide for a fulsome discussion of how best to allow general solicitation under Rule 506 while, at the same time, considering the needs of investors. To me, it is clear that Congress did not expect the SEC to ignore investor protection issues. Instead of enacting a self-implementing provision to allow general solicitations, Congress gave the SEC the obligation to determine how best to do so. A re-proposal that allows for a real discussion of reasonable alternatives is the only path forward that will adequately address investor protection issues. To say that I was disappointed in the Commission’s action would be an understatement.

Disqualifying Felons and Other Bad Actors from Rule 506 Offerings

I must also say that I am disappointed in the Commission’s apparent lack of urgency in implementing the Dodd-Frank Act’s mandate to prevent crooks and so-called “bad actors” from utilizing Rule 506 (the “Bad Actor Rule”).12 It does not seem controversial for the Commission to prevent felons and other law-breakers from pitching private investment deals to investors. However, it has been almost two years since the Commission’s proposal to disqualify “bad actors” from 506 offerings,13 and the Commission has yet to adopt the Bad Actor Rule. I agree with U.S. House Financial Services Ranking Democrat Maxine Waters when she said:

[t]he Commission should work swiftly to impose the “bad actor” disqualification before expanding the availability of general solicitation and advertising, particularly since Congress directed the Commission to institute this disqualification provision nearly two years before the JOBS Act.14

The adoption of a disqualification provision would provide much needed investor protection and would not be detrimental to legitimate issuers. The continuing delay only hurts investors.

Strengthening Private Remedies for Victims of Fraud

In light of the SEC’s actions to shut out investors’ voices, and in unduly delaying the adoption of investor-friendly rulemaking, it is now more important than ever that defrauded investors have the ability to seek redress against those who participate in defrauding them. Unfortunately, a series of Supreme Court cases has restricted aiding and abetting liability in private actions.15 I agree with NASAA’s request that Congress amend the Securities Exchange Act of 1934 (“Exchange Act”) to allow for a private civil action against a person that provides substantial assistance in violation of the Exchange Act.16 In 2009, former Senator Arlen Specter introduced legislation that would have amended the Exchange Act so that any person who “knowingly or recklessly provides substantial assistance to another person would be subject to liability in a private action to the same extent as the person to whom such assistance is provided.”17 I join with NASAA in calling on Congress to reintroduce this legislation.

Congress has long recognized the importance of private actions under the federal securities laws. In the Private Securities Litigation Reform Act of 1995, or PSLRA, Congress reaffirmed that “[p]rivate securities litigation is an indispensable tool with which defrauded investors can recover their losses without having to rely upon government action. Such private lawsuits promote public and global confidence in our capital markets and help to deter wrongdoing and to guarantee that corporate officers, auditors, directors, lawyers and others properly perform their jobs.”18

Private actions give fraud victims the ability to recover their losses. It is unrealistic to expect that state regulators or the SEC will have the resources to police all securities frauds or go after every fraudster. Investors should have the ability to protect themselves.19

Pre-Dispute Mandatory Arbitration Weakens Investor Protection

Investors also should have the unencumbered right to seek redress in all available forums. This is why I want to spend a few moments discussing pre-dispute mandatory arbitration provisions. Currently, almost all customer agreements with brokerage firms include an arbitration clause requiring customers to arbitrate their claims in an arbitration forum20 – and they’re now popping-up in the investment advisory industry.21 By adding such provisions, brokerage and advisory firms are essentially requiring their clients to give up their legal rights before the client even knows about the nature of a dispute, and before the client has had the opportunity to consider whether giving up those rights would be in their interest. The inclusion of such provisions in brokerage and advisory contracts diminishes investor protection.

Today, I do not intend to discuss the merits of whether arbitration is a better or worse system than going through the federal and state court systems, except to note that the relative merits and benefits of the arbitration processes are still the subject of debates in the industry.22 Arbitration may be a viable option after a dispute arises and both parties knowingly agree to go into arbitration. However, my main concern with pre-dispute mandatory arbitration is the denial of investor choice; investors should not have their option of choosing between arbitration and the traditional judicial process taken away from them at the very beginning of their relationship with their brokers and advisers.

A client’s right to go to court to recover monetary damages is an important right that should be preserved and kept in the client’s toolkit.23 A client’s right to bring private actions under the Exchange Act is meaningful, and the client should not be required to waive – prematurely – their legal rights, including their rights to bring an action in federal or state court. Let me give you some statistics. In fiscal year 2012, the SEC brought 147 investment adviser-related cases.24 This is roughly 20% of all enforcement cases, and accounted for the largest category of enforcement cases during that fiscal year.25 Of these enforcement cases, approximately 88 out of 147 cases, or 60%, involved allegations of fraud under the Exchange Act.26

Similarly, in fiscal year 2012, the SEC brought 134 broker-dealer cases.27 This is about 18% of all enforcement cases, and accounted for the second largest category of enforcement cases during that fiscal year.28 Out of these 134 broker-dealer enforcement cases, roughly 95 cases, or 71%, involved allegations of fraud under the Exchange Act.29

In many of these cases, clients may be able to pursue claims against their advisers and brokers for fraud. However, if the clients had signed a pre-dispute mandatory arbitration agreement at the inception of the relationship, the clients’ ability to pursue claims through the judicial process is extinguished. My point is simply this: by providing investors with the ability to choose the forum in which to bring their legal claims and protect their legal rights, we enhance investor protection and add more teeth to our federal securities laws.

The concerns about mandatory pre-dispute arbitration are not new. For example, in April 2007, U.S. Representative Barney Frank, then the Chairman of the House Committee on Financial Services, sent a letter to the SEC Chairman to share his concerns that mandatory arbitration imposed limits on investor rights and required investors to “risk losing their rights under federal securities laws in order to invest in our public markets.”30 It is, therefore, not surprising that during the legislative process that resulted in the passage of the Dodd-Frank Act,31 members of Congress voiced their concerns about mandatory pre-dispute arbitration and noted the concerns that they were “unfair to the investors.”32

In passing the Dodd-Frank Act, Congress recognized the need to protect investors from abusive practices in the financial services industry.33 As many of you know, Section 921(a) of the Dodd-Frank Act authorizes the Commission to prohibit or restrict mandatory pre-dispute arbitration provision in customer agreements, if such rules are in the public interest and protect investors.34 The authority covers broker-dealers and investment advisers.35 I believe the Commission needs to be proactive in this important area. We need to support investor choice.


Before I end my remarks, I want to highlight an additional pro-investor initiative that is long overdue. As this group knows well, the Dodd-Frank Act reinforced the Commission’s need to be more focused on investor advocacy issues by mandating that the SEC establish an Office of the Investor Advocate.36 Yet, as of today, almost three years after Dodd-Frank became law, the Commission still has not created the Office of the Investor Advocate. I hope this is one of the first matters addressed by the new SEC Chairman.

The results of a recent survey reported in March 2013 show that, by an overwhelming margin, 84% of Americans want the federal government to play an active role in protecting investors.37 As my remarks have shown, the Commission’s leadership can do more to respond to the needs of investors.

The recognition that the Commission’s leadership can do a better job in addressing the needs of investors, however, does not in any way distract from the hard work and the commitment of the SEC staff to fulfill the SEC’s mission of protecting investors; maintaining fair, orderly and efficient markets; and facilitating capital formation. They are among the finest individuals I’ve had the privilege of working with every day.

In closing, I want to commend the SEC staff and NASAA members for all your efforts in enforcing the federal and state securities laws and for working to preserve the integrity of our financial markets. I think that the partnership between NASAA and the SEC has been, and can continue to be, a powerful force to protect investors.

As the SEC’s NASAA liaison, I am also aware of the benefits of cooperation between the SEC and NASAA. For example, during the past two years, approximately 2,400 investment advisers made a smooth transition to state regulation as a result of the Dodd-Frank Act,38 which expanded state authority over mid-sized investment advisers to those with up to $100 million in assets.39 This is a testament to the cooperation by the staffs of the SEC and state securities regulators.

I know that the Commission can count on NASAA’s support to work together on behalf of investors. I am honored to be working with you to protect investors. Though we may be outmanned and outgunned as state and federal securities regulators, I know that the people in this room have the resolve and commitment to fight on behalf of investors every single day.

Thank you for the opportunity to speak with you today.

1 See, NASAA Enforcement Report (Oct. 2012), available at

2 See, e.g., U.S. Gov’t Accountability Office, GAO-13-110, National Strategy Needed To Effectively Combat Elder Financial Exploitation, p. 20 (Nov. 15, 2012) (“For example, in one California county officials reported that due to budget cuts, they had lost many positions that involved educating the public about elder financial exploitation.”), available at; Russell Grantham, Investment Fraud; Georgia braces for fraud workload, The Atlanta Journal-Constitution (May 8, 2011, at 1D) (“[Georgia] last year folded its securities division into two other departments to cut costs. And it has cut its securities supervision budget by half since 2008, to roughly $1 million.”); John Wasik, Why are states taking over SEC’s duties?, Ventura County Star(Oct. 5, 2003, at D03) (“Congress needs to restore powers and share funding and resources with the states so that they can continue to supervise financial services in an era of massive state budget cuts.”); Thomas S. Mulligan, Markets; State Securities Staff Could Face Cutbacks; Plan By Department of Corporations Would Cut Unit Combating Fraud Against Small Investors, Los Angeles Times (May 9, 2003, at Business, Part 3, Business Desk, p. 1) (Due to state budget-cutting in California, “[t]he Department of Corporations’ 13 investigators would lose their jobs; they include veterans who worked on such high-profile cases as the 1989 collapse of Charles H. Keating Jr.’s Lincoln Savings & Loan.  The department's investigators typically work on lower-profile frauds, such as pyramid schemes, phony limited partnerships and other scams whose victims tend to be elderly.”).

3 Rule 506 is one of three exemptive rules for limited offerings under Regulation D. Rule 506 is by far the most widely used Regulation D exemption, accounting for an estimated 90% to 95% of all Regulation D offerings and the overwhelming majority of capital raised in transactions under Regulation D. Staff of the SEC’s Division of Risk, Strategy, and Financial Innovation estimate that, for 2009, 2010, and 2011, approximately $581 billion, $902 billion, and $909 billion, respectively, was raised in transactions claiming the Rule 506 exemption, in each case representing more than 99% of funds raised under Regulation D for the period. See, Vlad Ivanov and Scott Baugess, Capital Raising in the U.S.: The Significance of Unregistered Offerings Using the Regulation D Exemption (Feb. 2012), available at Rule 506 permits sales to an unlimited number of accredited investors and up to 35 non-accredited investors, so long as there was no general solicitation, and appropriate resale limitations were imposed.

4 Section 201(a)(1) of the JOBS Act directs the Commission to amend Rule 506 of Regulation D under the Securities Act of 1933 to provide that the prohibition against general solicitation or general advertising shall not apply to offerings under Rule 506 provided that all purchasers of the securities are accredited investors

5 17 CFR 230.506. If an investor is an accredited investor then under the “certain standards” of Rule 506 there is no limit on the number of purchasers, no requirement that individuals receive any information, and no conditions or restrictions relating to the status of the issuer. In fact, the only requirement other than the prohibition on general solicitation is that the issuers take reasonable care to assure that purchasers are not underwriters. Rule 506 provides a requirement to file a Form D within 15 days after the first sale; however, this requirement is not a condition to the exemption.

6 Supra, Note 1.

7 See, SEC File No. S-7-07-12, comment letter from NASAA (Oct. 3, 2012) (The year 2011 are the latest statistics available), available at; Year-by-Year SEC Enforcement Statistics (The SEC brought 89 and 124 enforcement actions related to securities offering fraud in 2011 and 2012, respectively), available at; and Recommendations of the Investors Advisory Committee Regarding SEC Rulemaking to Lift the Ban on General Solicitation and Advertising in Rule 506 Offerings: Efficiently Balancing Investor Protection, Capital Formation and Market Integrity (In 2011, state regulators brought 200 enforcement actions related to 506 offerings, 250 actions were brought in 2010, and 175 actions in 2009), available at

In fact, several state securities regulators have published statistics that highlight investor harm as a result of certain Rule 506 offerings.

In Virginia, regulators took enforcement actions in 24 offerings in 2010 and 2011, which resulted in $12 million in losses to Virginia investors. See, comment letter from the State Corporation Commission, Division of Securities and Retail Franchising of the Commonwealth of Virginia (Oct. 4, 2012), available at

In Montana, investors have lost more than $100 million in fraudulent Rule 506 offerings in the last four years. See, comment letter from the Commissioner of Securities and Insurance, State of Montana (Oct. 4, 2012), available at

In South Carolina, fraudulent Rule 506 offerings are the number one complaint received by the attorney general’s office, and those complaints have more than doubled in the last two years. See, comment letter by the Securities Commissioner of the State of South Carolina (Oct. 5, 2012), available at

8 See, comment letter from Fund Democracy, Consumer Federation of America, Americans for Financial Reform, AFSCME, AFL-CIO, International Brotherhood of Teamsters, U.S. PIRG, Public Citizen, Consumer Action, SAFER (The Economists’ Committee for Stable, Accountable, Fair and Efficient Financial Reform), Consumer Assistance Council, Inc., Florida Consumer Action Network, Consumer Federation of the Southeast, Dēmos, Chicago Consumer Coalition, Consumers for Auto Reliability and Safety, CA REINVESTment Coalition, Center for California Homeowner Association Law, Cumberland Countians for Peace & Justice and Network for Environmental & Economic Responsibility, Virginia Citizens Consumer Council, Lynn E. Turner (Former SEC Chief Accountant), James D. Cox (Brainerd Currie Professor of Law, Duke Law School), Joseph V. Carcello (Ernst & Young Professor, Director of Research – Corporate Governance Center, University of Tennessee), J. Robert Brown, Jr. (Chauncey Wilson Memorial Research Professor of Law, Director, Corporate and Commercial Law Program, University of Denver Sturm College of Law), Jane B. Adams (Former SEC Acting Chief Accountant), Gaylen Hansen (Audit Prtner, EKS&H) and Bevis Longstreth (Former SEC Commissioner) (Aug. 15, 2012), available at

9 For example, several commenters recommended that the Commission condition the availability of the proposed exemption on the filing of Form D, in advance of any general solicitation, and suggested modestly amending Form D to require some additional information. See, SEC Release No. 33-9354 (the “Proposing Release”), note 28, available at Other commenters suggested that the Commission’s proposal address the content and manner of advertising and solicitations used in offerings conducted under the proposed exemption. See, the Proposing Release, note 31.

10 See, Staff Current Guidance on Economic Analysis in SEC Rulemakings, (March 16, 2012), available at

11 The Commission approved the proposal by a vote of 4 to 1. Commissioner Luis Aguilar dissented from the Commission’s action stating, “I cannot support today’s proposal, because it presents a framework that is not balanced and that fails to address the acknowledged increased vulnerability of investors. In fact, there is no consideration of any of the commenters’ proposals that would have decreased investor vulnerability.” Commissioner Luis A. Aguilar, Statement at SEC Open Meeting (Aug. 29, 2012), available at

12 Dodd-Frank Act, § 926, 124 Stat. 1376, 1851 (Jul, 21, 2010) (to be codified at 15 U.S.C. 77d note). (Section 926 of the Dodd-Frank Act requires the Commission to adopt rules to disqualify certain securities offerings from the safe harbor provided by Rule 506 for exemption from registration under Section 4(a)(2) (formerly Section 4(2)) of the Securities Act of 1933.)

13 See, Securities and Exchange Commission Release No. 33-9211, Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings (May 25, 2011), available at

14 See, Investor Advocates Press SEC to Finish Bad Actor Rule, Thomson Reuters, Sarah N. Lynch (Dec. 6, 2012), available at

15 See, e.g., Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) (clarified that Section 10(b) of the Exchange Act and Rule 10b-5 do not create an implied private cause of action for aiding and abetting liability); Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) (reaffirmed Central Bank); Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) (same).

16 See, NASAA Legislative Agenda for the 113th Congress (Mar. 5, 2013), available at

17 The legislation would have amended Section 20 of the Exchange Act. See, S. 1551 (111th): Liability for Aiding and Abetting Securities Violations of 2009 (Jun. 30, 2009), available at See also, H.R. 5042 (111th): Liability for Aiding and Abetting Securities Violations of 2010 (Apr. 15, 2010), available at

18 Securities Litigation Reform Act, Conference Report, H.R. 104-369, 104th Cong., 1st Sess. (Nov. 28, 1995), p. 31, available at

19 Although the SEC recovered $140 million for investors defrauded by Enron, investors recovered more than $7 billion in private suits. See, Thomas C. Pearson, Enron’s Banks Escape Liability (2010), available at

20 According to the U.S. Supreme Court, customers who sign pre-dispute arbitration agreements with their brokers may be compelled to arbitrate claims arising under the Exchange Act, and these agreements are binding with respect to investors’ claims under the Securities Act of 1933 and state laws. See, Shearson/American Express, Inc. v. McMahon, 482 U.S. 222 (1987); Rodriquez de Quijas v. Shearson/American Express, 490 U.S. 477 (1989); Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985). “The standard arbitration agreement covers all disputes arising under federal law, state law, and [Self-Regulatory Organization] rules.” See, U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers, p. 80 n. 378 (Jan. 2011), available at Most arbitrations in the securities industry are conducted through the Financial Industry Regulatory Authority (or “FINRA”), which is the largest dispute resolution forum in the securities industry. See, FINRA, Arbitration and Mediation, available at

21 See, e.g., Massachusetts Securities Division, Report on Massachusetts Investment Advisers’ Use of Mandatory Pre-Dispute Arbitration Clauses in Investment Advisory Contracts, p. 2 (Feb. 11, 2013), available at'%20Use%20of%20MPDACs.pdf. (“The Division has received 370 returned surveys as of February 11, 2013, representing 52.11% of all state-registered investment advisers located in Massachusetts. Of those 370 responses, 87.3% (323) of investment advisers indicated that they use standardized written contracts pertaining to their investment advisory services … Of the 323 investment advisory firms that indicated they had written contracts, nearly half confirmed that those contracts contained a mandatory pre-dispute arbitration clause.”)

22 See, e.g., Jill I. Gross & Barbara Black, When Perceptions Changes Reality: An Empirical Study of Investors’ Views of the Fairness of Securities Arbitration, 2008 J. Disp. Resol. 349, 400 (2008) (“We then present our findings, including our primary conclusions that (1) investors have a far more negative perception of securities arbitration than all other participants, (2) investors have a strong negative perception of the bias of arbitrators, and (3) investors lack knowledge of the securities arbitration process… Simply put, even if the system meets objective standards of fairness, a mandatory system that is not perceived as doing so cannot maintain the confidence of its users and, in the long run, may not be sustainable. As a result, customers' negative perceptions are changing the realities of the current system of securities arbitration and require a re-thinking by policy-makers.”); Jennifer J. Johnson & Edward Brunet, Arbitration of Shareholder Claims: Why Change is Not Always a Measure of Progress, Lewis & Clark Law School Legal Studies Research Paper No. 2008-11, p. 5 (“We find numerous problems with arbitration of shareholder claims and conclude that arbitration is not an attractive alternative to litigation), available at; Comment letter from Richard M. Layne to the SEC (Aug. 25, 2010) (providing reasons why arbitrations may be unfair and favors the brokerage industry), available at; Comment letter from Melinda Steuer to the SEC (Aug. 18, 2010) (same), available at

23 For advisory clients, this is an indispensable right, especially in light of the U.S. Supreme Court case stating that advisory clients generally do not have a private right of action for monetary relief against their investment adviser under the Investment Advisers Act of 1940 (“Advisers Act”). See, Transamerica Mortgage Advisors, Inc. et al. v. Lewis, 444 U.S. 11, 24 (1979). Advisory clients may have limited private rights of action to void an investment adviser’s contract and obtain restitution of the fees paid to the adviser. See, Section 215 of the Advisers Act; id. at 24, n. 14. An advisory client, however, may file private claims for fraud against an investment adviser under the Exchange Act. See, e.g., Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1970); Laird v. Integrated Resources, Inc., 897 F.2d 826 (5th Cir. 1990); Carl v. Galuska, 785 F. Supp. 1283 (N.D.Ill. 1992); and Levine v. Futransky, 636 F. Supp. 899 (N.D.Ill. 1986).

24 U.S. Securities and Exchange Commission, Fiscal Year 2012 Agency Financial Report, Management’s Discussion and Analysis, p. 16 (FY 2012), available at

25 Id.; U.S. Securities and Exchange Commission, Select SEC and Market Data 2012, p. 3 (Fiscal 2012), available at

26 U.S. Securities and Exchange Commission, Select SEC and Market Data 2012, pp. 3, 11-14 (Fiscal 2012), available at

27 Id., at 3.

28 Id.

29 Id.

30 Letter from Rep. Barney Frank, Chairman of the House Committee on Financial Services, to SEC Chairman Christopher Cox, dated April 25, 2007 (showing great concerns that “the Commission and its staff may begin permitting public companies to impose mandatory arbitration requirements on their shareholders through the registration process.”), available at Similarly, in May 2007, Senators Patrick Leahy and Russell Feingold sent a letter to the SEC Chairman to share their concerns about mandatory arbitration clauses, stating, “[t]he SEC’s mission is, first and foremost, to protect investors, and simply relying on investors’ ability to exercise informed choice when no choice is actually offered is clearly insufficient.” Letter from Sen. Patrick Leahy, Chairman of the Senate Committee on the Judiciary, and Sen. Russell D. Feingold, to SEC Chairman Christopher Cox (May 4, 2007), available at

31 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), Pub. L. No. 111-203, 124 Stat. 1376 (2010), available at

32 Report of the Senate Committee on Banking, Housing, and Urban Affairs on S. 3217, S.Rep. No. 111-176, at 110 (“There have been concerns over the past several years that mandatory pre-dispute arbitration is unfair to the investors.”), available at

33 See, supra Note 33.

34 See, Section 921(b) of the Dodd-Frank Act, which added Section 205(f) of the Advisers Act, provides that “The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any investment adviser to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.’’

Similarly, Section 921(a) of the Dodd-Frank Act, which added Section 15(o) of the Exchange Act, provides that “The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.”

The Dodd-Frank Act also required the Commission to conduct a study to evaluate, among other things, the legal and regulatory standards of care and any shortcomings in the standards in the protection of investment advisory clients. See, Section 913 of Title IX of the Dodd-Frank Act. The staff completed this study more than two years ago. See, U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers, p. i (Jan. 2011), available at That study covered pre-dispute mandatory arbitration agreements in many respects, but the staff did not offer any recommendations. See, id., at pp. 43-46, 80-83, 133-135.

35 See, Dodd-Frank Act, § 921.

36 See, Dodd-Frank Act, § 915.

37 See, The Financial Planning Coalition Survey (Mar. 8, 2013), available at

38 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), Pub. L. 111-203, § 410 (2010).

39 See, Dodd-Frank Act, § 410, and Give States Oversight and Examination Authority Over RIAs Managing $1 Billion Or Less To Solve The RIA Regulatory Authority Mess” (Feb. 26, 2013) (quoting NASAA Spokesman Bob Webster).

Return to Top