Venable reports that Virginia has issued new regulations banning arbitration in investment advisor client agreements. Venable’s article begins as follows:
Virginia’s State Corporation Commission (SCC) has issued a new regulation, 21-VAC5-80-200(F) (the “SCC Anti-Arbitration Regulation”), that prohibits investment advisers operating in Virginia from including “any mandatory arbitration provision in an advisory contract.”1 This new rule, which became effective on September 16, 2019, is apparently the result of investment adviser exams conducted by the SCC, which showed a growing trend of advisers including mandatory arbitration provisions in their client agreements. According to an interview with a representative of the SCC’s Division of Securities and Retail Franchising, mandatory arbitration agreements are “contrary to the fiduciary duty” that investment advisers owe to their clients. Virginia appears to be the first state to prohibit mandatory arbitration provisions in investment adviser agreements.
Virginia’s new rule is almost certainly preempted by federal law and therefore unenforceable. Specifically, the SCC Anti-Arbitration Regulation runs afoul of the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (FAA), and clear United States Supreme Court precedent interpreting the FAA. To the extent investment advisers operating in Virginia seek to challenge the SCC Anti-Arbitration Regulation in court, it appears likely they would prevail.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.