The use of mandatory arbitration clauses in advisory agreements may become more widespread after the U.S. District Court of Minnesota’s decision to enforce such a provision in Bakas v. Ameriprise Financial Services, Inc. Previously, the SEC had called the enforceability of such clauses into question in a 1986 interpretive letter which advised that arbitration clauses in advisory agreements may violate the antifraud provisions of the Investment Advisers Act by misleading clients. In the letter, the SEC stated that the advisory contract “should disclose that the clause does not constitute a waiver of any right provided by the Act, including the right to choose the forum, whether arbitration or adjudication.”
The plaintiff in Bakas sought to rely on the SEC’s interpretive letter, among other arguments, to avoid an arbitration clause included in her advisory services agreement and bring a class action against Ameriprise for breach of contract and improper practices under the Advisers Act. The Court instead held Bakas’s claim subject to arbitration under the clause, adding that “because the legal landscape has changed in the 23 years since the [interpretive] Letter, Bakas’s reliance on it is misplaced.” The 1953 Supreme Court case that the interpretive letter relied on had been expressly overruled in 1989 and was, the Court noted, “no longer good law.” The Bakas Court also noted that the “hostility to arbitration of such [federal securities] claims” shown by the 1953 Supreme Court “no longer applie[s].” To read how current legislation initiatives affect such clauses, see “Financial Regulatory Reform Threatens Manadatory Arbitration Provisions,” page 17.