Many investors are surprised to learn that an advisory or account agreement limits or bars the investor from bringing a claim in court. Advisers and brokers often require clients to sign agreements with arbitration clauses as part of hiring the adviser or opening an account. In many cases, the arbitration clause is buried in a long, complicated account agreement.
Arbitration clauses in investor agreements typically seek to force claims relating to investments into arbitration before FINRA, the American Arbitration Association (“AAA”), or another arbitration forum, such as the Arbitration Service of Portland. Sometimes agreements are silent about the arbitration forum or purport to require an investor to attempt to mediate or participate in some other pre-filing dispute resolution procedure.
Issues relating to arbitration clauses can be complex. An attorney evaluating a potential investor case will often need to review all agreements entered into by an investor in connection with his or investment account for an arbitration clause and any other language that purports to limit the investor’s rights. Whether an arbitration clause applies to a dispute or is enforceable often requires a careful examination of the facts and law.
There are also strategic decisions to make. This includes whether to sue in court and wait to see if the defendant petitions to compel arbitration. Investors sometimes propose that the parties enter into a tolling agreement that stops the statute of limitations and other time-based defenses from running while the parties attempt to resolve the dispute.
A careful review of agreements for an arbitration clause must also include a search for any clauses that purport to limit the time period to bring a claim. Critically, some agreements purport to shorten the time to bring a claim. Under Oregon law, for example, the statute of limitations for securities claims involving a misrepresentation or omission in connection with a sale is the later of three years after the sale or two years after the plaintiff or claimant knew or should have known about the bad act(s). Other statutes of limitations under Oregon law that might be relevant include one year for violations of the Unlawful Trade Practices Act, two years from the time an investor discovered or reasonably should have discovered fraud or breach of fiduciary duty, and seven years under Oregon’s Elder Abuse Law. Whether or not there is an agreement that purports to shorten (or lengthen) the time to bring a claim, once a deadline has passed, an investor may lose the right to bring a claim.
If the claim is brought before FINRA, the investor should remember that FINRA Rule 12206 requires a claim to be filed within six years of the occurrence or event giving rise to the cause of action. FINRA’s six year window may be shorter than the statute of limitations under state or federal law, particularly if discovery, tolling rules, and ongoing or continuing violations that may affect time-based defenses apply. As with arbitration clauses, whenever a statute of limitation or time-based defense is at issue, an investor should not wait to consult an attorney.
Finally, there are other issues that investors and lawyers should consider when evaluating arbitration clauses. Agreements that seek to limit an investor’s rights may not be enforceable. The Securities and Exchange Commission’s July 12, 2019 Interpretation Regarding Standard of Conduct for Investment Advisers is a good starting point for issues relating to the duties of investment advisers, as interpreted by the SEC. These duties may be implicated when an adviser seeks to impose costs or force delays in connection with an investor’s claim or otherwise limit an investor’s rights.