Last Friday, FINRA issued Regulatory Notice 16-25 reminding member firms that, under FINRA Rules 12200 and 13200, they have a regulatory duty to arbitrate at the request of a customer (account-related disputes) or an associated person (employment disputes). The Notice cited a number of recent circuit court decisions holding that a forum selection clause in the parties’ agreement superseded FINRA rules. (In those cases, the broker-dealer was attempting to avoid arbitration at FINRA.) FINRA disagrees with those holdings, arguing that these courts improperly deemed firms’ duty to arbitrate “contractual” and thus can be superseded or waived.
Striking in its cautionary language, the Notice warned broker-dealers that they will be subject to disciplinary action if they do not remove any offending clause (i.e., one that takes away the customer’s or an employee’s right to arbitrate disputes with firms) from their agreements. The Notice contains some of the strongest investor protection language I have seen lately in a FINRA proclamation. Of particular interest to this blog’s readers might be FINRA’s bold statements that FINRA’s dispute resolution program is not only fair, but offers important benefits and protections to investors. See Jill Gross, The Historical Basis of Securities Arbitration as an Investor Protection Mechanism, 2016 J. Disp. Resol. 171 (2016) (arguing that FINRA had lost sight of its investor protection mission in developing its arbitration program).
Another article I recently published argues that, for customer cases, section 29(a) of the Securities Exchange Act, which bars broker-dealers from forcing investors to waive compliance with securities laws (including rules of securities self-regulatory organizations) voids forum selection clauses in customer agreements. See Jill I. Gross, The Customer’s Non-Waivable Right to Choose Arbitration in the Securities Industry, 10 Brook. J. Corp. Fin. & Com. L. 383 (2016). If a firm were to attempt to enforce a forum selection clause in the face of an investor’s demand for arbitration (and risk facing discipline), a court could look not only to RN 16-25 but also to section 29(a) to support a holding that the firm’s duty to arbitrate cannot be waived.
I predict firms will quickly revise their standard agreements with customers and employees to remove forum selection clauses that purport to supersede the firms’ duty to arbitrate. The larger question remains: why are firms seeking to avoid arbitration in the FINRA forum if it is, as the industry claims, a “fair, and … faster and more economical means of resolving disputes than court-based litigation.“?
