Earlier this week, the Court of Appeals for the D.C. Circuit granted, in part, a broker-dealer’s request for review of the Securities and Exchange Commission’s denial of the firm’s petition for rulemaking related to FINRA arbitration. See Thrivent Financial for Lutherans v. Securities and Exchange Commission, __F. 4th __, 2026 WL 2095279 (D.C. Cir. July 21, 2026). Though the opinion breaks little new ground with respect to administrative law, the court’s dicta with respect to the intersection of the Federal Arbitration Act, FINRA arbitration, and the federal securities laws caught my attention.
In the case, the bylaws of Thrivent, a registered broker-dealer (BD), established its own dispute resolution program requiring arbitration of disputes between customers and the brokerage firm in a non-FINRA forum. However, FINRA arbitration rules, which are reviewed and approved by the SEC, require BDs to allow customers to pursue disputes arising out of their trading accounts in the FINRA arbitration forum. Specifically, Rule 12200 of the Code of Arbitration Procedure for Customer Disputes requires disputes between FINRA members and their customers to be arbitrated at FINRA if “[r]equired by a written arbitration agreement” or “[r]equested by the customer.” Rule 12204 of the same Code bars class action claims from being arbitrated in the FINRA forum, and bars FINRA members from enforcing “any arbitration agreement against a member of a certified or putative class action” until class certification is denied, the class is decertified, or the individual customer is excluded from the class. Rule 2268 of FINRA’s Conduct Code requires BDs to include particular language in its arbitration agreement, including a bar on including a class action waiver in its agreement.
At first, Thrivent treated its own dispute resolution program as optional. Thrivent, however, wanted to make its program mandatory, but knew that FINRA rules prevented it from doing so. So, it filed a petition for rulemaking with the SEC in December 2021, seeking to abrogate the three FINRA rules discussed above as inconsistent with the Federal Arbitration Act. Thrivent argued that those rules “constrained its ability to enter into its preferred arbitration arrangements with its customers,” in conflict with FAA section two’s mandate to courts to enforce arbitration agreements as written. Id. at *3.
The SEC did not respond to Thrivent until three years later. In March 2025, the SEC sent a generic, three paragraph letter that referenced its limited resources and its discretionary authority to amend FINRA’s rules. Thrivent sought review in the D.C. Circuit, which reviews administrative agency denials of petitions for rulemaking.
The D.C. Circuit granted the petition in part, and remanded to the SEC for consideration. The court noted that its “review of agency denials of petitions for rulemaking is quite deferential, but the agency still must ‘provide analysis that follows a discernable path to which the court may defer.’” Id. at *1. The Court of Appeals found that the SEC’s “largely boilerplate letter,” did not “engage with Thrivent’s arguments.” The court found that the letter does not even meet that “low bar,” as the SEC, while it has discretion, must “do more to explain” why it denied the petition. Id.
While the main holding of the case is not all that notable, as it is uncommon but not unheard of for the DC Circuit to overturn a denial of a rulemaking petition, the Court of Appeals’ comments about FINRA arbitration are noteworthy. In particular, Thrivent had argued that the SEC had “no discretion” at all to deny the petition for rulemaking, and that the proper remedy was for the court to remand the matter to the SEC with instructions to grant the petition. In rejecting that argument, the court identified alternative actions the SEC could take on remand short of granting the petition. One of those alternative actions, the court suggested, would involve the SEC exercising its authority Congress explicitly granted to it in 2010 in the Dodd-Frank Act to restrict or limit in some way mandatory securities arbitration. The court stated:
Rather than undertaking a rulemaking to amend FINRA’s rules, …the Commission could, if warranted, use its rulemaking authority to preserve FINRA’s rules to protect the integrity of the securities markets. Congress has authorized the Commission, “by rule, [to] prohibit, or impose conditions or limitations on the use of,” agreements to arbitrate disputes “arising under the federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization[.]” 15 U.S.C. § 78o(o) (“Authority to restrict mandatory pre-dispute arbitration”); see also Epic Sys. Corp. v. Lewis, 584 U.S. 497, 138 S. Ct. 1612, 1624, 200 L.Ed.2d 889 (2018) (A “clearly expressed congressional intention” to displace the Arbitration Act will “suspend its normal operations in a later statute.”) (quotation marks omitted). The Commission, in other words, could cure the conflict Thrivent perceives between the Arbitration Act and FINRA’s rules by determining through notice-and-comment rulemaking that FINRA’s three rules are “in the public interest and for the protection of investors.” 15 U.S.C. § 78o(o). The Commission’s authority in that regard redoubles the propriety of remand in this case.
Id. at *10.
The court invoked 15 U.S.C. § 78o(o) as arguably a “contrary congressional command” sufficient to overcome the FAA, repeating an argument I made previously. 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); Barbara Black and Jill I. Gross, Investor Protection Meets the Federal Arbitration Act, 1 Stan. J. Complex Litig. 1 (2012). According to the D.C. Circuit, the tension between the federal securities laws and the FAA could be resolved, if the SEC only acted within its statutory authority.
Absent that action, questions still exist as to whether FINRA can mandate BDs to arbitrate customer disputes in its forum, and whether FINRA arbitration rules are preempted by the FAA. That uncertainty has permitted some broker-dealers to thwart the spirit of the FINRA arbitration forum: to provide an affordable process for customers to pursue justice against BDs, that is regulated for fairness by the SEC. To date, the SEC has declined to act pursuant to its statutory authority granted in 2010 to regulate securities arbitration; the D.C. Circuit implied that maybe now it is time for it to act to protect investors.
