FINRA Defends Mandatory Arbitrations; Threatens Discipline

In a July 22 Notice, FINRA took umbrage at a growing line of Court decisions suggesting that a later or more-specific forum selection clause in an agreement between the parties may override a prior customer arbitration agreement. FINRA defended it arbitral forum, pointing out that members are subject to discipline for restricting a customer's right (or even request) to arbitrate.

An expanding line of precedent holds that a later forum-selection provision (limiting disputes to a particular court) may supersede a prior arbitration provision between the same two parties. See, e.g., Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764 F.3d 210 (2d Cir. 2014) (holding that a forum selection clause requiring "all actions and proceedings" to be brought in federal court supersedes the agreement under FINRA to arbitrate with customers); Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733 (9th Cir. 2014); Applied Energetics, Inc. v. New Oak Capital Markets, LLC, 645 F.3d 522 (2d Cir. 2011); Cf. UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013)(not superseding, but could).

FINRA Rule 12200 requires members to arbitrate disputes based on prior written arbitration agreements or even if requested by a customer (absent any pre-dispute agreement). Rule 2268 sets out the requirements for arbitration clauses in customer agreements and Rule 2268(f) prohibits provisions that limit a party's ability to file a claim in arbitration. "A customer's right to request FINRA arbitration at any time under FINRA rules, however, cannot be superseded or disclaimed by any separate agreement between the customer and member firm." The same is true of disputes with associated persons under Rule 13200.

"FINRA rules are not mere contracts that member firms and associated persons can modify," FINRA said, testily. The Notice argues the recent decisions are wrongly decide and based on mere dicta from 1990s precedent.

The Notice pointedly reminded member firms that using pre-dispute arbitration or other provisions in customer agreements that do not comply with FINRA rules may be subject to disciplinary action. See Dep't of Enforcement v. Charles Schwab & Co., No. 2011029760201, 2014 FINRA Discip. LEXIS 5 (FINRA Bd. of Governors Apr. 24, 2014).

FINRA Reg. Notice 16-25 is here.


Thomas K. Potter, III ( is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 30 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2016 by Thomas K. Potter, III (all rights reserved).

Posted in: Arbitration, FINRA
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