While Financial Industry Regulatory Authority (FINRA) rules do not require member firms and customers to enter into arbitration agreements or otherwise preclude parties from litigating disputes through the state and federal court systems, FINRA issued and published Regulatory Notice 21-16 (the “Notice”) on April 21, 2021 to emphasize the applicable FINRA Rules when member firms choose to utilize mandatory pre-dispute arbitration agreements for customer and investor accounts.
FINRA member firms should take note that in the Notice, FINRA emphasized the minimum disclosure requirements for arbitration clauses prescribed in Rule 2268, which provides, in relevant part, that “any predispute arbitration clause must be highlighted in the customer agreement and immediately preceded by disclosures that the customer agreement contains such a clause and that describe the consequences of agreeing to arbitration.” Furthermore, FINRA emphasized other Rule 2268 requirements proscribing pre-dispute arbitration agreement provisions which “(1) limit or contradict the rules of any self-regulatory organization (SRO); (2) limit the ability of a party to file any claim in arbitration; (3) limit the ability of a party to file any claim in court permitted to be filed in court under the rules of the forums in which a claim may be filed under the agreement; or (4) limit the ability of arbitrators to make any award.”
In the Notice, FINRA urges compliance with FINRA rules governing hearing locations, time limitations, class action claims, claims and awards, and indemnity and hold harmless provisions. Specifically, FINRA first emphasizes that a pre-dispute arbitration agreement may not specify hearing locations, as FINRA Rule 12213 provides that the hearing location will be decided by the Director of Dispute Resolution Services. Second, it states that a time limitation is problematic if it attempts to “shorten or extend [the] applicable statutes of limitations” in a manner inconsistent with FINRA Rule 12206 (allowing arbitration claims to be submitted “unless six years have elapsed from the occurrence or event giving rise to the claim). Third, it emphasizes that pre-dispute arbitration agreements may not limit a customer’s right to pursue class actions in court or include a class action waiver provision in violation of Rule 2268. Fourth, it states that provisions which attempt to limit the ability of a customer to file claims, provisions which attempt to limit an arbitrator’s ability to make awards, or choice of law provisions without an “adequate nexus between the law chosen and the transaction or parties at issue,” violate FINRA rules. Fifth and finally, it emphasizes that limiting claims that customers may assert through indemnity or hold harmless provisions in the pre-dispute arbitration agreement violates FINRA rules if the customer would be unable to bring a claim or receive an award they would otherwise be entitled to bring or receive.
Troutman Pepper frequently represents financial services institutions such as broker-dealers and their associated persons in FINRA arbitration disputes and regulatory matters involving customer/investor, employment, and intra-industry claims.