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FINRA Warns Firms Not to Avoid FINRA Dispute Resolution Arbitration

May 25, 2018

In July 2016, FINRA issued Notice to Members 16-25, warning its members against preventing their customers and employees from attempting to resolve their disputes through FINRA Dispute Resolution arbitration. It is also FINRA’s effort to deter members from relying on several federal court decisions upholding dispute forum selection clauses in forums other than FINRA DR arbitration.

FINRA summarizes the Notice by stating:

FINRA reminds member firms that customers have a right to request arbitration at FINRA’s arbitration forum at any time and do not forfeit that right under FINRA rules by signing any agreement with a forum selection provision specifying another dispute resolution process or an arbitration venue other than the FINRA arbitration forum..
FINRA reminds member firms that FINRA rules do not permit member firms to require associated persons to waive their right to arbitration under FINRA’s rules in a pre-dispute agreement.
A member firm’s failure to comply with FINRA’s rules relating to the pre-dispute arbitration agreements with customers or pre-dispute agreements with associated persons, or failure to submit a dispute to FINRA arbitration as required by FINRA’s rules would violate FINRA rules, and member firms may be subject to disciplinary action.

Under FINRA rule 12200, FINRA member firms must arbitrate disputes with customers if the customers choose to file with FINRA DR, even if no written agreement exists between the customer and the member firm. NTM 16-25 makes it clear FINRA views 12200 as a rule designed to offer investor protection.

FINRA’s position in NTM 16-25 is not new. However, it should cause member firms who may have agreements with their customers that waive the customer’s right to pursue FINRA arbitration or require other arbitration forums (such as the American Arbitration Association) to amend their agreements or face a possible FINRA enforcement action.

In our experience, FINRA members’ difficulty with rule 12200 occurs in “away from the firm” cases filed in FINRA DR arbitration. These cases are often filed by investors who allege they were misled by an investment professional employed by a member firm in connection with an investment occurring outside of a traditional investment account. Although these claimants allege they are customers of a member firm, there is often no documentary evidence of a customer relationship. These claimants may not have signed a client agreement, opened an account, or received a monthly statement or trade confirmation. Nevertheless, the mere allegation that they were a “customer” of the broker-dealer arguably provides them standing under rule 12200 and NTM 16-25. Any member firm arguing otherwise in any forum other than FINRA DR arbitration would appear to risk a FINRA enforcement action.

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