By Donald R. McNeil
The Financial Industry Regulatory Authority (FINRA) recently marked its territory for resolving disputes with customers and its members through its own arbitration forum, FINRA Dispute Resolution. See FINRA Notice to Member 16-25. This comes in response to two decisions from the United States Court of Appeals that allowed parties to resolve the dispute in a non-FINRA arbitral forum. Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Authority, 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 Rule 12200 to arbitrate with customers); Goldman, Sachs & Co. v. City of Reno, 747 F.2d 733 (9th Cir. 2014) (majority holding that the forum selection clauses in broker-dealer agreements between the parties superseded the default obligation to arbitrate under FINRA rules and that by agreeing to those clauses, the customer disclaims any right it might otherwise have had to a FINRA arbitration forum).
In the coming months, we are sure to see a battle played out through regulatory action and litigation as to whether the parties are able to contractually agree to resolve disputes outside of FINRA. As we say in Minnesota, this should be “interesting.”
Here’s the background. Under the FINRA Code of Arbitration Procedure, brokerage firm members must arbitrate a dispute with the customer when the dispute arises in connection with the business activities of the member, with the limited exception for disputes involving the insurance business activities. The FINRA Code of Arbitration Procedure has a second section that requires member disputes with other members or associated persons to also be resolved in FINRA arbitration. This is rather broad language that has required arbitration before FINRA Dispute Resolution of virtually all customer disputes and member disputes.
Recently, two federal appellate courts held that a member may require a customer to arbitrate in a private arbitration forum or to litigate in state or federal courts other than FINRA Dispute Resolution. FINRA found these court holdings to be blasphemous. In essence, these courts held that the parties could contractually agree to something other than the FINRA forum and these contractual rights supersede FINRA rules.
FINRA took issue with these two court decisions and issued Notice to Member 16 – 25 to remind members of its jurisdiction. In this Notice, FINRA reminded its members that its rules do not permit member firms to require associated persons to waive the right to arbitration under FINRA rules, and that customers have a right to request arbitration at any time and do not ever forfeit that right by signing an agreement with a different forum selection provision specifying another dispute resolution venue. Contract or not, FINRA wants the dispute resolved in its venue.
FINRA argues that the Exchange Act requires most broker-dealers to be a member of FINRA and FINRA rules are approved by the Securities Exchange Commission. As a result, these rules are binding on FINRA member firms and have the force of federal law. FINRA rules are not mere contracts that member firms and associated persons can modify. Instead, these are regulatory requirements that can be enforced by FINRA through disciplinary action.
The bottom line is that customers and associated persons – if they prefer – will be able to compel arbitration to be held through the FINRA Dispute Resolution forum. A member will not be able to force the customer into a different venue, such as the American Arbitration Association. The same will be true for associated persons that find themselves in the dispute with another relating to the business activities of the member.
This raises a fun twist. There may indeed be a circumstance in which a member prevails in court in upholding a contractual obligation to resolve a dispute in a non-FINRA venue, such as AAA. The victor in court, however, will then find themselves in hot water through FINRA disciplinary action for actually prevailing in court and following the law. Regardless of a court decision, FINRA has made clear that it views its own dispute resolution form as exclusive and will not react favorably to those seeking to impose another forum.