A registered representative (the "Rep") sued his former broker/dealer (the "Firm") in New Jersey state court. The Firm moved to compel arbitration, the trial court denied the motion, and the Superior Court of New Jersey, Appellate Division affirmed. See Barr v. Bishop Rosen & Co., No. A-2502-14T2. Holding that the arbitration provision in the Rep's Form U4s (signed in 1997 and 2009) was, under New Jersey law, insufficient, standing alone, to require arbitration, the Court observed:

Although the … clauses state the parties' agreement to arbitrate any dispute, claim or controversy, they fail to "explain what arbitration is," nor do they "indicate how arbitration is different from a proceeding in a court of law." As the [New Jersey] Supreme Court observed, "an average member of the public may not know – without some explanatory comment – that arbitration is a substitute for the right to have one's claim adjudicated in a court of law."

Id. (internal citations omitted).

At first glance, this decision suggests that the Form U4 arbitration agreement is invalid, at least in New Jersey. Closer review indicates that the problem is not with the Form U4, per se; rather, it arises from the Firm's failure to comply with FINRA Rule 2263. Rule 2263, first effective in January 2000 as NASD Rule 3080, requires FINRA member firms to provide certain written disclosures to associated persons when those persons are asked to sign or acknowledge an initial or amended Form U4. Those written disclosures address the omissions noted by Court.

The Barr Court noted that the Firm provided the Rep with a memo discussing arbitration in 2000, but concluded that the memo and the U4 signed nine years later “may not be fairly read together,” explaining:

This separate disclosure would likely have been adequate had Bishop Rosen simultaneously sought plaintiff's execution of a new Form [U4]. ... That failure alone was fatal to the contention that the 2009 arbitration agreement also contained an adequate waiver of plaintiff's right to sue Bishop Rosen in court.

In conclusion, if a member firm complies with FINRA Rule 2263 and contemporaneously provides written disclosures to associated persons when those persons are asked to sign or acknowledge their Form U4 (and amendments), the agreement to arbitrate should remain valid. This decision should serve as a reminder to member firms to review their U4 practices and procedures. Some questions to consider:

  • Were there periods of less than complete compliance with FINRA Rule 2263?
  • Are there associated persons hired before the Rule went into effect who have had no U4 updates since then?
  • Were disclosures provided to associated persons after the July 30, 2007 consolidation of NASD and NYSE into FINRA?
  • Are there other agreements with the representative that contain more fulsome arbitration clauses, disclosures or acknowledgements?

Depending on the answers to these questions, member firms should consider taking remedial actions to ensure the enforceability of arbitration agreements with their associated persons.