The Financial Industry Regulatory Authority issued a regulatory notice to member firms that warned them against eliminating the possibility of a FINRA arbitration in contracts with customers or associated persons (e.g., registered employees), despite recent court decisions that said that member firms could eliminate such availability. According to FINRA, under its rules, member firms must offer customers a right to arbitrate disputes with them at a FINRA arbitration forum (click here to access FINRA Rule 12200 and here to access FINRA Rule 2268). Although acknowledging recent federal appellate court decisions that held that forum selection causes in customer agreements supersede FINRA requirements, FINRA claimed that “the reasoning giving rise to these decisions is mixed and conflicts with FINRA’s views regarding the application of its arbitration rules.” Similarly, FINRA noted that a recent federal appellate court decision in New York held that an associated person could waive his or her right to a FINRA arbitration in a pre-dispute agreement, and agree to resolve all disputes with a member firm in a private forum (click hereto access the relevant court decision). However, FINRA claimed that the court’s view was inconsistent with its own rules (click here to access FINRA Rule 13200). FINRA warned member firms utilizing customer agreements or pre-dispute agreements with associated persons that do not comply with its requirements “may be subject to disciplinary action.”
My View: It seems terribly inappropriate and unfair for FINRA to advise member firms that if they follow permissions given by a federal court that may be inconsistent with FINRA rules they “may be subject to disciplinary action.” FINRA certainly may express its disappointment regarding a court outcome and work with the Securities and Exchange Commission to design an appropriate response (including a legislative proposal to submit to Congress), but, in the interim, threatening to take disciplinary actions against members who fail to follow its rules, despite appellate courts’ views that such rules under certain circumstances do not have to be followed, seems to be a horrific precedent by a regulatory organization.