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Regulation and Compliance > Federal Regulation > FINRA

FINRA Reminds BDs of Arbitration Rights for Clients, Reps

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The Financial Industry Regulatory Authority is reminding member firms of their customers’ and reps’ right to request FINRA arbitration “at any time” and that customers do not forfeit that right by signing any agreement to a dispute resolution process or an arbitration venue other than FINRA’s.

In its just-released Regulatory Notice, Forum Selection Provisions, FINRA states that member firms are not permitted “to require associated persons” — registered reps and certain firm employees — “to waive their right to arbitration under FINRA’s rules in a predispute agreement.”

Failure to comply with FINRA’s rules relating to predispute arbitration agreements with customers or with associated persons, or failure to submit a dispute to FINRA arbitration as required, “would violate FINRA rules, and member firms may be subject to disciplinary action,” FINRA warns.

Micah Hauptman, financial services counsel with the Consumer Federation of America, notes that “some firms will stop at nothing to benefit themselves” in forum selection, “including placing further restrictions on investors’ legal rights than already exist. I hope firms will take FINRA’s reminder that they can’t include such restrictions to heart.”  

FINRA also filed a proposed rule Wednesday with the Securities and Exchange Commission amending its code of Arbitration Procedure for Customer Disputes to require that all parties in an arbitration, except customers who are not represented by an attorney or other person (“pro se customers”), to use the FINRA Office of Dispute Resolution’s Party Portal.

Mercer Bullard, professor of law at the University of Mississippi Law School and founder of Fund Democracy, an advocacy group for mutual fund shareholders, said the rule change would likely provide “for a more efficient, less costly [arbitration] process.”

Hugh Berkson, president of the Public Investors Arbitration Bar Association, said in an email message to ThinkAdvisor that while the rule proposal is pretty lengthy and PIABA is still digesting it, the group is “all in favor of promoting efficiency in the arbitration process, so long as that efficiency doesn’t come at the expense of the parties’ due process rights.”

A FINRA spokesperson said that the self-regulator has brought enforcement actions against firms for denying FINRA arbitration rights. It fined Merrill Lynch in 2012 for structuring its advisor transition program to circumvent the requirement to arbitrate disputes under FINRA rules.

Berkson added that from his experience, ”in the customer/firm dispute arena, forum selection is rarely an issue – but choice of law is a common one.” Anecdotal evidence shows that “forum selection issue arises more frequently in the intra-industry disputes (such as those between registered reps and their firms).”

Such a case was recently cited in The New York Times regarding dozens of former Credit Suisse advisors who have been fighting for their deferred compensation after leaving the bank last year. The advisors “had been forced by Credit Suisse to use two other arbitration services they didn’t want,” the Times reported.

PIABA, a group of lawyers who represent investors in cases against securities firms, would also like to see “any savings associated with the implementation [via the rule change proposal] passed along those using the arbitration process,” Berkson said. ”It’s particularly important to try to lower the costs borne by investors using the [arbitration] program. Far too many of those claimants have lost a significant portion, if not all, of their retirement funds and any expense related to arbitration is too much for them to bear.”

Outgoing FINRA CEO Richard Ketchum said in mid-May at the self-regulator’s annual conference that FINRA planned to act on recommendations put forth by FINRA’s arbitration task force, particularly those dealing with expungement of offenses from brokers’ records.

In mid-December, FINRA’s Dispute Resolution Task Force made 51 recommendations to change FINRA’s arbitration and mediation procedures.

— Check out FINRA’s Ketchum Warns on Dangers of Poor Firm Culture on ThinkAdvisor.


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