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Regulation and Compliance > Federal Regulation > FINRA

FINRA Warns BDs on Arbitration Agreements

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What You Need to Know

  • Some firms are attempting to improperly limit the claims that customers can file with FINRA.
  • Firms can't stop customers from participating in class-action suits.
  • Not complying with FINRA rules related to customer agreements could result in disciplinary action.

The Financial Industry Regulatory Authority is warning broker-dealers to get their predispute arbitration agreements for customer accounts in order as some firms’ customer agreements run afoul of FINRA rules.

In just-released Regulatory Notice 21-16, FINRA states that it has recently become aware of customer agreements used by broker-dealers that contain provisions that do not comply with FINRA rules.

 

Problematic provisions included failure to properly highlight the arbitration clause and explain the consequences to customers; attempts to force customers to hold the firm harmless, thus preventing them from bringing claims against the firm; and attempts to restrict customers from claiming certain types of damages.

“Member firms with customer agreements that include provisions that do not comply with FINRA rules should take prompt steps to ensure that their customer agreements fully comply with FINRA rules,” the notice states.

Failing to comply with FINRA rules related to customer agreements may subject member firms to disciplinary action, the broker-dealer self-regulator states.

When using mandatory arbitration clauses in customer agreements, “FINRA rules establish minimum disclosure requirements regarding the use of such clauses and prohibit predispute arbitration agreements from including conditions that, among other things, limit or contradict” those rules, according to the notice.

FINRA rules also do not allow class-action claims in FINRA arbitration, the notice states.

Conversely, FINRA rules prohibit broker-dealers “from incorporating provisions that would prevent customers from bringing or participating in judicial class actions by adding waiver language into customer agreements (class action waivers) and prohibit member firms from enforcing arbitration agreements against members of a certified or putative class action,” the notice states.

The notice also cites examples of noncompliant provisions related to hearing locations and time limitations.

As to hearing locations, some customer agreements attempt to dictate the location of the arbitration hearing, the notice states.

For example, according to the notice, “some customer agreements require the hearing to be held in a particular state, regardless of where the customer resides. Any such provision does not comply with FINRA Rule 12213, which provides that the Director of Dispute Resolution Services will decide which of FINRA’s hearing locations will be the hearing location for the arbitration.”