FINRA Issues Regulatory Notice Affirming Arbitration Rights

By Jeffrey M. Haber

What is a FINRA arbitration? The Financial Industry Regulatory Authority ("FINRA") issued a Regulatory Notice in July 2016 reminding member firms that customers have a right to request arbitration "at any time." In addition, the self-regulator stated that customers do not forfeit their right to a FINRA arbitration by signing an agreement that calls for another venue. The notice also reiterated that FINRA members cannot require registered representatives and certain employees to waive their right to arbitration in a pre-dispute arbitration agreement.

FINRA Arbitration at a Glance

The FINRA arbitration forum protects customers from a wide range of practice violations, such as unsuitable investment advice, churning, breach of fiduciary duty, and the like. Arbitration is a more expedient and cost-effective approach to dispute resolution than a court trial. The process involves selecting a neutral third party, the "arbitrator," to resolve the dispute. By pursuing arbitration, a customer waives the right to pursue the matter in court, and the arbitrator's decision is final and binding.

The Regulatory Notice is a reminder that failing to comply with the rules concerning arbitration agreements, or failing to submit disputes to a FINRA forum, are rules violations that could result in disciplinary action. The notice serves as a warning to firms that have reportedly been including restrictive provisions regarding dispute forums in their arbitration agreements. While these restrictions are more common in disputes between member firms and registered representatives, the real issue in customer disputes tends to be the selection of law.

In a related development, FINRA has also filed a proposed rule with the SEC to amend its Code of Arbitration Procedure for Customer Disputes. The goal is to provide a more efficient arbitration process that is also less costly, while maintaining the rights of the parties involved in a dispute. Some observers believe the process could be made more efficient, but argue that any cost savings should be passed through to the customers involved in the proceeding. FINRA has continued to refine its arbitration and dispute-resolution procedures since; see our post on FINRA's proposed changes to the expungement process for a related development.

Notwithstanding FINRA's July 2016 notice, brokers and investment advisors have a duty to act in a reasonable and prudent manner when acting as a fiduciary, and are required to put their customers' interests first. A registered representative who becomes embroiled in a dispute with a customer or employer should engage the services of an experienced securities arbitration attorney. For a broader look at how the process works, see our post, In Focus: Securities Arbitration.

This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.