Recently FINRA released a Regulatory Notice reminding member firms that if they have a mandatory arbitration clause in their customer agreement, there are certain minimum disclosure requirements that are established by FINRA rules. FINRA Rule 2268 spells out what can and can’t be in arbitration clauses.

FINRA Rule 2268

When member firms use mandatory arbitration clauses, FINRA rules establish minimum disclosure requirements regarding their use to help ensure customers understand these clauses, and to protect customers’ rights under FINRA rules. These requirements, set forth in FINRA Rule 2268, include that any predispute arbitration clause must be highlighted in the customer agreement and immediately preceded by disclosures that the customer agreement contains such a clause and that describe the consequences of agreeing to arbitration.

In addition, FINRA Rule 2268 prohibits any predispute arbitration agreement from including any condition that:

  1. Limits or contradicts the rules of any self-regulatory organization (SRO);
  2. Limits the ability of a party to file any claim in arbitration;
  3. Limits the ability of a party to file any claim in court permitted to be filed in court under the rules of the forums in which a claim may be filed under the agreement; or
  4. Limits the ability of arbitrators to make any award. These requirements make clear that predispute arbitration agreements must preserve customers’ rights under FINRA rules.

Hearing Locations

Some customer agreements attempt to dictate the location of the arbitration hearing. 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. Customer agreements cannot be used to restrict the location of an arbitration hearing contrary to FINRA rules.

Time Limitations

Some customer agreements attempt to shorten or extend applicable statutes of limitations. This contradicts FINRA Rule 12206, which allows arbitration claims to be submitted unless six years have elapsed from the occurrence or event giving rise to the claim.

Customer agreements may not be used to shorten or extend statutes of limitations or require that a question of whether a time limitation applies be judicially determined instead of being submitted to an arbitrator or panel under the Code of Arbitration Procedure for Customer Disputes (Customer Code).

Class Action Claims

Some customer agreements attempt to limit a customer’s right to pursue class actions in court. Limiting a customer’s right to pursue class actions in court through a customer agreement, or seeking to enforce such an agreement, does not comply with FINRA rules.

Specifically, FINRA Rule 12204(a) provides that class action claims may not be arbitrated under the Customer Code, and FINRA Rule 12204(d) prohibits member firms and associated persons from enforcing arbitration agreements against members of a certified or putative class action until certain events such as the denial of class certification occur.

Claims and Awards

Some customer agreements attempt to limit the ability of a customer to file a claim or to limit the authority of the arbitrators to make an award. Including a choice of law or governing law clause in a customer agreement without an adequate nexus, which suggests an intent to limit an award, or otherwise including provisions that attempt to limit the ability of a customer to file a claim or the authority of arbitrators to make an award, is a prohibited condition under FINRA Rule 2268(d).

Indemnity and Hold Harmless Provisions

Some customer agreements contain indemnification or hold harmless provisions, such as broad provisions that require that the customer indemnify and hold harmless the member firm from all claims and losses arising out of the agreement. Indemnification and hold harmless provisions do not comply with FINRA Rule 2268 where the provisions, if given effect, would limit the customer from bringing a claim or receiving an award from the member firm or associated person that they would otherwise be entitled to receive.

Firms are encouraged to review their customer agreements to confirm any mandatory arbitration clauses used comply with FINRA rules. Failure to comply with FINRA rules related to customer agreements may subject your Firm to disciplinary action.

For specific information on requirements when using predispute arbitration agreements for customer accounts, see FINRA rule 2268.

For more information and examples of potential violations, see Regulatory Notice 21-16.

If your firm needs assistance complying with the rules regarding arbitration clauses, please contact us. MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities.