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September 1st, 2016
securities
FORUM SELECTION PROVISIONS IN CUSTOMER AGREEMENTS

FINRA released Regulatory Notice 16-25 reminding broker dealers that claimants have a right to request arbitration through FINRA at any time and do not forfeit that right by signing any agreement with a forum selection provision specifying another dispute resolution process or an arbitration venue other than the FINRA arbitration forum.   

            FINRA Code of Arbitration Procedure Rule 12200 requires parties to arbitrate a dispute if: (1) required by written agreement or requested by the claimant; (2) the dispute is between a customer and FINRA member broker dealer or registered representative of the member broker dealer; and (3) the dispute arises in connection with the business activities of the broker dealer or registered representative.  The rule preserves a claimant’s ability to resolve a dispute through FINRA arbitration, regardless of whether arbitration is required by a written agreement. 

            Most broker dealers require customers to agree in writing to arbitrate disputes at the time they open their accounts.  FINRA Rule 2268 requires that any predispute arbitration clause be highlighted and immediately preceded by a disclosure that the agreement contains a predispute arbitration clause and that by signing the agreement, the customer acknowledges a list of items, including that he is giving up the right to sue in court and that arbitration awards are generally final and binding. 

            Even with a predispute arbitration agreement, broker dealers and customers may elect, by mutual consent, to resolve their disputes in a forum other than FINRA, such as through a private arbitration forum or by civil litigation.  A customer’s right to request FINRA arbitration at any time under FINRA rules, however, cannot be superseded or disclaimed by any separate agreement.  Notice 16-25 reminds broker dealers that FINRA rules are not default rules that may be overridden by more specific or separate contractual terms without consequences under FINRA rules.

            Thus, any broker dealer’s denial, limitation or attempt to deny or limit a customer’s right to request FINRA arbitration, even if the customer seeks to exercise that right after having agreed to a forum selection clause specifying a venue other than the FINRA arbitration forum, would violate FINRA Rules 12200 and 2268.  Broker dealers who do not comply with these rules may be subject to disciplinary action.  Accordingly, we recommend that our broker dealer clients thoroughly read Notice 16-25 and suggest that they promptly review their predispute arbitration agreements and any other customer agreements to ensure that they comply with FINRA rules.                                                     


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