News & Insights

Finra Issues Guidance Regarding Predispute Arbitration Agreements For Customer Accounts

FINRA recently issued Regulatory Notice 21-16 “FINRA Reminds Members About Requirements When Using Predispute Arbitration Agreements for Customer Accounts.” The Notice reminds members firms about certain requirements when using predispute arbitration agreements for customer accounts, as FINRA has recently become aware of customer agreements containing provisions that do not comply with FINRA rules.

Under FINRA Rules, arbitration through FINRA’s Dispute Resolution service is required if there is a written agreement establishing such. Many broker-dealer firms require customers opening accounts to agree in writing to arbitrate eligible claims. When member firms use mandatory arbitration clauses, FINRA rules establish minimum disclosure requirements regarding the use of such clauses and prohibits predispute arbitration agreements from including conduct that limit or contradict FINRA rules.

The Notice identifies common issues as it relates to arbitration agreements that limit or contradict FINRA rules. For instance, certain customer agreements attempt to dictate the location of the arbitration hearing. To the contrary, and pursuant to FINRA rules, the Director of Dispute Resolution Services will decide which of FINRA’s hearing locations, usually the hearing location closest to the customer’s residence, will be the hearing location for the arbitration. Customer agreements cannot be used to restrict the location of an arbitration hearing.

Another common issue associated with arbitration agreements is time limitations. FINRA has become aware that certain customer agreements attempt to shorten or extend applicable statutes of limitations. However, FINRA argues that FINRA Rule 12206 details the appropriate time limits associated with FINRA claims. As such, the arbitrator or panel resolves any questions regarding the eligibility of a claim under this rule or under an applicable state statute of limitations. Customer agreements may not be used to shorten or extend statutes of limitations.

We encourage our clients to review Regulatory Notice 21-03 and to take prompt steps to ensure their customer agreements fully comply with FINRA rules.