Stroock Special Bulletin
"FINRA Increases Scrutiny of Predispute Forum Selection Provisions"
On July 21, 2016, the Financial Industry Regulatory Authority issued Regulatory Notice 16-25 (“RN 16-25”), which is discussed in this Stroock Special Bulletin. RN 16-25 broadly prohibits member firms from using exclusive forum selection provisions in predispute agreements to deny or restrict customers or associated persons from availing themselves of FINRA arbitration. Notwithstanding existing Federal Appellate court precedent upholding the practice, FINRA warned that it will consider any effort by member firms to enforce such non-compliant predispute agreements a violation of FINRA rules that may result in disciplinary action. According to FINRA, “FINRA rules are not mere contracts that member firms and associated persons can modify,” and FINRA specifically disapproved of the line of judicial decisions holding that contractual forum selection clauses between parties superseded the obligation to arbitrate under FINRA rules.
Predispute forum selection provisions are ubiquitous in the securities industry, in agreements with both customers and associated persons. Member firms are advised to review promptly the language of the forum selection provisions in their agreements and policies pertaining to the enforcement of such provisions, in order to ensure compliance with RN 16-25 and FINRA rules, and to avoid potential disciplinary action. Going forward, any efforts by member firms to use alternative forums, such as the AAA or JAMS, in disputes with customers and associated persons, will likely come under heavy scrutiny. Further analysis of RN 16-25 reveals several important principles related to the drafting and enforcement of forum selection provisions in customer and industry agreements.