Finra could be girding for some fights against brokerage firms who insist on avoiding Finra arbitration in lieu of other dispute-resolution forums.
Last week, Finra warned broker-dealers in no uncertain terms that they can’t force customers or registered reps into dispute forums other than Finra’s own arbitration program.
The warning, in a regulatory notice issued Friday, said firms could be subject to enforcement action if they deny access to Finra arbitration.
The regulator has been frustrated with a string of court cases that have undermined its rules allowing customers and industry employees to choose Finra arbitrations to settle disputes—even when account agreements and employment contracts specify another forum.
Finra rules requiring arbitration “are not mere contracts that member firms and associated persons can modify,” the notice said.
In what reads almost like a legal brief, the notice says that a number of federal court decisions allowing the use of non-Finra forums were wrongly decided.
These cases have relied on two appellate court decisions from the 1990s “that never actually decided whether a member firm may obtain and enforce a waiver of its obligation to arbitrate” at Finra, the notice says.
Industry lawyers who defend brokers in employment cases welcomed the notice, but see it as too little too late.
“My question [to Finra] is, where have you been over the past 20 years” when the issue has been litigated in court, said David Gehn, a lawyer at Gusrae Kaplan Bruno & Nusbaum PLLC in New York.
Finra’s failure to get involved in the fight has allowed firms to duck Finra’s system and develop “a body of case law” that they can now use to forum shop, Gehn said.