Securities Litigation

Last week, FINRA issued Regulatory Notice 21-16 cautioning member firms against attempting to limit customer claims through language in mandatory pre-dispute arbitration agreements. Rule 2628 prescribes disclosure requirements for arbitration clauses and generally prohibits provisions that contradict other FINRA Rules.

The Notice specifically cautions against several provisions that improperly limit customer claims:

First, firms cannot specify hearing locations, because FINRA Rule 12213 provides the Arbitration Director will. FINRA usually schedules hearings closest to the customer’s location;  some firms try for home-court advantage.

Second, firms cannot vary time limitations for filing claims from the six years specified in Rule 12206. That is a “gateway” filing rule that reserves to the Panel determinations of state or federal limitations or repose.

Third, although FINRA Rule 12204(a) does not allow class-action claims in arbitration, Rule 2268 also prohibits firms from enforcing arbitration agreements against any member of a putative or certified class.  Thus, class action waiver provisions in arbitration agreements are prohibited.

Fourth, firms cannot limit claims or Panel awards, whether directly or by a choice of law provision without a sufficient nexus to the parties or transactions an issue.

Finally, firms cannot use indemnification or hold harmless provisions to limit the claims customers may assert.

Regulatory Notice 21-16 (April 21, 2021) is here.