United States: FINRA Increases Scrutiny Of Predispute Forum Selection Provisions

On July 21, 2016, the Financial Industry Regulatory Authority ("FINRA") issued Regulatory Notice 16-25 ("RN 16-25"), broadly prohibiting 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disapproved of the line of judicial decisions holding that contractual forum selection clauses between parties superseded the obligation to arbitrate under FINRA rules.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.

1. Customer Disputes

The starting point for FINRA arbitration under the FINRA Code of Arbitration Procedure for Customer Disputes ("Customer Code") is Rule 12200, which provides that parties must arbitrate if: 1) arbitration is required either by written agreement, or requested by the customer; 2) the dispute is between a customer and a member or associated person of a member; and 3) the dispute arises in connection with the business activities of the member or the associated person. Accordingly, RN 16-25 emphasizes that the obligation to arbitrate does not solely stem from a written agreement, but also can arise from a customer's request made at any time. In other words, "this rule preserves a customer's ability to resolve disputes through FINRA arbitration, regardless of whether arbitration is required by a written agreement."

Predispute arbitration agreements are contained in virtually all new account opening agreements, and they must meet various requirements under FINRA rules. For instance, FINRA Rule 2268 specifies that an arbitration agreement clause be highlighted and immediately preceded by certain disclosures regarding the nature of arbitration. See, generally, FINRA Rule 2268. Importantly, FINRA Rule 2268(d) also prohibits any predispute arbitration agreement from including any condition that: 1) limits or contradicts the rules of any SRO, or 2) limits the ability of a party to file any claim in FINRA arbitration. RN 16-25 clarifies that this Rule requires arbitration agreements to "preserve the rights of the contracting parties under SRO rules and that FINRA arbitration must be a choice for the parties as a means of dispute resolution."

In RN 16-25, FINRA also expressed disapproval of several Federal Appellate court decisions which held that forum selection clauses in agreements between member firms and customers supersede the requirements of FINRA Rule 12200, and thus permitted member firms to require customers to arbitrate outside of FINRA or to litigate in state or federal court. See, e.g., Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764 F.3d 210 (2d Cir. 2014); Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733 (9th Cir. 2014). According to FINRA, these decisions were based on the erroneous premise that the "duty to arbitrate under FINRA rules, or to arbitrate in FINRA's arbitral forum, is merely contractual and can be superseded or waived." As FINRA bluntly puts it in RN 16-25, "they are not default rules that may be overridden by more specific or separate contractual terms without consequences under FINRA rules."

Importantly though, FINRA recognized that member firms and customers may elect, by mutual consent, notwithstanding an arbitration agreement, to resolve their disputes outside of FINRA arbitration without running afoul of FINRA rules. However, this election is only permitted "after a dispute has arisen between the parties." Similarly, if there is no written agreement to arbitrate, and if the customer does not elect FINRA arbitration, then the parties can agree to resolve their dispute outside of FINRA.

Through RN 16-25, FINRA makes very clear that "any member firm's denial, limitation, or attempt to deny 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 a arbitration forum" is a violation of FINRA Rules 2268, 12200 and 2010 (Standards of Commercial Honor and Principles of Trade). Additionally, FINRA warns member firms that "provisions in predispute arbitration agreements or any other customer agreements that do not comply with FINRA rules may be subject to disciplinary action." Nor are member firms permitted to "use an existing non-compliant agreement as a basis to deny a customer the right to FINRA arbitration at the customer's request, without violating FINRA rules."1

2. Associated Person Disputes

RN 16-25 expresses the same principles and policy as it pertains to predispute forum selection provisions between member firms and associated persons. Under FINRA Rule 13200 of the Code of Arbitration Procedure for Industry Disputes, disputes between member firms and associated persons arising out of the business activities of a member or an associated person must be arbitrated through FINRA.

FINRA similarly rejected recent precedent holding that Rule 13200 could be waived in a predispute agreement to arbitrate in a forum other than FINRA. See Credit Suisse Sec. (USA) LLC v. Tracy, 812 F.3d 249 (2d Cir. 2016). Again, RN 16-25 reiterated that "FINRA's arbitration rules are not default rules. FINRA Rule 13200 specifically states that industry disputes must be arbitrated at FINRA[.] Thus any attempt to override this requirement of FINRA Rule 13200 in a predispute agreement by more specific contractual terms would violate FINRA rules."

As in the case of customer disputes, RN 16-25 issued a clear warning to member firms: "[m]ember firms with provisions in predispute agreements that do not comply with FINRA Rules may be subject to disciplinary action."2

The Bottom Line

RN 16-25 further solidifies FINRA arbitration as the preferred forum for resolution of disputes between member firms and its customers or associated persons. FINRA clearly instructs member firms that, notwithstanding existing Federal Appellate court precedent upholding the practice, it will consider it a violation of FINRA rules for member firms to restrict or prohibit customers or associated persons from availing themselves of FINRA arbitration through the use of exclusive predispute forum selection provisions, or to refuse to arbitrate through FINRA arbitration disputes within the scope of Rules 12200 and 12300 upon request by customer or associated persons.

Any attempts to enforce such non-compliant provisions, whether in new agreements or existing agreements, may also subject member firms to disciplinary action. Accordingly, member firms should promptly review the language of the forum selection provisions in their agreements with customers and associated persons, and their 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.


1. If a member firm is using a forum selection clause in a predispute agreement specifying a forum other than FINRA arbitration, FINRA recommends that the member firm use a non-exclusive forum selection provision, and include the following language: "This agreement does not prohibit or restrict you from requesting arbitration of a dispute in the FINRA arbitration forum as specified in FINRA rules."

2. RN 16-25 also provides, as it does with customer disputes, recommended language for member firms to use in forum selection provisions contained in agreements with associated persons in order to comply with FINRA rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions