FINRA Arbitration

Halbeath Ridge Securities uses a customer agreement containing a PREDISPUTE ARBITRATION clause. To keep the document tidy, the firm sets the clause in the same small type as the rest of the agreement, places it on page nine among the fee provisions, and does not mention it during account opening. A customer signs, and the firm keeps the only executed copy in its files. What is wrong with this?

1. A.Nothing, since the customer signed the agreement and is bound by everything it contains.A signature does not cure the presentation and delivery failures the rules require to be met.
2. B.Predispute arbitration clauses are prohibited in customer agreements, so the clause is void.They are permitted. The problem is how this one was presented and that no copy was given.
3. C.The clause is unenforceable only because the customer was not separately represented by counsel.Independent counsel is not required. The requirements are highlighting, prescribed disclosures and delivery of a copy.
4. D.The clause must be highlighted, accompanied by the prescribed disclosures, and a copy of the executed agreement given to the customer.Correct. Each of those requirements exists because arbitration waives the right to litigate, and the firm met none of them.

Why: Predispute arbitration agreements are permitted, but they carry specific presentation and delivery requirements because they waive the customer's right to go to court. The clause must be HIGHLIGHTED so that it stands out rather than being buried among ordinary terms, the agreement must contain the prescribed disclosures explaining what arbitration means and what rights are given up, and the customer must be given a COPY of the executed agreement. Burying an unmarked clause on page nine and retaining the only signed copy defeats each of those protections. The customer cannot make an informed choice about a waiver she was never shown, and she cannot later consult terms she does not possess.

The new account agreement Kirkbride Securities asks retail customers to sign contains a predispute arbitration clause. Under FINRA's rule governing such clauses, which statement is CORRECT?

1. A.The clause may be included anywhere in the agreement, provided the customer signs the agreement as a whole.The clause must be highlighted and preceded by prescribed disclosures; burying it is not permitted.
2. B.The clause must be highlighted and accompanied by prescribed disclosures, and a claim filed as part of a putative class action may not be compelled into arbitration while the customer remains a class member.Correct. Highlighting and disclosure are required, and class action claims are carved out of the arbitration obligation.
3. C.The clause bars the customer from participating in any class action against the firm on any subject.Class actions are expressly preserved. The customer may remain a class member rather than arbitrate.
4. D.The clause is unenforceable unless the customer separately initials it in the presence of a registered principal.No separate initialling before a principal is required. Highlighting and the prescribed disclosures are what the rule requires.

Why: A predispute arbitration clause must be highlighted and preceded by prescribed disclosures telling the customer, among other things, that arbitration is final and binding, that the parties give up the right to sue in court, and that discovery is generally more limited than in litigation. The customer must be given a copy of the agreement, and the firm must provide a copy of the arbitration clause on request. Importantly, a claim that is part of a certified or putative class action may not be compelled into arbitration while the customer remains a class member.

A retail customer of Corbin Securities signed a predispute arbitration agreement when she opened her account. She now wants to bring a claim against the firm for unsuitable recommendations, and she is also a member of a putative class action raising the same allegations. Which statement about FINRA's Code of Arbitration Procedure is correct?

1. A.The claim must generally be arbitrated, but a customer who is a member of a certified or putative class action may pursue it there instead and cannot be compelled to arbitrate while she remains in the class.Correct. Class actions are carved out of FINRA arbitration precisely so that class members are not forced out of the class proceeding.
2. B.Either party may appeal a FINRA arbitration award to the SEC for de novo review of the facts.Wrong. Awards are final and binding. Court challenges are limited to narrow statutory vacatur grounds, and the SEC does not rehear arbitrations.
3. C.She may choose arbitration or court freely, because predispute arbitration agreements are unenforceable against retail customers.Wrong. Predispute arbitration agreements are enforceable; that is why they are disclosed prominently in the margin and account agreements.
4. D.Arbitration is compulsory only for disputes between member firms and is always optional for a customer.Wrong. Member-versus-member arbitration is indeed compulsory, but a customer who signed a predispute agreement is bound by it outside the class action carve-out.

Why: A valid predispute arbitration agreement is enforceable, so a customer claim against a member firm normally proceeds in FINRA arbitration rather than in court. The Code carves out CLASS ACTIONS: a claim that is part of a certified or putative class action may not be arbitrated, and a class member may not be compelled to arbitrate until the class is decertified, certification is denied, or she is excluded from or opts out of the class. Awards are final and binding, with only the narrow grounds for vacatur available in court.