Earlier this summer the United States Court of Appeals for the Third Circuit held that banks must comply with Financial Industry Regulatory Rules (FINRA) that require arbitration of all claims brought against them by customers. This most recent decision broke from two 2014 decisions issued by the Second and Ninth Circuits on the issue.
The case concerned FINRA Rule 12200. The rule mandates that FINRA members arbitrate any dispute with a customer, upon the customer’s request for alternative dispute resolution. The Security and Exchange Act (Act) created FINRA, which is an independent self-regulatory organization established under Section 15A of the Act. FINRA was granted the authority to exercise comprehensive oversight over all securities firms that do business with the general public.
This requirement has been attempted to be circumvented by banks, broker-dealers, and other FINRA members. Many included forum-selection clauses in customer agreements and omitted mentioning the customer’s right to arbitration when a dispute arose. The Second and Ninth Circuits issued opinions in 2014 allowing FINRA members with forum-selection clauses to litigate disputes in federal court. FINRA responded by issuing a regulatory notice in 2016 reminding its members that customers have a right to arbitration.
Benefits of Arbitration
Arbitration is one type of alternative dispute resolution that is used in an effort for the parties involved in a lawsuit to avoid the expense and length of litigation. During arbitration, the parties are encouraged to participate fully in negotiations and sometimes help to structure the resolution. For this reason, arbitration is more peaceful than litigation, which often involves a level of hostility. While both parties hire their own lawyers and must pay the arbitrator, resolving the case this way is often less expensive because it is not as complicated or costly as a lawsuit. Unlike trials, arbitration hearings can typically be scheduled around the needs and availabilities of the parties involved. The rules of procedure and evidence are much more simplified than in a court proceeding.
The Third Circuit
Taking a different approach, the Third Circuit held that the practice of using forum-selection clauses to litigate cases and avoid arbitration had been condoned by several sister circuits. The Third Circuit found the practice deprived investors of the benefits associated with using FINRA’s arbitration forum to resolve disputes. The court held that FINRA member institutions cannot avoid the arbitration requirement by contracting around the requirement with forum selection clauses that fail to mention a waiver of arbitration rights. Due to the split in the circuits, the Supreme Court of the United States may hear the issue in the future.