Firms Can’t Force Brokers Into Private Arbitration, Finra Warns
The Financial Industry Regulatory Authority sent out a stern warning on Friday notifying broker-dealers that they may face disciplinary action if they prevent brokers from bringing disputes over pay or other issues before a Finra arbitration forum.
“Finra rules do not permit member firms to require associated persons to waive their right to arbitration,” in employee agreements, the industry-financed regulator said in a “Forum Selection Provisions” notice issued as Regulatory Notice 16-25. “FINRA rules are not mere contracts that member firms and associated persons can modify.”
Lawyers representing brokers and other so-called associated persons that work for broker-dealers embraced the notice, saying that Finra’s three-person arbitration panels are better qualified—and more likely to understand broker-firm relationships because they often include industry veterans—than private groups that use single arbitrators that some firms favor.
While it does not make mention of specific firms, the notice follows a lawsuit by former Credit Suisse brokers who claimed Credit Suisse was ‘arbitration shopping’ in violation of industry rules when it filed notice to withhold deferred compensation from former employees who jumped to other firms. Morgan Stanley also has increased its reliance on private arbitration forums.
“This is a major victory for registered representatives and their right to arbitrate in their forum of choice,” said Brian Neville, a New York-based lawyer who represents several former Credit Suisse brokers. “We will be filing dozens of arbitration claims at Finra involving hundreds of million of dollars in deferred compensation.”
In March, Neville and seven other lawyers representing scores of Credit Suisse brokers sent a letter to Finra urging it to stand up for itself and preserve “the integrity of the financial industry’s self-regulatory system.”
Friday’s notice effectively “shuts down the private arbitration forums,” Neville said, referring to the JAMS and American Arbitration Association alternatives that some broker-dealers prefer.
Credit Suisse has brought claims against former brokers at its now-shuttered U.S. brokerage unit in an attempt to collect balances on so-called forgivable loans that were not fully amortized when advisers left. Many brokers, in turn, are seeking payment of deferred compensation that Credit Suisse withheld when they jumped.
Finra’s notice effectively “slams” Credit Suisse, said Curtis Carlson, a Miami, Florida lawyer who represents some former Credit Suisse brokers.
Stephen Kramarsky, a lawyer representing Credit Suisse, did not return requests for comment. A spokeswoman for Credit Suisse declined to comment.
Finra’s notice specifically addresses a finding by an influential federal appeals court in New York in 2014 that upheld firms’ ability to require employees to arbitrate outside Finra. If the regulatory group had wanted to prohibit its arbitration forum rule from being waived in employment or customers agreements, it would have done so, the Second Circuit appeals court ruled in allowing exceptions for Finra’s mandatory arbitration rule.
“Rule 13200 specifically states that industry disputes must be arbitrated at FINRA,” the group wrote in its 11-page notice. “Thus, any attempt to override this requirement of Finra Rule 13200 would violate Finra rules.”