Posted On: April 24, 2012

FINRA Proposal Giving Collective Actions Exemption from Arbitration Gains SEC’s Accelerated Approval

The Securities and Exchange Commission has given accelerated approval to a proposed rule change by the Financial Industry Regulatory Authority. The proposal modifies FINRA’s Dispute Resolution's Code of Arbitration Procedure for Industry Disputes exempts collective actions from arbitration. The SEC decided to approve the proposed rule change after determining that it is consistent with not just the Exchange Act’s requirements, but also with regulations and rules applicable to a national securities association.

While class actions have been exempt from arbitration, small and large customers claims, employee disagreements, and complex cases have not. However, with the increase in collective actions, FINRA now believes that it is better to hear such actions submitted under the Equal Pay Act of 1963, the Age Discrimination in Employment Act, and the Fair Labor Standards Act (FLSA) in the courtroom.

"This seems to be a reversal of FINRA's earlier goals to expand their arbitration system to perhaps even include class action cases,” said FINRA Securities Lawyer William Shepherd. “Noting that FINRA is really just a trade association of all securities dealers, the suspicions are that legislators and courts have become so friendly to Wall Street lately that they no longer need their own dispute forum to avoid responsibility for their misdeeds."


FINRA sought the rule change following the ruling issued by a district court that held that a collective action is not a class action, per the Industry Code’s Rule 13204 that precludes class action from arbitration. The case was Hugo Gomez et al. v. Brill Securities, Inc. The U.S. District Court for the Southern District of New York ignored FINRA’s Interpretive Guidance that the SRO’s intent was to have collective actions also precluded from arbitration, much like class actions as is interpreted within Rule 13204’s meaning.

Also, per FINRA’s proposal, the rule change would:
• Provide that a claim involving plaintiffs that are similarly situated and make a case against the same defendants will not be settled through FINRA arbitration.

• Bar an associated person/firm member from enforcing any arbitration agreement against a member of a putative/collective class action group as it relates to any claim subject to a putative/collective class action (unless collective certification is not given or decertification occurs.)

• Grant arbitrators the power to determine whether a claim belongs to a collective action.

(Also, last month FINRA submitted an amendment to its proposal that would let a party ask any forum presiding over the collective action to resolve the disagreement within a specified time frame.)

Shepherd Smith Edwards and Kantas, LTD, LLP represents investors in arbitration and the courts. Contact our securities fraud law firm to speak with a FINRA securities arbitration attorney today.

Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change , FINRA, January 5, 2012

Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, SEC, April 9, 2012 (PDF)


More Blog Posts:
FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits, Stockbroker Fraud Blog, February 8, 2012

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud Blog, October 22, 2011

US Supreme Court Once Again Upholds Enforcement of Arbitration Agreements, Institutional Investment Securities Fraud, February 17, 2012