FINRA Issues New Guidance About Class Action Waivers in Account Agreement
FINRA has discovered that firms sometimes attempt to dissuade investors from recovering their financial losses through “pre-distribution arbitration agreements.” They may also attempt to prevent investors from pursuing a class action suit. These types of clauses are not allowed under FINRA regulations and are not enforceable. FINRA’s Regulatory Notice 21–16 reminds firms of the limitations of these agreements.
Key Takeaways
There are three key takeaways from this notice:
1. FINRA does not allow firms to stop investors from pursuing class-action suits.
2. Firms cannot include provisions that attempt to curtail the investor’s ability to recover losses that result from broker misconduct.
3. Firms cannot include provisions in their agreements that contradict FINRA rules.
Why Can’t I Sue My Broker?
Most disputes between investors and brokers end up in front of a FINRA arbitration panel. Arbitration is not a FINRA requirement, but many brokers will not start working with an investor until the investor signs a pre-dispute arbitration agreement. If you signed such an agreement, you may not be able to sue your broker in a civil court. That said, you can still hire a securities lawyer for FINRA arbitration, which in many cases can resolve your claim more quickly than civil court, and at a lower cost.
What If I Don’t Remember Signing a Pre-Distribution Clause?
Plenty of investors will find they have no memory of signing a pre-dispute arbitration agreement. If that happens to you, your firm may not have met the minimum disclosure requirement. Pre-dispute arbitration clauses must be highlighted in the agreement, with preceding language that brings attention to the clause.
What Can Firms NOT Include In Pre-Dispute Agreements?
1. Limitations on Arbitration Hearing Locations
Certain customer agreements have attempted to dictate the location of potential arbitration hearings. This is not allowed. According to FINRA rules, the Director of Dispute Resolution Services will decide which FINRA arbitration hearing location to use. The Director generally tries to select the location closest to the investor’s residence. (Increasingly, these hearings have taken place via videoconference calls.)
2. Time Limitations for Filing a Claim
According to FINRA Rule 12206, investors have six years from the date of misconduct to file a Statement of Claim. Customer agreements cannot shorten or extend this statute of limitations.
3. Restrictions Against Class Action Claims
According to FINRA Rule 12204, investors cannot waive their rights to bring a class-action suit against their broker. Class action claims also cannot be resolved through FINRA arbitration.
The notice cites an example from 2014 when FINRA fined Charles Schwab $500,000 and ordered them to remove language that attempted to discourage class-action lawsuits. FINRA also ordered Schwab to notify its customers that the anti-class action language in their agreement was unenforceable.
4. Limits on Liability for Punitive Damages
Firms have attempted to use pre-dispute agreements to limit the firm’s liability for punitive damages, i.e., fines intended to punish the firm on top of any money they have to return to the investor. Firms are not allowed to decide what type of fine an arbitration panel imposes.
5. “Hold Harmless” Provisions
Firms cannot include clauses that limit their liability. Why would firms be able to create a contract that protects them from violating FINRA rules? It doesn’t make sense, and these provisions are not enforceable.
What Should I Do If I Want to Pursue Arbitration?
You can still hire a lawyer for arbitration, just as you would for a civil case. Once you review your case with a securities lawyer, you’ll start the process by filing a Statement of Claim. From there, your attorney can help you prepare for your arbitration hearings.
