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FINRA Rule 2268: What is a Preedispute Arbitration Agreement? 

Nov 2, 2022 Articles

FINRA Rule 2268 outlines the requirements for predispute arbitration clauses that appear in agreements between investors and brokerage firms. If you work with a brokerage firm, you probably signed an agreement that contained a predispute arbitration clause, possibly without realizing.

Predispute arbitration clauses prohibit investors from suing their firms, brokers, and financial advisors in civil court. Instead, arbitration clauses require investors to pursue their case through FINRA arbitration. These clauses are legally enforceable, but brokerage firms must not overstep the boundaries of FINRA Rule 2268 in an attempt to prevent investors from collecting a FINRA arbitration award.

What is NOT Allowed in a Predispute Arbitration Clause?

There are limits on what predispute arbitration clauses may include or prohibit. If your brokerage firm attempts to include any of the elements expressly prohibited under FINRA Rule 2268, the arbitration clause may not be enforceable. Our securities lawyers can review your brokerage firm agreement to determine if there are any violations of the rule.

Predispute arbitration clauses must not:  

  1. Limit or contract the rules of any self-regulatory organization, such as FINRA or the SEC.
  2. Limit the ability of a party to file any claim in arbitration.
  3. Limit the ability of a party to file any claim in court that is otherwise permitted to be filed in court.
  4. Limit the ability of FINRA arbitrators to make any award. FINRA arbitration panels decide the amount of the award, with no input from brokerage firms.

What is Required in a Predispute Arbitration Clause?

FINRA Rule 2268 is designed to prevent brokerage firms from hiding predispute arbitration clauses.

Agreements that contain predispute arbitration clauses must highlight the existence of the clause before the signature line, along with what page and paragraph where the predispute arbitration clause is located.

Pursuant to FINRA’s rules, any predispute arbitration clause must be preceded by the following language.

This agreement contains a predispute arbitration clause. By signing an arbitration agreement, the parties agree as follows:

  1. All parties are giving up the right to sue each other in court.
  2. Arbitration awards are generally final and binding, and an investor’s ability to appeal is very limited. (For instance, an investor may be able to appeal to a court if they had evidence that a FINRA arbitrator accepted a bribe.)
  3. The ability of the parties to obtain documents and witness statements during discovery is more limited than in court proceedings.
  4. Arbitrators do not have to explain the reasoning behind their decisions and awards, except in eligible cases when both parties request an explained decision.
  5. The rules of some arbitration forums may impose time limits for bringing a claim.

What is FINRA Arbitration?

Arbitration is a dispute resolution forum administered through FINRA. FINRA does not settle disputes but provides a pool of neutral arbitrators that ultimately decide the case after an evidentiary hearing. Investors and brokerage firms often turn to securities attorneys to represent them in FINRA arbitration. This is a niche area of law and requires securities industry expertise.

Moreover, there is some debate over whether FINRA arbitrators are truly neutral. Many arbitrators have strong ties to the securities industry. In fact, one Harvard study suggested that there is a discernible pro-industry bias among arbitrators. FINRA arbitrators may even be brokers or financial advisors themselves — FINRA Rule 2168 stipulates that the panel of arbitrators may include a minority of arbitrators who were or are affiliated with the securities industry.

According to FINRA, arbitration is designed to resolve more quickly than a civil trial. The discovery process is streamlined. For instance, certain documents are automatically discoverable, with no subpoenas for advisory and brokerage firms that are members of FINRA.

Can Firms Use FINRA Rule 2268 to Compel Arbitration?

Yes, under FINRA Rule 2268 brokerage firms may compel arbitration. For instance, if an investor files a complaint in court that involves claims that are the subject of arbitration, the firm may compel arbitration.

What About Class Action Suits?

Firms may try to include language that prohibits class action lawsuits. These clauses are not enforceable. In fact, Rule 2268 specifically states that a class action suit cannot be brought to arbitration.

However, under FINRA Rule 12204, a case that is subject to a class action suit may also be arbitrated by FINRA if the party filing the claim will not participate in any recovery that may result from the class action claim. An investor may also file a claim for FINRA arbitration if they have withdrawn from a class action suit.

Do You Have Questions About Your Predispute Arbitration Clause?

If you have questions about your predispute arbitration clause, or any part of your agreement with your brokerage firm, you should contact a securities lawyer. Securities lawyers can help you determine if there is anything unenforceable in your agreement. Our attorneys also offer free case evaluations. You can contact us today at (877) 600-0098 or info @kurtalawfirm.com.