The Customer's Non-Waivable Right to Choose Arbitration in the Securities Industry

Abstract

Arbitration has been the predominant form of dispute resolution in the securities industry since the 1980s. Virtually all brokerage firms include pre-dispute arbitration agreements (PDAAs) in their retail customer contracts, and have successfully fought off challenges to their validity. Additionally, the industry has long mandated that firms submit to arbitration at the demand of a customer, even in the absence of a PDAA.

More recently, however, brokerage firms have been arguing that forum selection clauses in their agreements with sophisticated customers (such as institutional investors and issuers) supersede firms’ duty to arbitrate under FINRA Rule 12200. The Courts of Appeal currently are split on the question of whether, under general principles of contract interpretation, FINRA member firms can circumvent their duty to arbitrate by inserting forum selection clauses in their customer agreements.

Most of these courts have not addressed the argument that the anti-waiver provision of the Securities Exchange Act of 1934 (§ 29(a)) bars securities firms from forcing customers to waive their right to arbitrate disputes. The Supreme Court long ago interpreted § 29(a) to apply to waivers of substantive rights arising under the Exchange Act. Is the right to arbitrate in the FINRA forum, which is heavily regulated by the SEC to promote investor protection, a right that cannot be waived?

This paper will explore the interaction between the anti-waiver provision of the Exchange Act, and the right of a customer to demand a particular dispute resolution process. This paper argues that investors’ long-standing right to choose arbitration in the securities industry is a right that brokerage firms cannot force their customers to waive.

Keywords: securities regulation, arbitration, forum selection clause

JEL Classification: K22