It should be abundantly clear to everyone that BDs are required to arbitrate disputes with their registered reps. There are several reasons I can assert this with such a great deal of certainty. First, and most obvious, there is a rule about it. Rule 13200(a) of the Code of Arbitration Procedure provides that
[e]xcept as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:
- Members and Associated Persons; or
- Associated Persons.
The importance of the word “must” in that rule is made readily evident in IM-13000, which is titled “Failure to Act Under Provisions of Code of Arbitration Procedure for Industry Disputes”: “It may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Rule 2010 for a member or a person associated with a member to . . . (a) fail to submit a dispute for arbitration under the Code as required by the Code.” Plainly, since not arbitrating an industry dispute can result in disciplinary action, this is something FINRA takes seriously.
Second, in addition to the rule, there is the arbitration agreement embedded in every registered person’s Form U-4, which reads as follows:
I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the SROs indicated in Section 4 . . . as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction.
Between the rule and the U-4 language, it seems pretty straightforward that industry disputes must be arbitrated, right? Well, curiously enough, that is not always the case.
There was a court decision in New Jersey this week that teaches that the rule and the U-4 may not, by themselves, constitute adequate evidence of the parties’ intent to arbitrate.
In Barr v. Bishop Rosen & Co., Inc., the Superior Court of New Jersey upheld a lower court’s decision to deny a motion by a broker-dealer to compel arbitration of a complaint filed in court by one of its former registered reps. The Court took notice of the fact that the rep had signed the Form U-4 – more than once. But, that was not enough, at least under New Jersey law. In addition to agreeing to arbitrate disputes, the law also requires that the parties expressly waive their ability to pursue their rights in court. While that waiver may seem implicit in light of the agreement to arbitrate, the law does not permit it to be implied; it must be explicit, i.e., “clearly and unmistakably established.” Because the U-4 agreement to arbitrate does not include a recitation that the registered rep is affirmatively waiving his or her right to litigate in court, the Court concluded that the arbitration provision in the U-4 was not enforceable.
Interestingly, FINRA has recognized this deficiency in Form U-4. That is why FINRA Rule 2263 exists. Rule 2263 is one of the Conduct Rules that never gets any attention, but has been around for a long time, since 2000. According to Rule 2263, “A member shall provide an associated person with the following written statement whenever the associated person is asked, pursuant to FINRA Rule 1010, to manually sign an initial or amended Form U4, or otherwise provide written (which may be electronic) acknowledgment of an amendment to the Form U4.” It then goes on to recite, verbatim, specific language that “must” be provided to a registered rep every time a Form U-4 is signed, whether initially or as an amendment.
Among the required verbiage is an explicit waiver of the right to sue in court: “You are agreeing to arbitrate any dispute, claim or controversy that may arise between you and your firm, or a customer, or any other person that is required to be arbitrated under the rules of the self-regulatory organizations with which you are registering. This means you are giving up the right to sue a member, customer, or another associated person in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.”
The lesson here is very obvious. If a broker-dealer wants to be 100% confident of its ability to enforce an arbitration provision in industry disputes, it cannot rely simply on the language in Form U-4; rather, it must also provide the separate written statement required by Rule 2263. In my experience, unfortunately, I cannot say that all broker-dealers uniformly follow this practice, particularly with U-4 amendments.
It is perhaps even more important to understand that this legal principle, at least in New Jersey, does not apply only to industry arbitrations; it applies to all arbitrations, including customer claims. Thus, failure to include language in a customer arbitration agreement that includes a sufficiently “clear” waiver of the right to sue in court could be fatal to the ability to compel arbitration of a customer claim. Happily, FINRA anticipated this, too. Rule 2268 thus requires that predispute customer arbitration agreements include this: “All parties to this agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.”
 The Court did not discuss Rule 13200, so I have to presume that did not enter into its analysis.
 Some of the other recitations that must be included in the written statement include: (1) whistleblower disputes need not be arbitrated; (2) the limited ability to appeal an arbitration award; and (3) the limited discovery available in arbitration.