Federal appeals court rules banks must allow arbitration upon customer request
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Federal appeals court rules banks must allow arbitration upon customer request

The US Court of Appeals for the Third Circuit [official website] ruled [opinion, PDF] Tuesday that banks must comply with the Financial Industry Regulatory Authority (FINRA) [official website] rules requiring the arbitration of all claims brought against them by customers, breaking from two 2014 decisions issued by the Second and Ninth [official websites] Circuits.

The issue concerns FINRA Rule 12200 [materials], which requires a FINRA member to arbitrate any dispute with a customer upon the customer’s request. FINRA is an independent self-regulatory organization established under Section 15A [materials] of the Security and Exchange Act to “exercise comprehensive oversight over all securities firms that do business with the public.”

Banks, broker-dealers and other FINRA members have attempted to circumvent this requirement by including forum-selecting clauses in their customer agreements and not mentioning the customer’s right to arbitrate. Both the Second and Ninth Circuits issued opinions allowing FINRA members with such forum-selecting clauses to litigate in federal court. In response, FINRA issued a regulatory notice [text, PDF] in July 2016 reminding its members that customer’s have a right to request arbitration.

The Third Circuit took a different approach, finding that “[t]his practice, which has been condoned by several of our sister circuits, deprives investors of the benefits associated with using FINRA’s arbitral forum to resolve brokerage-related disputes.” As such, the court held that these institutions cannot avoid FINA arbitration requirements via forum selection clauses that do not explicitly mention the waiver of arbitration rights.

Due to the circuit split, the issue could be heard next by the Supreme Court.