Today, the Second Circuit followed an April 2014 decision by the Ninth Circuit in Goldman Sachs & Co. v. Reno(described here) — and rejected an opposite holding by the Fourth Circuit — and held that a forum selection clause in a contract supersedes a broker-dealer’s obligation to arbitrate disputes with a customer under FINRA Rule 12200.  The Court of Appeals, in a single opinion, resolved two cases: Goldman Sachs & Co. v. Golden Empire Sch. Fin. Auth., No. 13-797-cv (2d Cir. Aug. 21, 2014) and Citigroup Global Mkts. Inc. v. N.C. E. Mun. Power Agency, No. 13-2247-cv (2d Cir. Aug. 21, 2014).  The respective forum selection clauses at issue required “all actions and proceedings” related to the transactions between the parties be brought in court.

FINRA’s Rule 12200 has been the source of much litigation recently, as broker-dealers have tried to elude their obligations to arbitrate with customers, by asking courts to construe the word “customer” narrowly.  To aid lower courts, the Second Circuit recently adopted a bright-line definition of “customer.”.  See here.

I don’t understand why recently amended sec. 29(A) of the Exchange Act doesn’t void the parties’ forum selection clause. That provision voids “any condition, stipulation, or provision binding any person to waive compliance … with any provision of the Exchange Act or its rules.”  Dodd-Frank (2010) amended § 29(a) to include rules issued by all SROs. Thus, since 2010, § 29(A) explicitly invalidates provisions in brokerage agreements that require customers to waive compliance with FINRA rules.  To the extent courts have held in the past that parties could contract around FINRA rules, that line of cases seems to be vitiated by amended § 29(A).

 An equally important issue is whether a broker-dealer’s conduct in trying to avoid arbitration with a customer by inserting a forum selection clause in its contracts with that customer violates FINRA IM-12000, which states that it “may be deemed conduct inconsistent with just and equitable principles of trade and a violation of [FINRA Conduct] Rule 2010 for a member… to…(a) fail to submit a dispute to arbitration under the [FINRA Arbitration] Code.”  FINRA Enforcement should pursue these broker-dealers for including these clauses in customer agreements.

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By Jill Gross

Jill Gross is a Professor of Law and the Director of the Investor Rights Clinic at Pace Law. She teaches the Investor Rights Clinic and Seminar, Mediation and Arbitration, Professional Responsibility, and Securities Litigation and Enforcement. She has published numerous law review articles in the area of dispute resolution and investor justice, and has been quoted in the national media on issues relating to securities arbitration. She is also a contributor to ADR Prof Blog.