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New FINRA Rule Confirms That Whistleblower Claims Need Not Be Arbitrated

Before the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) was enacted, whistleblower claims by registered representatives, including those arising pursuant to the Sarbanes-Oxley Act of 2002 (“SOX”) were subject to mandatory arbitration at FINRA.  See FINRA Regulatory Notice 12-21 (PDF).  Dodd Frank changed that.  Dodd Frank specifically amended SOX to provide that “[n]o dispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.”  In addition, SOX was also amended to provide that rights and remedies provided for in the statute cannot be waived, including by having a predispute arbitration agreement.  In order to be consistent with SOX and to make it clear that FINRA will not require the arbitration of other similar statutory claims, as of May 21, 2012, FINRA amended Rule 13201 of the Code of Arbitration Procedure for Industry Disputes (the “FINRA Code”) to address the arbitrability of statutory whistleblower claims.

Prior to the amendment, Rule 13201 made it clear that statutory employment discrimination claims were not subject to mandatory arbitration unless the parties to the dispute specifically agreed to arbitrate such claims.  See FINRA Rules 13201 and 13802: Arbitrating Statutory Employment Discrimination Claims.

In that regard, Rule 13201 of the FINRA Code (PDF) provided:

A claim alleging employment discrimination, including sexual harassment, in violation of a statute, is not required to be arbitrated under the Code. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose. If the parties agree to arbitrate such a claim, the claim will be administered under Rule 13802.

Rule 13201 has now been supplemented with regard to statutory whistleblower claims:   “a dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under the Code. Such a dispute may be arbitrated only if the parties have agreed to arbitrate it after the dispute arose.”

It should be noted that unlike Rule 13201’s provision regarding statutory discrimination claims, FINRA’s new provision regarding whistleblower statutes only covers claims arising under those whistleblower statutes that prohibit the use of predispute arbitration.  Accordingly, whistleblower claims that arise under laws with no such limitations may still be subject to mandatory arbitration before FINRA.  In addition, unlike statutory discrimination claims which parties can agree to arbitrate before or after a dispute arises, covered whistleblower claims may only be arbitrated if the parties agree after the dispute arises.

Together with the change to Rule 13201, FINRA revised the disclosure requirement for registered representatives signing new or amended Form U4s.  See FINRA Rule 2263 (PDF).  FINRA’s new disclosure form explicitly sets forth that certain statutory whistleblower claims are not required to be arbitrated.

What employers should do now? 

  • Review arbitration agreements. Employers should make sure that their current or proposed arbitration agreements do not include SOX claims or claims under other whistleblower laws that prohibit predispute arbitration.  Employers should keep in mind, however, that predispute arbitration agreements may still require the arbitration of statutory employment discrimination claims.  While there are pros and cons of arbitration, employers who wish to require it for employment discrimination claims should make sure to draft the inclusion of such claims into an arbitration agreement specifically.
  • Use the New Disclosure Form.  When registered representatives sign new or amended Form U4s, they should be given the revised FINRA disclosure form pursuant to Rule 2263.
  • Review policies and employment agreements. Employers should review their written policies and outstanding employment agreements to determine whether any policy or contract is too broadly drafted and could be interpreted to include the prohibited whistleblower claims.