SEC Approves Amendments to Align FINRA Rules With Statutes That Invalidate Predispute Arbitration Agreements for Whistleblower Disputes

Arbitration of Whistleblower Disputes

Executive Summary

The SEC approved amendments to FINRA Rule 13201 of the Code of Arbitration Procedure for Industry Disputes (Industry Code) to provide that a dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under the Industry Code.¹ Parties may arbitrate such a dispute only if they have agreed to arbitrate it after the dispute arose. The rule change aligns the Industry Code with statutes that invalidate predispute arbitration agreements for whistleblower disputes. The rule change also makes a conforming change to FINRA Rule 2263 (Arbitration Disclosure to Associated Persons Signing or Acknowledging Form U4).

The amendments to Rule 13201 are effective on May 21, 2012, for all whistleblower disputes arising under a statute that prohibits the use of predispute arbitration agreements, regardless of when the predispute arbitration agreement was executed. The amendments do not apply to any pending matters at FINRA. The conforming change to FINRA Rule 2263 also is effective on May 21, 2012.

The text of the amendments is set forth in Attachment A.

Questions concerning this Notice should be directed to:

Background & Discussion

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)² amended the Sarbanes-Oxley Act of 2002 (SOX) by adding a new paragraph (e) to 18 U.S.C. § 1514A³ to provide that:

Prior to the Dodd-Frank Act, FINRA required parties to arbitrate SOX whistleblower claims under the Industry Code. In light of the changes set forth in the Dodd-Frank Act that invalidate predispute arbitration agreements in the case of SOX whistleblower claims, FINRA is amending FINRA Rule 13201 of the Industry Code to make clear that parties are not required to arbitrate SOX whistleblower claims. While the main impetus for the rule change is the need to update FINRA staff's stated position on SOX whistleblower claims, FINRA made the rule text broad enough to cover any statutes that prohibit predispute arbitration agreements for whistleblower claims.⁴

Rule 13201 of the Industry Code currently provides that a claim alleging employment discrimination, including sexual harassment, in violation of a statute, is not required to be arbitrated under the Industry Code. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose. FINRA is amending Rule 13201 to add a new provision to provide that a dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under the Industry Code. The revised rule states that such a dispute may be arbitrated only if the parties have agreed to arbitrate it after the dispute arose.

FINRA is making a conforming amendment to FINRA Rule 2263, which requires firms to provide each associated person with certain written disclosures regarding the nature and process of arbitration proceedings whenever the firm asks an associated person, pursuant to FINRA Rule 1010 (Electronic Filing Requirements for Uniform Forms), to manually sign a new or amended Form U4, or to otherwise provide written acknowledgment of an amendment to the form. FINRA is amending Rule 2263 to add a disclosure provision stating that a dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under FINRA rules, and that such a dispute may be arbitrated only if the parties have agreed to arbitrate it after the dispute arose.

Effective Date

The amendments to Rule 13201 are effective on May 21, 2012, for all whistleblower disputes arising under a statute that prohibits the use of predispute arbitration agreements, regardless of when the predispute arbitration agreement was executed. The amendments do not apply to any pending matters at FINRA. The conforming change to FINRA Rule 2263 also is effective on May 21, 2012.

1. See Securities Exchange Act Rel. No. 66575 (March 12, 2012), 77 Federal Register 15824 (March 16, 2012) (File No. SR-FINRA-2011-067).

2. See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203 (2010).

3. See Dodd-Frank Section 922(c)(2), adding 18 U.S.C. § 1514A(e) (Nonenforceability of Certain Provisions Waiving Rights and Remedies or Requiring Arbitration of Disputes).

4. The Dodd-Frank Act also invalidated predispute arbitration agreements in other whistleblower statutes, including, for example, 7 USCA § 26(n) relating to Commodity Exchange Whistleblower Incentives and Protections.

Attachment A

New language is underlined; deletions are in brackets

Code of Arbitration Procedure for Industry Disputes

* * * * *

* * * * *

* * * * *