Securities Litigation

On April 9, FINRA amended its customer arbitration rules to give customers more options when a Respondent firm or associated person becomes “inactive” during an arbitration.

The largest percentage of unpaid customer awards in FINRA arbitrations are those against Respondent firms or associated persons who are “inactive” – that is, whose FINRA membership has been terminated, suspended, canceled, or revoked.  Those “inactive” Respondents are out of the business – and often just out of business, period.

FINRA Rule 12202 requires a customer Claimant to ratify, by post-dispute writing, the election to proceed in FINRA arbitration against a Respondent who becomes inactive before the Statement of Claim is filed.

The new rule change addresses those instances where a Respondent becomes inactive during a pending customer arbitration proceeding.  In those circumstances, the new rule requires FINRA to notify the customer who – within 60 days – then may (a) withdraw the arbitration, presumably to re-file it in a court; (b) amend the claim without prior panel approval, presumably to add other Respondents more likely to respond in judgment; and (c) postpone, without penalty, any hearing scheduled to begin within 60 days.  The change preserves a customer’s option to pursue default proceedings against inactive Respondents.

The rule change will work well enough where the underlying pre-dispute arbitration clause specifies FINRA arbitration (or the use of its rules).  Where, however, the pre-dispute arbitration clause does not specify FINRA rules, then it is not clear that the “withdraw and refile in court” option would be viable.  That may be academic, except in odd cases or under very old customer agreements.

The rule is effective for all FINRA arbitrations filed after June 29, 2020.

FINRA Reg. Notice 20-11 is here.