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B-Ds Find Ways To Bypass Finra Arbitration

Financial Advisor—Dan Jamieson

Some brokerage firms are successfully avoiding Finra arbitration for employment disputes—despite Finra rules to the contrary.

In several recent cases, firms have persuaded courts to uphold contractual provisions to arbitrate at the American Arbitration Association (AAA), a private forum that specializes in business disputes.

Although not a widespread trend, legal observers say the legal tactic by firms raises concerns about eroding Finra’s intended policy of providing an economical dispute-resolution process, and risks burdening registered reps with parallel proceedings. 

In the most recent case, a Texas federal court this month ruled that advisor Kirk Baur of Marlton, N.J., must pursue a deferred-pay claim against First Command Financial Services before the AAA. U.S. district judge Reed O’Connor of the U.S. District Court for the Northern District of Texas in Fort Worth said that First Command Financial Services (and the parent of First Command Financial Planning) is not a broker-dealer and so is not subject to Finra rules that require arbitration of employment disputes.

At the same time, First Command Financial Planning, a broker-dealer, is pursuing a separate but related non-competition case against Baur in Finra’s arbitration forum.

That appears to leave Baur with the expensive task of litigating in two forums, despite a Finra panel’s ruling in March that the entire dispute should be heard at Finra. 

A Finra hearing is scheduled to begin in October in Philadelphia, and a AAA hearing, which will probably be set in Dallas, is also in the works, Baur said.

“We’re trying to weigh what we should do with an appeal” of the court decision, Baur said.

Baur’s attorney, Christopher Trowbridge, a partner at Bell Nunnally & Martin LLP in Dallas, was not available for comment.

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A similar case involves a pair of former Ameriprise Financial Services reps—Jack Griffith and John Chapman—both based in Columbia, S.C.

Ameriprise Financial, the parent company, is withholding incentive stock from Griffith and Chapman, which was given to them as an incentive for sticking with Ameriprise after it bought their former firm, H&R Block, in 2008.

Under terms of the stock offer, the brokers forfeited the stock if they ever left Ameriprise. Both of them joined Janney Montgomery Scott early last year.

Ameriprise Financial, which is not a Finra member, filed at the AAA to get the stock back. 

The brokers want the cases moved to Finra, but last December a federal court in South Carolina denied a motion by Griffith to stay the AAA proceedings.

Griffith “has provided no persuasive authority indicating that the court can and should compel a non-Finra member to arbitrate with Finra,” wrote federal judge Terry  Wooten of the U.S. District Court, District of South Carolina, in Columbia.

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Finra has taken at least one enforcement action against a broker-dealer for avoiding arbitration of employment disputes.

In 2012, it settled a case with Merrill Lynch for $1 million. The case arose from the firm’s policy of forcing retention-bonus cases into New York state courts.

Griffith cited the Merrill case in his federal court action—but to no avail.

The Merrill action “is not binding precedent on this court,” Judge Wooten ruled, noting that Merrill funneled money through a non-Finra member specifically to avoid any kind of arbitration.

Industry attorneys say use of alternatives to Finra, such as AAA and JAMS  (formerly the Judicial Arbitration and Mediation Services), are not uncommon for employees on the institutional side of the industry.

And they say alternative forums do offer some advantages.

“I think the level of panel is far better in the AAA, but it is far more expensive,” said David Gehn, a lawyer at Gusrae Kaplan Bruno & Nusbaum in New York, who represents individual advisors.

“If firms pick up the cost [of AAA], you can’t argue about that,” Gehn said.

Baur’s independent contractor agreement with First Command requires each party to a dispute to pay their own forum costs.

For disputes relating to its incentive stock plan, Ameriprise pays all fees above what courts would charge, with parties responsible for their own legal representation.

Despite some advantages at AAA, lawyers who represent individual brokers tend to prefer Finra, where arbitrators are more likely to be familiar with industry practices and procedural rules are less formal.

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Despite its rules requiring Finra arbitration between registered representatives and firms, Finra is “very reticent [to] compel a non-member firm to arbitrate at Finra,” said Larry Moy, an employment lawyer and partner at Outten Golden LLP in New York.

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