FINRA Proposes Rule Change Precluding Collective Actions

By Jennifer Liu

The SEC recently published a notice that the Financial Industry Regulatory Authority, Inc. (“FINRA”) has proposed a rule change to its Code of Arbitration Procedure for Industry Disputes. The proposal would be a welcome change – the new rule would make collective actions ineligible for FINRA arbitration, just as class actions already are. With the rule change, employees who are registered with FINRA (e.g., stockbrokers, traders, and other employees working in securities businesses) will be able to file and participate in FLSA, ADEA, and EPA collective actions without the threat of being compelled to arbitrate their claims in FINRA’s forum. 

The proposal responds directly to Gomez v. Brill Securities, Inc., No. 10 Civ. 3503, 2010 WL 4455827 (S.D.N.Y. Nov. 2, 2010), in which Judge Jed Rakoff held that the employer could compel the plaintiff to arbitrate his FLSA collective action claims. Although FINRA Code of Arbitration Procedure for Industry Disputes Rule 13204 provides that class action claims may not be arbitrated in FINRA, Judge Rakoff concluded that FLSA collective actions were different from class actions and therefore were eligible for FINRA arbitration. Judge Rakoff refused to defer to FINRA’s longstanding position, as set forth in a 1999 Interpretive Letter addressed to the National Employment Lawyers’ Association, that FLSA collective actions should be treated as class actions ineligible for FINRA arbitration, and granted the employer’s motion to compel. Several other district courts had also found that FLSA collective actions claims were subject to arbitration in FINRA. See Velez v. Perrin Holden & Davenport Capital Corp., 769 F. Supp. 2d 445 (S.D.N.Y. Feb. 3, 2011) (listing cases).

The proposed rule change would amend current Rule 13204 to make it apply to FLSA, ADEA, and EPA collective actions as well as class actions. Rule 13204, as it currently stands, bars the arbitration of class action claims and provides that any claim based upon the same facts as a certified class action or putative class action shall not be arbitrated. It also states that “[a] member [firm] may not enforce any arbitration agreement against a member of a certified or putative class action with respect to any claim that is the subject of the certified or putative class action until” class certification is denied, the class is decertified, the class member is excluded from the class, or the class member elects not to participate or to opt out. If and when the rule change is adopted, the fact that an employee is a registered person and would usually be compelled to arbitrate should no longer be a barrier to bringing a collective action in court.

FINRA gives two basic reasons for the rule change: its belief that (1) courts are better equipped to manage complex representative actions, and that (2) “preserving access to the courts for these types of claims for associated persons protects the public interest as it permits associated persons and the forum to allocate resources effectively.”

Structurally, the proposal would split 13204 into two subparagraphs — (a) for class actions, and (b) for collective actions — where the text of (b) would track the current language of 13204. The Code of Arbitration Procedure for Customer Disputes would not change, since collective actions only arise in the employment context, which are encompassed in Industry Disputes.

All in, the proposal would be a positive step toward ensuring that employees have an appropriate forum in which to pursue their rights on a collective basis. 

Please visit the professional bio of  Jennifer Liu  at the Outten & Golden LLP website.