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FINRA Amends Rules to Provide That Whistleblower Disputes are No Longer Subject to Mandatory Arbitration

May 22, 2012

The Financial Industry Regulatory Authority (“FINRA”) is amending Rules 13201 and 2263 to provide that whistleblower disputes are no longer subject to mandatory arbitration.1 This change aligns the rules with the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)2 that invalidate predispute arbitration agreements for whistleblower claims. In light of this change, member firms should update their employment agreements to reflect that whistleblower claims are not required to be arbitrated. The amendments to Rules 13201 and 2263 are set to take effect on May 21, 2012.

Background

The Sarbanes-Oxley Act of 2002 (“SOX”)3 establishes a federal cause of action for whistleblower claims. Initially, FINRA required SOX whistleblower claims to be arbitrated. In 2010, however, Congress passed the Dodd-Frank Act, which contains a provision that invalidates predispute arbitration agreements that require SOX whistleblower claims to be arbitrated. Specifically, Section 922(c)(2) of the Dodd-Frank Act declares:

No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.4

On Nov. 21, 2011, FINRA filed with the Securities and Exchange Commission a proposed rule change amending Rules 13201 and 2263 to conform with statutes that invalidate predispute arbitration agreements for whistleblower claims. The SEC approved FINRA’s proposed rule change on March 12, 2012. The new rules make clear that parties are not required to arbitrate whistleblower claims brought under SOX or any other whistleblower statute that prohibits predispute arbitration agreements. As amended, Rule 13201 declares:

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.5

Nearly identical language has been added to Rule 2263, thereby changing the disclosure language concerning predispute arbitration that member firms are required to include in their agreements with registered representatives. The amendments to Rules 13201 and 2263 are scheduled to take effect on May 21, 2012.

Analysis

Member firms should update the arbitration language in their employment agreements to make clear that a whistleblower dispute arising under a statute that prohibits pre-dispute arbitration agreements is not required to be arbitrated. This change would conform the arbitration disclosure language in the agreements with Rules 13201 and 2263.

In considering these updates, member firms should be mindful that Section 922(c)(2) of the Dodd-Frank Act is broadly drafted. On its face, the provision invalidates any predispute arbitration agreement that requires arbitration of a SOX whistleblower claim. A plaintiff could seize upon this language to argue that his predispute arbitration agreement is wholly invalid, and that all of his claims — whether or not arising under a whistleblower statute — must be decided in court.6 A plaintiff may also argue that Section 922(c)(2) extends to non-public companies,7 or that it applies retroactively.8 By updating the arbitration language in their employee agreements to explicitly exclude whistleblower disputes, member firms can help protect against attempts by whistleblowers to invalidate their arbitration agreements.

Conclusion

Member firms should update the arbitration disclosure language in their employment agreements to conform with amended Rules 13201 and 2263.

*This alert was co-authored by David Boch, W. Hardy Callcott and Jason Pinney.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Boch-David
Joseph-Roger
Smith-Edwin

1  FINRA Regulatory Notice 12-21 (April 2012) (“Regulatory Notice 12-21”), http://www.finra.org/ Industry/Regulation/Notices/2012/P126040.

2  Pub. L. No. 111-203, 124 Stat. 1376 (2010).

3  Pub. L. No. 107-204, 116 Stat. 745 (2002).

4  Section 922(c)(2) also states that: “The rights and remedies provided for in this section may not be waived by any agreement, policy form, or condition of employment, including by a predispute arbitration agreement.”  This provision amends SOX.  Section 748 of the Dodd-Frank Act adds similar language to the Commodities Exchange Act.

5  Regulatory Notice 12-21. Note that this language does not implicate other whistleblower provisions of the Dodd-Frank Act that do not prohibit predispute arbitration agreements, such as Section 922(a). Whistleblower claims brought pursuant to such provisions may presumably still be arbitrated.

6  See, e.g., Holmes v. Air Liquide USA LLC, No. 11–02580, 2012 WL 267194, at *4 (S.D. Tex. Jan. 30, 2012) (considering, but not deciding, plaintiff's argument that “agreements requiring the arbitration of all federal statutory claims are rendered invalid by the passage of Dodd-Frank simply because, without having anticipated the statute, the agreements implicitly require arbitration of claims arising under it”).

7  See id. at *4 n.1.

8  At present, the district courts are split on whether Section 922(e) applies retroactively. Compare Henderson v. Mansco Framing Corp., No. 11–00088, 2011 WL 3022535, at *4 (D. Nev. July 22, 2011) (finding that the plaintiff’s “right to arbitrate his SOX claim is not retroactively barred”) with Pezza v. Investors Capital Corp., 767 F. Supp. 2d 225, 234 (D. Mass. 2011) (“I conclude that Section 922 of the Act should [] be applied to conduct that arose prior to its enactment.”).

This article was originally published by Bingham McCutchen LLP.