The Financial Industry Regulatory Authority (FINRA) is a not-for-profit, non-governmental organization that was created in 2007 through the consolidation of the National Association of Securities Dealers (NASD) and the New York Stock Exchange's member regulation, enforcement and arbitration operations. FINRA is authorized by Congress to ensure that the securities industry in the US operates fairly and honestly, and is subject to oversight by the Securities and Exchange Commission (SEC).

A dispute must be arbitrated under the FINRA Code of Arbitration Procedure for Industry Disputes if it arises out of the business activities of a Member or an Associated Person and is between or among:

Apparently not in New Jersey. In Barr v. Bishop Rosen & Co., an intermediate appellate court considered whether arbitration was required under Barr's Form U-4 securities registration application, which was promulgated not by his employer but by the industry under FINRA regulations. The court held that the arbitration clause contained in the U-4 was invalid under New Jersey law because it was not the product of mutual assent and therefore the registered representative did not knowingly waive his right to a judicial forum (No. A-2502-14T2, (N.J. App. Div. Oct. 26, 2015)). The court followed last year's holding of the New Jersey Supreme Court in Atalese v. US Legal Services Group, L.P., 99 A.3d 306 (N.J. 2014), cert. denied, 135 S.Ct. 2804 (2015), which held, in the context of a consumer dispute, that for an arbitration provision to be enforceable against a consumer, it must clearly and unambiguously notify her that she is waiving the right to seek relief in a judicial forum, including a trial by jury (see Legal Update, Arbitration Provisions in Consumer Contracts Must Unambiguously Waive Right to Judicial Relief: NJ Supreme Court).

The Barr decision discounts the disclosure statement required by FINRA Rule 2263 that informs the Associated Person that the arbitration agreement means that the Associated person is "giving up the right to sue a member, customer, or another associated person in court, including the right to a trial by jury." The court found Mr. Barr was given the disclosure years before the U-4 Forms in question and for that reason disclosure was ineffective.

If the Barr decision stands, brokerage firms with employees in New Jersey will no longer be able to rely on the industry-mandated securities registration application to enforce their registered representatives' obligation to arbitrate employment-related disputes. As in any other industry, a separate agreement to arbitrate, compliant with holdings in Barr and Atalese, may need to be executed (see Drafting a Mandatory Arbitration Agreement: Best Practices Checklist). At the very least, employers should retain proof that the employee read the FINRA Rule 2263 disclosure statement just prior to signing the Form U-4.

Practical Law has resources to help securities industry participants navigate FINRA industry arbitration, including: