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FINRA Jurisdiction

The National Association of Securities Dealers, Inc., (NASD), now the Financial Industry Regulatory Authority (FINRA), was first founded in 1939 and registered with the Securities and Exchange Commission (SEC). FINRA was founded as a self-regulatory entity in response to amendments to the Securities Exchange Act of 1934, which authorized the NASD/FINRA to supervise the conduct of its members subject to oversight by the SEC. In 1987, the United States Supreme Court ruled in Shearson v. McMahon that under the Securities Exchange Act of 1934 arbitration clauses that mandated disputes be carried out through arbitration were enforceable.

Three years later, in Rodriguez v. Shearson, the Court extended mandatory arbitration requirement to disputes arising under the Securities Act of 1933. As a result of this ruling, FINRA acquired the legal jurisdiction to decide virtually all customer securities-related disputes through, making all FINRA arbitration binding to this day. If a customer or firm refuses to bring such claims into arbitration, the other party can seek a court order compelling the other party to bring their claims before FINRA.

Similarly, FINRA requires all registered persons to execute and file a Uniform Application for Securities Industry Registration or Transfer (“Form U-4”) with FINRA as a routine condition of being hired by a broker-dealer. As part of the Form U-4, brokers consent to submit any dispute, apart from statutory discrimination claims (discussed below), between said broker and his or her firm, before FINRA for a binding arbitration decision. If either broker or firm refuse to do so, that party may be compelled by court order to proceed to FINRA arbitration. A broker may wonder:

“What if I am no longer employed by a broker dealer? Does FINRA still have jurisdiction over me?”

The answer is “Yes.” As stated in Article 5, Section 4, of FINRA’s By-Laws, FINRA continues to hold jurisdiction over all FINRA-member broker-dealers for two years after your termination from the firm. Claims alleging employment discrimination in violation of a statute, including claims of sexual harassment claim, are not required to be arbitrated through FINRA arbitration and may proceed as non-arbitration cases in the courts. Depending on the particular facts, an employee’s claims might be better filed in court, rather than in arbitration. However, at their time of hire, brokers routinely sign contractual agreements, containing a provision that they bring all claims, including statutory discrimination claims, through FINRA arbitration. Such contractual agreements to arbitrate these disputes will be honored by FINRA and are routinely enforced by courts. Finally, there are certain types of statutory claims, such as whistleblower claims, which cannot be compelled to FINRA arbitration unless you sign an agreement to arbitrate such claims after they arises.

For these reasons, you should have an experienced FINRA arbitration attorney review all employment-related documents you may have signed at your time of hire prior to filing any claims, so that you may adequately determine the best jurisdiction for your statutory employment discrimination claims.

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