FINRA proposes to amend Rule 13204 of the Code of Arbitration Procedure for Industry Disputes (“Industry Code”) to preclude collective action claims under the Fair Labor Standards Act, the Age Discrimination in Employment Act, or the Equal Pay Act of 1963 from being arbitrated under the Industry Code. The rule change will become effective within 90 days of SEC approval - and will be announced in a Regulatory Notice. Current Provisions. Rules 12204 and 13204 under the Customer Code and Industry Code, respectively, provide that any claim that's based upon the same facts and law, and involves the same defendants as in a court-certified class action or a putative class action, shall not be arbitrated, unless the party bringing the claim files with FINRA one of the following:

• a copy of a notice filed with the court in which the class action is pending that the party will not participate in the class action or in any recovery that may result from the class action, or has withdrawn from the class according to any conditions set by the court;  or,
• a notice that the party will not participate in the class action or in any recovery that may result from the class action.

What FINRA Now Proposes. FINRA would amend Rule 13204 to preclude collective actions from being arbitrated in the forum.  As such, the current rule would be separated into two subparagraphs - one for class actions, the other for collective actions. Expanded 'Collective Action' Section. The new expanded 'Collective Action' section would contain the following 4 subparagraphs. 1.  Proposed Rule 13204(b)(1) ... would state that collective action claims under the Fair Labor Standards Act ("FLSA"), the Age Discrimination in Employment Act ("ADEA"), or the Equal Pay Act of 1963 ("EPA") may not be arbitrated under the Code.

FINRA believes that, although collective actions are opt-in actions, once a court grants approval for the collective action to proceed under a federal statute, the claims in dispute are administered like a class action, and, therefore, should be ineligible for arbitration in FINRA’s forum. Moreover, FINRA believes that collective actions, like class actions, should be handled by the judiciary system, which has extensive procedures to manage such claims.

2.  Proposed Rule 13204(b)(2) ... would state that any claim that involves similarly situated plaintiffs against the same defendants, like a court-certified collective action or a putative collective action, would not be arbitrated in FINRA’s arbitration forum.

Thus, if an associated person opts in to a collective action, that person could not arbitrate the same claims in FINRA’s arbitration forum. The proposed rule would not prevent an associated person from opting in to a collective action in court. However, an associated person would be required to choose the forum – either arbitration or court – that the person believes would address effectively the issues in dispute. Further, under proposed Rule 13204(b)(2), a case in which a court orders the plaintiffs to file as a collective action at a forum not sponsored by a self-regulatory organization would be ineligible for arbitration at FINRA.

3.  Proposed Rule 13204(b)(3) ... would give arbitrators the authority to decide disputes about whether a claim is part of a collective action.

This provision would be consistent with the proposed, renumbered class action rule, Rule 13204(a)(3), in that the panel decides the merits and disposition of an arbitration claim. Alternatively, under the proposed rule, parties may ask the court hearing the collective action to resolve the dispute concerning whether the claim is part of the collective action within 10 days of receiving notice that the Director has decided to refer the dispute to a panel.

4.  Proposed Rule 13204(b)(4) ... would prohibit a member firm or associated person from enforcing any arbitration agreement against a member of a certified or putative collective action with respect to any claim that is the subject of the certified or putative collective action until either the collective certification is denied or the group is decertified.

This proposed rule clarifies that the existence of a certified or putative collective action nullifies any pre-dispute arbitration agreements. If, however, a court denies a plaintiff’s request to certify a collective action or the court decertifies the collective action, the pre-dispute arbitration agreement would be enforceable, and FINRA would arbitrate the claims.

FINRA Staff Contact. Direct questions to:   Mignon McLemore, Ass't Chief Counsel, Dispute Resolution - (202) 728-8151. For further details, go to:  [FINRA Rule Filing 11-75, 12/22/11]