July 11, 2025

Via E-Mail to [email protected]

Robert L.D. Colby
Executive Vice President and Chief Legal Officer
FINRA
1700 K Street, NW
Washington, DC 20006

Re: Recommendations for FINRA Arbitration

Dear Mr. Colby:

The Securities Industry and Financial Markets Association (“SIFMA”)¹ appreciates the opportunity to provide recommendations for improving the FINRA arbitration forum. SIFMA strongly supports efforts by FINRA to enhance the forum while also addressing our members’ longstanding concerns.² We recognize that any changes must balance the interests of all stakeholders in FINRA arbitration, and, above all, ensure investor protection. We believe our recommendations achieve that balance by focusing on improving the overall fairness and efficiency of the forum.

Executive Summary

Nearly all disputes between broker-dealers and their customers and employees are resolved in FINRA’s arbitration forum.³ Thus, it is critical that the forum operates efficiently and ensures predictable and fair outcomes for member firms, customers, and employees alike. To accomplish this, it is incumbent on FINRA to make necessary reforms when presented with discrete issues that undermine the forum’s efficiency and/or fairness.

This letter provides recommendations regarding five key areas that are ripe for reform.⁴ Specifically, FINRA should:

• permit agreements to adjudicate certain narrow categories of claims in alternative forums;
• permit agreements to preclude or limit punitive damages awards where permitted by applicable law;
• improve the fairness of adjudicating Form U5 defamation claims;
• amend certain procedural rules governing arbitrations; and
• enhance requirements to improve arbitrator quality and accountability.

Our recommendations are intended not only to be responsive to FINRA’s request to identify reforms that are fairly simple and straightforward (and thus could be implemented expeditiously), but also to improve the fairness and integrity of, and confidence in, the forum.

I. FINRA Should Permit Agreements to Adjudicate Certain Narrow Categories of Claims in Alternative Forums

FINRA takes the position that Rule 12200 prohibits any limitation on a customer’s right to request FINRA arbitration, and that the requirements of Rule 12200 supersede forum selection clauses in customer agreements.⁵ FINRA asserts that allowing forum selection clauses in customer agreements undermines the principles of investor protection and public interest embodied in FINRA’s arbitration rules, and that denying investors the benefits of FINRA’s arbitration forum may have the result of “foreclos[ing] customers from asserting their claims, particularly small claims.”⁶

With respect to a small subset of claims, however, we believe that FINRA should take a more permissive approach to forum selection clauses. Particularly, with respect to claims: (i) seeking damages over a certain, high dollar threshold (with a specific amount to be defined); or (ii) involving counterparties that are considered “institutional investors” pursuant to Rule 2210(a)(4), “small claim” or general investor protection concerns do not apply. Rather, these are precisely the types of claims that many stakeholders recognize are not best-suited for the FINRA arbitration forum.⁷ Accordingly, we recommend that FINRA revise Rule 12200 to allow member firms to contractually agree to opt out of FINRA arbitration and arbitrate disputes in an alternative forum in the two, above-referenced, narrow and discrete circumstances.

We also recommend changes to the requirements for arbitrating industry disputes under Rule 13200. FINRA has taken the same approach to Rule 13200 as it has to Rule 12200, stating that it prohibits provisions in predispute agreements between member firms and associated persons that waive the requirement to arbitrate disputes in a FINRA forum.⁸ Yet, in industry disputes, forum selection clauses obviously do not give rise to the same investor protection concerns, and FINRA has not identified any justification for treating these types of claims the same.⁹ SIFMA therefore recommends that FINRA amend Rule 13200 to permit parties to enter into predispute arbitration agreements that waive the requirement to arbitrate in a FINRA forum and permit arbitration in an alternative forum.

II. FINRA Should Permit Agreements to Preclude or Limit Punitive Damages Awards Where Permitted by Applicable Law

FINRA Rule 2268(d)(4) prohibits member firms from putting any contractual limitations on the awards a FINRA arbitrator can provide in customer agreements.¹⁰.)) Thus, firms cannot contractually preclude or limit punitive damages under FINRA rules, regardless of whether such limitations are permitted under applicable state law¹¹

Recent extreme outlier punitive damages awards issued by FINRA arbitration panels highlight the urgency for FINRA to allow firms to contract with their clients to preclude punitive damages awards where permitted by applicable law. Numerous policy and practical arguments support limiting the ability of FINRA arbitrators to impose punitive damages.

First, FINRA arbitration lacks the necessary procedural safeguards for awarding punitive damages. Punitive damages awards by FINRA arbitration panels are final and binding. There is no specific mechanism for seeking review or appeal of such awards. Moreover, the general grounds for appealing an arbitration award are extremely limited. Stated otherwise, it is nearly impossible to vacate even an obviously unreasonable arbitration award.

Second, punitive damages are intended to punish the wrongdoer and deter future misconduct. But FINRA arbitrators already have a sufficient—and arguably more effective—way of punishing wrongdoers and achieving deterrence: they can refer cases to FINRA Enforcement for disciplinary proceedings. More broadly, the highly-regulated nature of the securities industry further renders punitive damages unnecessary. Not only are firms regulated by FINRA, but they are also subject to extensive oversight by a multitude of federal and state regulators, which serves as a more than adequate deterrent to wrongful conduct.

Third, there is no compelling reason for FINRA’s rules to prohibit parties from contractually excluding or limiting punitive damages awards in arbitration where such agreements are permitted by state law. There is nothing extraordinary about parties contracting out of punitive damages in arbitration, and courts will generally enforce an agreement to do so if the agreement clearly expresses the parties’ intent to exclude these claims from the arbitrator’s purview.¹²

For these reasons, we recommend that FINRA amend Rule 2268(d)(4) to permit parties to agree in their predispute arbitration agreements to preclude or limit punitive damages in FINRA arbitration, so long as it is allowed under applicable state law.

Alternatively, at a minimum, FINRA should impose specific caps on punitive damages awards (e.g., requiring awards to be below a certain amount and/or tied to a multiple of any compensatory damages award).

1. SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). [↩]
2. SIFMA identified FINRA arbitration reform as a top priority in our response to FINRA Regulatory Notice 25-04, which sought the identification of areas FINRA should prioritize in connection with its rule modernization review. See SIFMA Letter, Regulatory Notice 25-04: Rule Modernization (June 11, 2025), https://www.sifma.org/wp-content/uploads/2025/06/SIFMA-Comment-on-RN-25-04-June-11-2025.pdf. SIFMA also raised concerns with the FINRA arbitration process in a February 2024 letter regarding the adjudication of Form U5 defamation claims. See SIFMA Letter, Form U5 Defamation Claims for Money Damages: Recommendations to improve the fairness of adjudication (Feb. 20, 2024), https://www.sifma.org/wp-content/uploads/2024/02/SIFMA-Letter-to-FINRA-re-U5-defamation-claims-220.2024.pdf. [↩]
3. FINRA Rules 12200 and 13200 give customers and employees, respectively, the ability to unilaterally compel member firms into FINRA arbitration. Virtually all member firms lock down that prospective choice –and help control their dispute resolution costs by designating FINRA arbitration for dispute resolution in their customer and employee agreements. Member firms cannot enforce dispute resolution clauses specifying court-based litigation, or an arbitration forum other than FINRA, in their customer or employee agreements. [↩]
4. Please note that these issues are not listed in priority order. [↩]
5. See FINRA Regulatory Notice 16-25, Forum Selection Provisions Involving Customers, Associated Persons and Member Firms (July 22, 2016) (“FINRA reminds member firms that customers have a right to request arbitration at FINRA’s arbitration forum at any time and do not forfeit that right under FINRA rules by signing any agreement with a forum selection provision specifying another dispute resolution process
   or an arbitration venue other than the FINRA arbitration forum.”). [↩]
6. Id. [↩]
7. See FINRA Dispute Resolution Task Force, Final Report and Recommendations of the FINRA Dispute Resolution Task Force (Dec. 2015), https://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf, at 30 (“It is generally recognized that large and complex cases present ‘special and often unique problems . . . which require greater procedural flexibility.’ Two related concerns have been expressed about the increase in large claims: whether the forum is meeting the needs of the parties and whether these cases place a disproportionate burden on the forum.”). [↩]
8. See FINRA Regulatory Notice 16-25, supra note 5. [↩]
9. See id. FINRA’s only justification for prohibiting forum selection clauses under Rule 13200 is that “FINRA Rule 13200 specifically states that industry disputes must be arbitrated at FINRA, except as otherwise provided in the Industry Code.” [↩]
10. FINRA Rule 2268(d)(4) (“No predispute arbitration agreement shall include any condition that . . . limits the ability of arbitrators to make any award.” (emphasis added [↩]
11. Three states prohibit punitive damages awards outright: Michigan, Nebraska, and Washington. Additional states impose caps or other limitations on punitive damages awards. For example, in New York, arbitrators are not permitted to award punitive damages. Garrity v. Lyle Stuart, 40 N.Y.2d 354, 356 (1976). In Massachusetts, the general rule is that punitive damages are not available absent specific statutory authority. Santana v. Registrars of Voters of Worcester, 398 Mass. 862, 867 (1986). [↩]
12. See Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52, 58 (1995) (stating that the Court’s decision on whether a New York choice-of-law provision precluded an arbitral award of punitive damages came down simply to “what the contract has to say about the arbitrability of petitioners’ claim for punitive damages”); see also Flintlock Construction Services, LLC v. Weiss, 122 A.D.3d 51, 54-56 (1st Dept. 2014) (stating that an arbitration agreement that expressly invokes New York’s prohibition on arbitral punitive damages awards, or expressly excludes claims for punitive damages, would be enforceable). [↩]