Friday, January 13, 2012

Securities Industry Urges Clarification of Proposed FINRA Whistleblower Rules

The securities industry has asked that FINRA rule proposals addressing disputes arising under a whistleblower statute be changed by replacing ``dispute” with “claim” in every instance in new section (b) of Rule 13201 and new item (3) of Rule 2263. In a letter to the SEC, which must ultimately approve the rule change, the Securities Industry and Financial Markets Association said that as a practical and definitional matter there can be no “dispute” until the parties join issue in an ongoing legal proceeding by disagreeing about the facts or the law. But a “claim” is the mere assertion of a right, in this case under a statute. To the extent that the proposal simply aligns FINRA’s rules with Dodd-Frank Act Section 922, and other federal statutes that do not require parties to arbitrate whistleblower claims, SIFMA supports the proposed changes.

According to SIFMA, using the term “dispute” creates a risk that a party could raise a whistleblower retaliation defense or otherwise assert some counterclaim under a whistleblower statute in an effort to improperly remove the entire case from arbitration. The proposal should clarify that it applies only to a bona fide whistleblower claim, that such a claim may be severed and removed from securities arbitration, and by doing so, the proposal is not intended to allow parties to avoid arbitrating other claims in the case that are properly subject to securities arbitration. SIFMA believes that replacing “dispute” with “claim” would help provide necessary clarity and certainty on this point.

SIFMA also urged that the word “federal” be inserted before “whistleblower statute” in new section (b) of Rule 13201 and new item (3) of Rule 2263 to clarify that the rule’s application is limited to federal whistleblower claims which are not subject to arbitration. As currently drafted, the proposed rule would seemingly apply to all whistleblower statutes, both federal and state (if any) that carve-out whistleblower claims from arbitration. The Federal Arbitration Act, however, generally preempts state statutes that invalidate arbitration agreements and thus would preempt state statutes that remove whistleblower claims from arbitration. As a result, the proposal could be read to expand upon U.S. Supreme Court jurisprudence and current law, and frustrate federal preemption under the FAA. The proposal should be amended to clarify that such is not the purpose or intent.

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