Predispute Arbitration Agreements in Account Paperwork

A predispute arbitration agreement asks a customer to give up court access before any dispute exists. Because of that, the predispute arbitration disclosure rule loads the agreement with required warnings, delivery deadlines, and hard limits on what the agreement can demand.

What Must the Required Disclosure Cover?

Any predispute arbitration clause in account paperwork must be highlighted and immediately preceded by disclosure in a prescribed form. The rule does not simply list topics to cover; it supplies the wording, opening with a statement that the agreement contains a predispute arbitration clause and that by signing it the parties agree as follows, and then setting out all seven of these points in outline form:

• The parties give up the right to sue each other in court, including the right to a jury trial, except as the arbitration forum's rules provide.
• Arbitration awards are generally final and binding; a court's ability to reverse or modify an award is very limited.
• The parties' ability to obtain documents, witness statements, and other discovery is generally more limited in arbitration than in court.
• Arbitrators do not have to explain the reasons for an award, unless, in an eligible case, all parties jointly request an explained decision at least 20 days before the first scheduled hearing date.
• The arbitration panel may include a minority of arbitrators affiliated with the securities industry.
• Some arbitration forums impose time limits for bringing a claim; a claim that is ineligible for arbitration may sometimes still be brought in court.
• The rules of the arbitration forum where a claim is filed, and any amendments to them, are incorporated into the agreement.

Exam Tip: Gotchas

• The 20-day joint-request deadline for an explained decision is measured from the first scheduled hearing date, and it requires all parties to request it jointly. A request from only one side does not trigger an explained decision.

What Must Appear at the Signature Line, and What Are the Delivery Deadlines?

• A highlighted statement must appear immediately before the signature line (or other place indicating agreement), stating that the agreement contains a predispute arbitration clause and identifying the page and paragraph where the clause is located.
• Within 30 days of signing, the firm must give the customer a copy of the signed agreement, and the customer must acknowledge receipt, either on the agreement itself or on a separate document.
• On a customer's request, the firm must, within 10 business days of the request, provide a copy of the predispute arbitration clause or customer agreement, or tell the customer the firm does not have a copy.
• If that request arrives before the firm has already delivered the copy it owes within 30 days of signing, the firm must meet whichever of the two deadlines falls earlier.
• On a customer's request, the firm must provide the names of, and how to contact or obtain the rules of, all arbitration forums in which a claim may be filed under the agreement.

Exam Tip: Gotchas

• Two different clocks apply. The firm has 30 days to deliver a signed copy without being asked, but only 10 business days to respond once the customer actually requests a copy.
• The two clocks are not fully independent. A request that arrives before the unprompted copy has gone out binds the firm to the earlier of the two dates, so a late request does not buy the firm 10 more business days.

What Conditions Can a Predispute Arbitration Agreement Never Include?

A predispute arbitration agreement may not include a condition that:

• Limits or contradicts the rules of any self-regulatory organization (SRO).
• Limits a party's ability to file any claim in arbitration.
• Limits a party's ability to file in court a claim that the applicable forum's rules otherwise permit to be filed in court.
• Limits the arbitrators' ability to make any award.

Every agreement must also state that no one may bring, or be compelled to arbitrate against, a putative or certified class action: a customer who has filed suit in court as part of a putative class, or who is a class member who has not opted out, cannot be forced into arbitration until the class is denied certification, decertified, or the customer is excluded from the class.

Exam Tip: Gotchas

• The class-action carve-out is not a permanent exit from arbitration. Once class certification is denied, the class is decertified, or the customer is excluded from the class, the predispute arbitration agreement becomes enforceable again for that customer's individual claims.

What Happens When a Customer Sues in Court Despite the Agreement?

• If a customer files a court complaint that contains claims covered by a predispute arbitration agreement, the member may seek to compel arbitration of the claims that are subject to arbitration.
• If the member does that, and the customer asks, the member must agree to arbitrate every claim in the complaint, not only the arbitrable ones.

Exam Tip: Gotchas

• Compelling arbitration is an all-or-nothing choice for the firm, at the customer's option. A firm cannot pull the favorable claims into arbitration and leave the rest in court if the customer objects.

What Should You Check on Exam Day?

• Count the required disclosure points: seven, covering jury trial, finality, discovery, explained decisions, panel composition, forum time limits, and incorporation of forum rules.
• Count the prohibited conditions: four, covering SRO rules, arbitration access, permitted court claims, and arbitrators' award power.
• Keep the two delivery clocks separate: 30 days unprompted, 10 business days on request, and the earlier of the two when a request precedes delivery.
• Remember the class-action carve-out lifts once certification is denied, decertified, or the customer is excluded, not permanently.
• Treat the compel-arbitration choice as all-or-nothing once the customer objects.