FINRA Files for Immediate Effectiveness Rule Changes Needed to Conform Industry Code to Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act
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By George H. Friedman, SAA Publisher & Editor-in-Chief

As authorized in March by its Board, FINRA has filed a rule change proposal to conform the Industry Code to the newly-enacted Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act.

As reported in SAA 2022-10 (Mar. 17), FINRA’s Board of Governors met in person March 9 – 10. Among other items on the Agenda were: “proposed amendments to rules related to arbitration of sexual assault and sexual harassment claims to conform to the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act.” The results, posted on March 16, added little to the previously-announced Agenda item: “The Board approved the submission to the SEC of proposed amendments to align FINRA rules with the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021.” The post-meeting video (ed: see starting around marker 0:20) was similarly cryptic.

New Law Drove Needed Changes

Recall that we said in our feature article, President Biden Signs Into Law the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act. It Became Effective Immediately – Part I, 2022:08 Sec. Arb. Alert 1 (Mar. 3, 2022): “The new law definitely affects securities arbitrations, since the Act amended the FAA. We think the impact at FINRA will be in two main areas: 1) opting out; and 2) intertwining…. We suggest that FINRA will need to amend the Industry Code and its administrative procedures to accommodate the Act’s PDAA opt-out provisions…. FINRA will [also] need to address the intertwining issues identified above.” We gave models to emulate in each area. As described below, FINRA has addressed our concerns.

The Rule Filing: Opting Out and Intertwining

The Authority on May 13 filed with the SEC SR-FINRA-2022-012, Proposed Rule Change to Amend the Code of Arbitration Procedure for Industry Disputes (“Code”) to Align the Code with the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021. The changes are effective immediately, as provided in the Notice of Filing and Immediate Effectiveness published in the Federal Register on May 24 (Vol. 87, No. 100, P. 31592). Here are the changes (ed: excerpted essentially verbatim; footnotes omitted):

Amendments to FINRA Rule 13100: FINRA is proposing to amend FINRA Rule 13100 to add definitions of “sexual assault claim” and “sexual harassment claim” that are consistent with the definitions of “sexual assault dispute” and “sexual harassment dispute” in the Act. Specifically, proposed FINRA Rule 13100(aa) would provide that “[t]he term ‘sexual assault claim’ means a claim involving a nonconsensual sexual act or sexual contact, as such terms are defined in section 2246 of title 18 of the United States Code.

Amendments to FINRA Rule 13201: FINRA is proposing to amend FINRA Rule 13201 to align it with the Act by adding new paragraph (c) to provide that a party alleging a sexual assault or sexual harassment claim that has agreed to arbitrate before the dispute arose may elect post dispute not to arbitrate the claim under the Code. Proposed paragraph (c) would also provide that the claim may be arbitrated if the parties agreed to arbitrate it after the dispute arose. Further, paragraph (c) would provide that sexual assault and sexual harassment claims would be administered in the forum under FINRA Rule 13802, which establishes the procedural requirements for administering SD [statutory employment discrimination] claims in DRS’s arbitration forum today.”

Amendments to FINRA Rule 13803: FINRA is proposing amendments to FINRA Rule 13803 [“Coordination of Statutory Employment Discrimination Claims Filed in Court and in Arbitration”] to ensure that sexual assault and sexual harassment claims are administered consistently with how SD claims are currently administered in DRS’s arbitration forum. Under the current framework, sexual harassment and sexual assault claims would be administered under FINRA Rule 13803 to the extent such claims constitute SD claims. The proposed rule change would add the terms “sexual assault claim” and “sexual harassment claim” to the title of FINRA Rule 13803 and throughout the rule to make explicit that it applies to the coordination of sexual assault and sexual harassment claims filed in court and other related claims that may be filed at DRS’s arbitration forum.

Amendments to FINRA Rule 2263: FINRA is proposing a conforming amendment to FINRA Rule 2263 to incorporate the language in proposed FINRA Rule 13201(c) into the written statement a member firm must provide to an associated person regarding the predispute arbitration clause in Form U4. Thus, firms would be required to disclose to the associated person that a party alleging a sexual assault or sexual harassment claim that has agreed to arbitrate before the dispute arose may elect post dispute not to arbitrate such a claim under the Code, and that such a claim may be arbitrated if the parties have agreed to arbitrate it after the dispute arose.

Immediate Effectiveness

As we predicted in our editorial note in # 10: “FINRA has filed the proposed rule change for immediate effectiveness and has requested that the Commission waive the requirement that the proposed rule change not become operative for 30 days after the date of the filing. The operative date will be the date of the filing of the proposed rule change [May 13].”

(*Comments may be filed through June 14 at https://www.sec.gov/rules/sro.shtml. **Our comment in # 10 was spot on: “We imagine this rule filing will be for immediate or accelerated effectiveness.” ***We still wonder what other ADR institutions like AAA, CPR, and JAMS are doing?)