Reimagining Securities Arbitration: FINRA Launches Broad Review of Arbitration Rules and Requests Comment on Modernization Initiative

Responding to concerns raised and longstanding debates over how the Financial Industry Regulatory Authority’s (FINRA) arbitration forum functions, on March 2, FINRA issued Regulatory Notice 26‑06, seeking public comment on modernization of its arbitration rules, guidance and processes, as part of its broader “FINRA Forward” rule modernization program.[1] The Notice signals that core features of FINRA arbitration, including forum selection, claim eligibility, dispositive motion practice, arbitrator qualifications and selection, discovery, hearing management, punitive damages, award publication, unpaid awards, and certain employment‑related claims, are on the table for potential reform. 

The breadth of issues under consideration, combined with sharply divided stakeholder feedback, signals that this initiative could significantly reshape the arbitration landscape for member firms, associated persons, and customers alike. With comments due May 1, 2026, stakeholders should carefully assess how proposed changes could affect their litigation strategy, compliance obligations, and customer-facing agreements. Given the potential for significant rule changes, firms and industry groups are encouraged to submit detailed comments addressing both practical implications and fairness considerations.

We will continue to monitor developments and are available to assist clients in preparing comment letters or assessing the potential impact of any resulting rule changes that could affect their litigation strategy, compliance obligations, and customer-facing agreements.

Forum Selection and Required Arbitration

FINRA recognized that many members expressed concerns about whether FINRA arbitration is appropriate for certain types of claims, such as those involving institutional clients or high-dollar-value claims. FINRA Rule 12200 requires certain customer disputes to be arbitrated in the FINRA forum when (1) there is a written agreement to arbitrate at FINRA or the customer requests FINRA arbitration; (2) the dispute involves a member or associated person; and (3) the dispute arises from the member or associate person’s business activities. Whether a forum selection clause in a customer agreement can override Rule 12200 and require litigation or arbitration elsewhere remains an open question. 

FINRA noted that only about 1 percent of claims brought in FINRA arbitration ever exceed $10 million in damages sought or awarded. For customer claims, FINRA requested comments on (1) whether certain categories of claims or customer types, such as high-dollar claims, institutional clients or complex cases, should be subject to different procedural requirements, arbitrator qualifications or even excluded from the FINRA forum; (2) whether parties should be able to contract in advance to opt out of FINRA arbitration for certain claim categories; (3) whether customers should have a unilateral post‑dispute right to choose arbitration or litigation, or whether FINRA arbitration should be available only when both sides agree after a dispute arises; and (4) what changes might improve efficiency and cost‑effectiveness.

For industry disputes, FINRA asked whether it should (1) stop requiring some or all intra‑industry disputes to be arbitrated under the Industry Code; and (2) carve out particular types of intra‑industry disputes from mandatory arbitration, and (3) what fairness considerations should inform such changes.

Punitive Damages

FINRA has historically prohibited customer pre-dispute arbitration agreements from restricting arbitrators' remedial authority, including punitive damages where available under applicable law. While punitive awards remain relatively rare — only about 3 percent of awards have included punitive damages since 1988 — recent sizeable awards have raised industry concerns that additional measures are needed.[2]

Industry commenters argue that FINRA arbitration lacks procedural safeguards commonly associated with punitive damages in court, such as heightened pleading standards, bifurcated proceedings, detailed judicial review and written opinions, and advocate for either allowing pre-dispute agreements to limit or preclude punitive damages or imposing caps (e.g., fixed amounts or multiples of compensatory damages). Customer advocates oppose new limits, stressing that customers compelled to arbitrate should retain access to the full range of remedies available in court.

FINRA is inviting comment on: 

• whether to maintain the current punitive-damages framework;
• permit parties, in customer pre-dispute agreements, to limit punitive damages to the extent allowed by applicable law;
• impose caps on punitive damages and how such caps should be structured;
• introduce procedural safeguards, such as bifurcated liability and damages phases, elevated standards for awarding punitive damages, or mandatory explained decisions when punitive damages are awarded;
• require that panels considering punitive damages meet additional qualification criteria; or
• create an internal appellate process focused on punitive damages (or broader appellate mechanisms), and if so, how such a process should be structured, including who can appeal, scope of review and arbitrator qualifications for any appellate roster.

Form U5 Defamation Claims

Under FINRA rules, firms must make disclosures on an associated person’s Form U4 or U5 after certain events, such as termination or public complaints. Associated persons often respond by filing arbitration claims seeking expungement of allegedly untrue or misleading statements and, in some cases, monetary damages for defamation or wrongful termination (or both). Industry commenters have suggested FINRA should provide additional arbitrator training on the substantive elements of defamation claims, require explicit written findings in awards granting monetary damages, and grant firms a qualified or absolute immunity against these claims. FINRA seeks comments on how to balance the regulatory need for complete and accurate Central Registration Depository (CRD) reporting with member concerns about adverse arbitration awards and associated persons' expectations for recourse, whether arbitrators hearing Form U5 defamation claims should have additional experience and qualifications, and whether FINRA should revisit providing members with further immunity against Form U5 defamation claims.

Eligibility Time Limits and Motions to Dismiss

FINRA also raised the possibility of modifying FINRA Rules 12206 and 13206, which place a six‑year time limit on claims “from the occurrence or event giving rise to the claim,” distinct from statutes of limitations and are designed to prevent “aged” claims from entering the forum. Some market participants have urged FINRA to eliminate the six-year rule and rely instead on applicable statutes of limitations. In contrast, others advocate for treating the rule as a strict statute of repose, barring any claim arising from events more than six years prior to filing. 

FINRA is asking market participants to comment on whether it should (1) eliminate the six‑year eligibility rule entirely; (2) codify a more flexible approach (e.g., allowing claims based on older events when there are ongoing damages or concealment); (3) clarify that the rule is a strict statute of repose, and how that would apply to continuing wrongs; or (4) consider other eligibility frameworks balancing investor access, recordkeeping burdens, and predictability. 

FINRA Rules 12504 and 13504 provide narrow grounds for dispositive motions, including prior release, naming the wrong party, and prior final adjudication of the same dispute. Current procedures limit abusive use by restricting refiling without panel permission, imposing potential sanctions for denied or frivolous motions, and requiring written explanations when motions are granted. Recent commentators have urged FINRA to broaden dismissal grounds and permit respondents to file dismissal motions before answering. FINRA seeks comments on whether and how to alter the timing and grounds for prehearing motions to dismiss, and how to weigh efficiency gains against customer protection.

Other Comment Topic Areas

In addition to these topics, FINRA is also seeking comments on a number of other topics, including updates to the discovery process, modifying arbitration roster make-up based on the category of case and limiting customers ability to strike all non-public arbitrators, the potential removal or redaction of published arbitration awards, mechanisms to reduce the number of unpaid awards, hearing oversight, case management procedures and support resources for arbitrators to consult on procedural or evidentiary questions. Beyond the specific areas addressed above, FINRA requests comment on any rules, guidance (including Regulatory Notices, FAQs, and other published materials), or processes affecting its arbitration forum and how they might be revised to enhance transparency, impartiality, and efficiency for all participants. 

For more information on the revisions to the FINRA Arbitration Process, please contact one of the authors of this article or your primary Katten attorney.