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Contract Forum Selection Clause Trumps Arbitration Requirement In U-4

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  • Posted on: Mar 21 2018

The Financial Industry Regulatory Authority (“FINRA”) is the largest independent, non-governmental regulator of broker-dealer firms doing business in the United States. See UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643, 648 (2d Cir. 2011).  FINRA was formed in 2007, pursuant to Section 15A of the Securities Exchange Act of 1934 (“Exchange Act”), through the merger of the National Association of Securities Dealers (“NASD”) and the New York Stock Exchange Regulation, Inc., the regulatory arm of the New York Stock Exchange (see 15 U.S.C.A. § 78o-3). The Securities and Exchange Commission regulates FINRA.

FINRA is involved in almost every aspect of the securities industry. Among other things, FINRA registers and educates industry participants, examines securities firms, promulgates rules and enforces them, enforces the federal securities laws, and educates the investing public. FINRA also provides regulatory services for the equities and options markets, as well as trade reporting and other utilities for the industry. Significantly, FINRA administers nearly all securities-related arbitrations in the country.

FINRA has a uniform set of rules for arbitrating disputes between Member firms and their customers and between Member firms and Associated Persons. Among these rules are FINRA Rule 12200, which requires Member firms, at a customer’s request, to arbitrate disputes that arise in connection with their business activities, and FINRA Rule 13200, which requires Member firms and Associated Persons to arbitrate their employment disputes. Despite the requirement to arbitrate under Rules 12200 and 13200, customers and Associated Persons may avoid arbitration by including non-exclusive judicial forum selection clauses in their agreements with Member Firms.

FINRA Rules 12200 and 13200

FINRA Rule 12200

Rule 12200 requires FINRA members to submit to arbitration if the following factors are met:

  • Arbitration is either required by a written agreement or requested by the customer;
  • The dispute is between a customer and a member or an associated person of a member; and
  • The dispute arises in connection with the business activities of the member or associated person, with certain exceptions for insurance company members.

Under Rule 12200, customers are given the unilateral right to demand arbitration even in the absence of a pre-dispute arbitration agreement.

FINRA Rule 13200

Under Rule 13200, disputes between Member firms and Associated Persons arising out of the business activities of a Member or an Associated Person must be arbitrated through FINRA. Rule 13200 does not permit waiver by the Member firm. A dispute must be arbitrated under the rule and administered in the FINRA forum. There is no provision for contractual waiver or modification of this requirement.

The purpose of Rule 13200 is to encourage market participants, both Members and their Associated Persons, take advantage of arbitration in the FINRA forum. In promulgating the rule, FINRA wanted to make it clear that it has the authority, expertise, and Congressional mandate to resolve intra-industry disputes in a manner that fairly and efficiently protects the markets, market participants, and the public.

Although the rule is mandatory, as with Rule 12200, Associated Persons may waive their right to a FINRA arbitration in a pre-dispute agreement.

Judicial Forum Selection Clauses

Judicial forum selection clauses – contractual provisions in which the parties agree to resolve their disputes in court – are intended to supersede or waive the right to arbitration under Rules 12200 and 13200.

In 2014, the Court of Appeals for the Second Circuit held that forum selection clauses in contracts between Members and customers supersede Rule 12200, permitting the parties to submit their disputes in state and federal court rather than in a FINRA arbitration. Goldman, Sachs & Co. v. Golden Empire Sch. Fin. Auth., 764 F.3d 210, 217 (2d Cir. 2014).

The Ninth Circuit took the same view in Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733, 747 (9th Cir. 2014).  Like the Second Circuit, the Ninth Circuit did not apply the presumption in favor of arbitration because the forum selection clause cast doubt on whether the agreement to arbitrate remained in effect at all. Applying state-law contract interpretation principles, the court held that the mandatory nature of the forum selection clause superseded the default obligation under FINRA’s rules to arbitrate, and that by agreeing to that clause, the customer waived any right to a FINRA arbitration. Id. at 741-46. The Fourth Circuit, likewise, has held that Members can contract with their customers to resolve their disputes in court. UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319, 328 (4th Cir. 2013).

Hyuncheol Hwang v. Mirae Asset Sec. (USA) Inc.

On February 28, 2018, Justice Saliann Scarpulla of the Supreme Court, New York County Commercial Division, issued a decision in Hyuncheol Hwang v. Mirae Asset Sec. (USA) Inc., 2018 N.Y. Slip Op. 30368(U) (here), in which she held that a forum selection clause in a broker’s employment contract trumped an arbitration clause in the broker’s later-signed Form U-4.


Hwang involved an employment dispute in which Hyuncheol Hwang (“Hwang”) sought to stay the arbitration of his claims on the grounds that his employment agreement with Mirae Asset Securities (USA) Inc. (“Mirae”), a broker-dealer firm registered with FINRA, contained a forum selection clause directing the parties to litigate their disputes under the agreement in a New York court, notwithstanding his later signed Form U-4, which contained a mandatory arbitration provision.

Hwang was hired to serve as Mirae’s Head of Prime Brokerage Services and Capital Markets Business, unless Mirae terminated his employment with or without cause, or if Hwang resigned with or without cause. The employment agreement included an exclusive judicial forum selection clause that required the parties to litigate any disputes relating to the terms of the agreement, including any counterclaims, in either a state or federal court sitting in New York County. The employment agreement also contained a standard provision requiring any amendments or modifications of the agreement to be signed in writing by both parties.

Immediately after entering into the employment agreement, Hwang applied to become a registered representative by filling out a Form U-4. The Form U-4 included a mandatory arbitration clause.

Less than a year after signing the employment agreement, Mirae terminated Hwang’s employment for cause.

Thereafter, Hwang sent Mirae a draft complaint that outlined the claims he intended to assert against the broker-dealer. The complaint was to be filed in federal court. In response, Mirae filed a statement of claim with FINRA, asserting the following claims: 1) declaratory award that Hwang was terminated for cause; 2) breach of employment agreement; 3) fraudulent inducement and misrepresentation, seeking rescission of the agreement and recoupment of the compensation paid to Hwang under the agreement; and 4) breach of the duties of good faith and loyalty, seeking disgorgement of the compensation paid to Hwang under the agreement. The same day that Mirae filed its complaint, Hwang filed his complaint in state court.

Hwang alleged that he was terminated without cause and was therefore entitled to his base salary for the remainder of his employment term, the remainder of his sign-on bonus, his retention bonus, his annual bonuses, his additional annual bonuses, and his benefits for the remainder of his employment term. He asserted causes of action for: (1) breach of contract; (2) violation of NYLL Section 193; (3) a declaratory judgment that he did not breach the agreement; (4) a declaratory judgment that the employment agreement should not be rescinded; and (5) a declaratory judgment that he did not breach any duty of good faith and loyalty.

Hwang moved to stay the arbitration and Mirae cross moved to compel arbitration and stay the action pending the resolution of the arbitration.

Hwang argued that the dispute should not be arbitrated because his employment agreement contained a forum selection clause directing the parties to litigate any disputes relating to the terms of the agreement in a New York court. He also contended that the Form U-4 did not amend or supersede the forum selection clause in his employment agreement, because any amendment would have required both parties to enter into a signed written agreement to modify its terms.

Mirae argued that Hwang agreed to arbitrate any employment related claims with Mirae when he signed his Form U-4, which replaced his earlier employment agreement to resolve his claims in a different forum. Further, Mirae argued that under Rule 12200, Mirae and Hwang were required to submit any disputes arising under the employment agreement to FINRA for arbitration.

The Court’s Decision

The court granted the motion to stay arbitration. The court found that the evidence presented “demonstrate[d] that the parties intended to be bound by the forum selection clause in the employment agreement.” “Mirae present[ed] no evidence,” said the court, “to show that the parties intended the arbitration clause in the U4 to supplant the forum selection clause in the employment agreement.”

The court found dispositive the fact that “the forum selection clause, was negotiated and executed” a few weeks before Hwang signed the Form U-4:

Hwang avers in his affidavit in support that, when he signed the employment agreement, both he and Mirae understood that Hwang’s position at Mirae would require him to sign the FINRA U4. As such, his signing of the U4 — which was done a few weeks after the employment contract was executed — was contemplated when the employment agreement, and specifically the forum selection clause, was negotiated and executed. Mirae submits no evidence to the contrary.

In a footnote, the court noted that the law in the Appellate Division, First Department (to which the motion court is bound), confirmed that “specific contract terms can supersede FINRA’s arbitration rules.” Bortman v. Lucander, 150 A.D.3d 417 (1st Dept. 2017) (citing Golden Empire Schs. Fin. Auth., 764 F.3d at 215).

Finally, the court rejected Mirae’s argument that the Form U-4 amended the employment agreement, finding that Mirae failed to proffer any evidence that the parties “knowingly agreed, in a written employment contract modification, to eliminate the forum selection clause in Hwang’s employment agreement.”

Further, Hwang’s employment contract contains a clause requiring any changes to the agreement be set forth in a signed written agreement. Mirae submits no evidence to show that both parties knowingly agreed, in a written employment contract modification, to eliminate the forum selection clause in Hwang’s employment agreement. If the parties intended to change the forum for disputes concerning Hwang’s employment, they would have had to indicate such in a signed written agreement, but they did not do so.



In the briefing of the motions, the parties addressed whether FINRA Regulatory Notice 16-25 (the “Notice”) mandated arbitration of their dispute. The Notice clarified FINRA’s position that its mandatory arbitration rules cannot be waived by Member firms in customer and industry disputes, notwithstanding the existence of a pre-dispute agreement to a different forum. See FINRA Regulatory Notice 16-25 (here). The Notice expressed the view that FINRA’s rules prohibit Member firms from precluding customers and Associated Persons, as the case may be, from pursuing arbitration at a FINRA arbitration, but do not prohibit customers and Associated Persons from agreeing to forego FINRA arbitration. The Notice specifically recommends that if Member firms wish to use a forum-selection provision in pre-dispute agreement, they are permitted to use a “non-exclusive forum selection provision” leaving the choice as to whether to proceed before FINRA to the customer or the Associated Person.

The Hwang court did not address the Notice directly. However, the result comports with the purpose of the Notice. Although the forum selection clause in Hwang was an exclusive one, and therefore subjected Mirae to FINRA scrutiny, it was Hwang, the Associated Person, not Mirae, the Member firm, that sought to enforce the clause.

Hwang also highlights the point that courts use state-law principles of contract interpretation to decide whether a contractual obligation to arbitrate exists. Thus, as in Hwang, where the parties’ agreement is clear on its face, courts will enforce it as written. Greenfield v. Philles Records, Inc., 98 N.Y.2d 562 (2002) (“[A] written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.”).

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