My former brokerage firm is suing me for some incentive compensation they paid me when I was hired. They filed suit in state court and, frankly, I’d prefer court over arbitration. However, I’ve spoken with two lawyers, one who says we have to move to compel arbitration and one who says we don’t. Do I have to arbitrate this even if my former employer has filed in court and I’m not objecting?

You have no choice but to go into arbitration, according to FINRA regulations.

FINRA Rule 13200 says that “Except as otherwise provided in the code, a dispute must be arbitrated under the code if the dispute arises out of the business activities of a member or an associated person and is between or among … members and associated persons.”

The regulator notes that failure to submit a dispute for arbitration “may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Rule 2010. That rule says, “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” For example, a large broker-dealer was recently fined $150,000 for failing to arbitrate similar types of disputes.

There are a few exceptions to the rule, however. Rule 13201 notes that claims alleging employment discrimination, including sexual harassment, in violation of a statute, are not required to be arbitrated unless the parties have agreed to arbitrate, either before or after the dispute arose, and whistleblower suits are likewise not required to be arbitrated if the whistleblower statute prohibits the use of pre-dispute arbitration agreements. Those disputes may be arbitrated only if the parties have agreed to arbitration after the dispute arose.

My firm began using an Internet, cloud-based document storage system. I know we can store documents electronically but is there anything in particular regarding cloud-based systems I should be aware of?

In 1997, the SEC amended Rule 17a-4 to allow broker-dealers to store records electronically.

The rule doesn’t limit broker-dealers to using a particular type of technology, but, rather, allows them to employ any electronic storage media, subject to certain requirements. Chief among these are that the media “preserve the records exclusively in a non-rewritable, non-erasable format.”

In 2003, the SEC said that a broker-dealer would not violate the rule if it used an electronic storage system that prevents overwriting, erasing or altering records during their required retention period through the use of integrated hardware and software control codes. The SEC’s interpretation does not, however, include storage systems that only “mitigate the risk a record will be overwritten or erased.”

In other words, if the records are only protected by authentication and approval policies, passwords or other security controls which, ultimately don’t prevent a record from being changed or deleted, the firm would not be considered to be complying with the rule. Even though such security measures might limit access to records or create a “finger print” to indicate that it was altered, the fact that the original record can be overwritten or erased makes such a system noncompliant.

Beyond this, you should also conduct some due diligence to determine the vendor’s privacy policy and cybersecurity protections to ensure the client’s nonpublic information remains private or you could run afoul of Regulation S-P. 

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