Court Finds SEC's Denial of Petition on Arbitration Arbitrary

The U.S. Court of Appeals ruled that the SEC acted arbitrarily and capriciously when it denied the petition of a broker dealer to abrogate three FINRA arbitration rules as the court found the SEC's denial letter too generic to satisfy the Administrative Procedure Act.

The petitioners are a broker-dealer (and its owners) selling variable annuities and variable life insurance. The broker-dealer had adopted its own dispute resolution process, which process conflicted with three FINRA rules - FINRA Rule 2268 (Requirements When Using Predispute Arbitration Agreements for Customer Accounts), FINRA Rule 12200 (Registration Categories), and FINRA Rule 12204 (Class Action Claims). The broker-dealer argued that the three FINRA rules were themselves in conflict with the Federal Arbitration Act by forcing members into the FINRA forum and barring class-action waivers.

The SEC denied the petition in a letter, justifying its denial only by resource constraints and the absence of FINRA arbitration from its regulatory agenda, and without engaging the substance of the petition. The broker-dealer filed for review in the U.S. Court of Appeals for the D.C. Circuit, seeking to compel the SEC to reconsider.

The court held that even under the highly deferential standard for rulemaking-petition denials, the SEC must provide analysis tied to the specific petition. On the other hand, the court also declined to vacate the challenged FINRA rules. The court noted the SEC retains options including (i) granting targeted waivers under Exchange Act Section 19(g)(2) (Registration, responsibilities, and oversight of self-regulatory organizations) for specific product types or members, or (ii) conducting notice-and-comment rulemaking to determine whether FINRA's rules serve the public interest. The court also cited the SEC's September 2025 policy statement (90 Fed. Reg. 45,125) - announcing that mandatory arbitration provisions would not affect acceleration of registration statements - as evidence the agency had signaled a more favorable posture toward arbitration supporting good-faith reconsideration.