Indemnification Agreements in Securities Arbitration

When a brokerage firm customer gives a trading authorization to a spouse, another family member, or another trusted person, the firm will typically require that the authorized person sign an indemnification agreement. The firm may seek to enforce the agreement in a counter-claims or third-party claim in the event the firm is sued by the customer in a FINRA arbitration proceeding. In most jurisdictions, such agreements cannot be relied upon to indemnify against losses arising out of an indemnitee’s own negligence unless there is “express and unequivocal language showing the intent of the parties to allow the indemnitee to shift the burden of active negligence.” 2 Modern Tort Law: Liability and Litigation § 20:7 (2d ed). [1]

If the agreement purports to extend to the indemnitee’s own negligence, the agreement may be deemed unenforceable as a matter of law under securities laws and regulations. See, e.g.,

• 15 USC § 77n (“Any condition, stipulation, or provision binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder, or of any rule of a self-regulatory organization, shall be void.”);
• MCL 451.2509 (“(11) A person that has made or engaged in the performance of a contract in violation of this act or a rule adopted or order issued under this act, or that has acquired a purported right under the contract with knowledge of the facts by reason of which its making or performance was in violation of this act, may not base an action on the contract. (12) A condition, stipulation, or provision binding a person purchasing or selling a security or receiving investment advice to waive compliance with this act or a rule adopted or order issued under this act is void.”);
• FINRA Rule 2268(d) (prohibiting the following provisions in customer agreements: “Provisions that limit or contradict the rules of any SRO; Provisions that limit the ability of a party to file any claim in arbitration; Provisions that limit the ability of arbitrators to make awards”);
• Susan Antilla, Brokers Countersue to Thwart Suits by Unhappy Investors, N.Y. TIMES, Sept. 18, 2014 (quoting FINRA spokeswoman Michelle Ong: “[I]ndemnification clauses do not shield firms from their legal and regulatory obligations to comply with federal securities laws and FINRA rules” and “[t]he use of any clause or tactic designed to intimidate or keep a customer from exercising his/her right to proceed in arbitration would violate FINRA conduct rules.”);
• SEC Release No. 58; (the federal securities laws prohibit indemnification clauses that waive compliance with federal securities laws or that waive any cause of action available under their anti-fraud provisions, including Section 10(b) of the Securities Act and its corresponding regulation Sec Rule 10(b)(5));
• Doody v. E.F. Hutton & Co., 587 F.Supp. 829, 833 (D.Minn.1984) ( “enforcing an indemnity provision … would discourage prospective plaintiffs from bringing securities fraud actions . . . Since the securities laws are a remedial measure intended to encourage the prosecution of securities fraud actions, the Court refuses to enforce this indemnity provision”. ).

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