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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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[1] See also Auto Owners Mut. Ins. Co. v. Northern Indiana Public Service Co., 414 F.2d 192 (7th Cir. 1969) (contractor constructing pipeline indemnified gas company; explosion caused by negligence of gas company not covered, because agreement did not evidence clear intention to provide indemnification for negligence (or joint negligence) of indemnitee); Guarnieri v. Kewanee-Ross Corporation, 263 F.2d 413 (2d Cir. 1959), opinion modified on reh’g, 270 F.2d 575, 2 Fed. R. Serv. 2d 748 (2d Cir. 1959); Holcim (US), Inc. v. Ohio Cas. Ins. Co., 38 So. 3d 722 (Ala. 2009) (indemnity agreement requires clear and unequivocal language of indemnity against indemnitee’s own wrongs); Prince v. Pacific Gas & Elec. Co., 45 Cal. 4th 1151, 90 Cal. Rptr. 3d 732, 202 P.3d 1115 (2009) (contractual language must be particularly clear and concise and will be construed strictly against indemnitee); Amoco Oil Co. v. Liberty Auto and Elec. Co., 262 Conn. 142, 810 A.2d 259 (2002) (indemnity contract will not be construed to indemnify indemnitee against losses resulting to him through his own negligent acts unless such intention is expressed in unequivocal terms); Smart v. International Harvester Co., 33 Ill. App. 3d 241, 337 N.E.2d 68 (3d Dist. 1975) (indemnity clause insufficient to expressly or unequivocally provide for indemnification); Indiana State Highway Commission v. Thomas, 169 Ind. App. 13, 346 N.E.2d 252 (1976) (no indemnity in absence of express reference to negligence of State); Maxim Technologies, Inc. v. City of Dubuque, 690 N.W.2d 896 (Iowa 2005) (indemnification contracts will not be construed to permit indemnitee to recover for its own negligence unless intention of parties is clearly and unambiguously expressed); Evans v. Howard R. Green Co., 231 N.W.2d 907 (Iowa 1975); Fireman’s Fund American Ins. Companies v. General Elec. Co., 74 Mich. App. 318, 253 N.W.2d 748 (1977); Hercules Drawn Steel Corp. v. Doran Elec. Co., Inc., 64 Mich. App. 117, 235 N.W.2d 82 (1975); Farmington Plumbing & Heating Co. v. Fischer Sand and Aggregate, Inc., 281 N.W.2d 838, 842 (Minn. 1979); Mantilla v. NC Mall Associates, 167 N.J. 262, 770 A.2d 1144 (2001) (contract will not be construed to indemnify indemnitee against losses resulting from its own negligence unless such intention is expressed in unequivocal terms); Bowman v. Davis, 48 Ohio St. 2d 41, 2 Ohio Op. 3d 133, 356 N.E.2d 496 (1976) (no mention of release from liability for negligence in hospital consent form); Jones v. City of Dyersburg, 59 Tenn. App. 354, 440 S.W.2d 809 (1967); Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705 (Tex. 1987) (adopting express negligence doctrine that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms, rejecting clear and equivocal test); Amoco Chemicals Corp. v. Sutton, 551 S.W.2d 459 (Tex. Civ. App. Eastland 1977), writ refused n.r.e., (Oct. 19, 1977); Northwest Airlines v. Hughes Air Corp., 104 Wash. 2d 152, 702 P.2d 1192 (1985) (intention to indemnify indemnitee against his or her own negligence must be expressed in clear and unequivocal terms).