FINRA Rule 12200 Arbitration superseded by subsequent agreement

In two simultaneous appeals, the Second Circuit addressed whether a forum-selection clause supersedes mandatory FINRA arbitration under FINRA Rule 12200. In Goldman, Sachs & Co. v. Empire Schools Financing Authority (764 F.3d 210), the plaintiff commenced arbitration against underwriter Goldman for claims related to issued securities.  Around the same time, a nearly identical case was brought by North Carolina Eastern Municipal Power Agency against Citigroup Global Markets, Inc (2013 U.S. Dist. LEXIS 188771).  In both situations, the agreements contained both forum selection and merger clauses; the forum selection clauses mandated that “all actions and proceedings” shall be brought in U.S. District Court.  After the plaintiffs initiated arbitration, both Defendants moved to enjoin.  The courts enjoined arbitration, appeals followed, and both were addressed simultaneously by the Second Circuit.

FINRA Rule 12200 states that FINRA members, who the defendants were, must honor arbitration requests from their customers that arise in connection with the member’s business activities.  The defendants did not dispute this, but argued that the forum selection clause superseded the rule.

The Second Circuit held Applied Energetics, Inc. v. NewOak Capital Mkts., LLC (645 F.3d 522) controlling, delineating the differences of Bank Julius Baer & Co. v. Waxfield (424 F.3d 278).  In Applied Energetics, the arbitration agreement was superceded by an agreement stating “[a]ny dispute…” shall be adjudicated in New York courts, and included a merger clause.  Bank Julius, however, stated that “any Action may be heard” in the specific court, without any merger clause.  The Court held the clause at hand indistinguishable from Applied Energetics.  Plaintiff’s attempted to argue that “all actions and proceedings” did not encompass arbitration, citing UBS Fin. Servs., Inc. v. Carilion Clinic (706 F.3d 319).  The court rejected their argument, citing contrary decisions in the Second Circuit, and held the argument a mere linguistic trick.

The district courts' decisions enjoining arbitration were affirmed.


Who Is Entitled to a FINRA Arbitration?

A recent case provides important clarity as to whether a person or entity is entitled to a Financial Industry Regulatory Authority (FINRA) arbitration.  While the particular facts of the case are somewhat unique, the Second Circuit established a test for determining who exactly is a "customer" of a FINRA member entitled to arbitrate. FINRA mandates that members submit a dispute to FINRA arbitration if either required by written agreement or requested by a customer. In Citigroup Global Markets, Inc. v. Abbar (2014 WL 3765867), an investor’s estate sought FINRA arbitration of a dispute with a member’s affiliate based on allegations of mishandling investments. After a trial on the merits, the district court ruled in favor of the affiliate and permanently enjoined arbitration. The estate appealed.

The case arose from investments between an investor, Abbar, and Citigroup Global Markets Ltd., a U.K. corporation (Citi UK). Although Abbar’s investments were through Citi UK, personnel of the New York affiliate (Citi NY) performed services for Abbar’s investments. When the investments lost value, Abbar commenced FINRA arbitration against Citi NY. The district court enjoined arbitration after determining that Abbar was not Citi NY’s customer.

The Second Circuit affirmed the decision. No agreement existed between Citi NY and Abbar, so Abbar could only compel arbitration if he was a customer of Citi NY. Abbar did not qualify as a customer of Citi NY; the totality of the transactions between the parties did not create the relationship, and there was no customer account. Here Abbar held the account with Citi UK, not Citi NY. On appeal, the Second Circuit held that the complicated nature of the relationship between the parties required clarifying the precise boundaries defining a FINRA customer. The Court held under FINRA Rule 12200, a customer is one who, while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member. The only relevant inquiry in determining the existence of a customer relationship is whether an account was opened or a purchase made. Abbar never opened an account with Citi NY nor purchased goods or services from them; therefore, he was not a customer. The Court held that discovery may be required if it is unclear whether goods or services were purchased, but not to the extent of a detailed examination.