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Court Defines "Customer" Under FINRA Arbitration Rules: Second Circuit
Practical Law Legal Update 3-576-9145 (Approx. 3 pages)
Court Defines "Customer" Under FINRA Arbitration Rules: Second Circuit
by Practical Law Litigation
| Published on 05 Aug 2014 • USA (National/Federal) |
In Citigroup Global Markets, Inc. v. Abbar, the US Court of Appeals for the Second Circuit defined "customer" under Financial Industry Regulatory Authority (FINRA) Rule 12200, which requires that a FINRA member arbitrate certain disputes between a customer and the FINRA member (or an associated person of the FINRA member). The Second Circuit then held that the appellant, who purchased options from a foreign affiliate of a FINRA member, was not a "customer" for purposes of the rule. The Second Circuit therefore held that the appellant could not compel FINRA arbitration against the FINRA member.
In Citigroup Global Markets, Inc. v. Abbar, the US Court of Appeals for the Second Circuit defined the meaning of the word “customer” under FINRA Rule 12200, which requires that a FINRA member arbitrate certain disputes between a customer and the FINRA member (or an associated person of the FINRA member). The Second Circuit then held that the appellant, who purchased options from a foreign affiliate (Citi UK) of a FINRA member (Citi NY), was not a “customer” for purposes of the rule. The court thus concluded that the appellant was not entitled to compel FINRA arbitration against Citi NY (761 F.3d 268 (2d Cir. 2014)).
The Second Circuit first addressed the “precise boundaries” of the term “customer” for purposes of the FINRA rules. The FINRA rules do not define "customer" except to say that a customer does not include a broker or dealer. Relying on the ordinary meaning of the term, the court held that a customer is one who either:
- Buys goods and services from a FINRA member.
- Has an account with a FINRA member.
The appellant argued that he was a customer of Citi NY because it provided services to him by helping him structure and manage the option transactions. However, because the appellant never held an account with Citi NY (the FINRA member) or bought any goods or services directly from Citi NY, the Second Circuit concluded that the appellant was not a customer of Citi NY, and therefore could not compel arbitration against it.
The court also rejected the appellant’s argument that any ambiguity should be decided in favor of compelling Citi NY to FINRA arbitration. The court reasoned that although a presumption in favor of arbitration would apply in a dispute over the scope of an arbitration clause, the presumption does not apply where parties dispute the existence of an agreement to arbitrate, as the parties did in this case. However, the court indicated that its “simple, predictable and suitably broad” definition of "customer" was consistent with federal policy favoring arbitration, because it permits a foreign business to gain access to FINRA arbitration by merely transacting business or holding an account with a FINRA member.