(Article from Securities Law Alert, December 2014)
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Second Circuit Holds Forum Selection Clauses May Supersede FINRA’s Arbitration Rules
On August 21, 2014, the Second Circuit held that the arbitration rules of the Financial Industry Regulatory Authority (“FINRA”) were “superseded by forum selection clauses requiring ‘all actions and proceedings’ related to the transactions between the parties to be brought in court.” Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764 F.3d 210 (2d Cir. 2014) (Walker, Jr., J.).
In so holding, the Second Circuit widened a circuit split on the issue of whether forum selection clauses may supersede FINRA’s arbitration rules. The Second Circuit acknowledged that the Ninth Circuit has held that a forum selection clause in a broker-dealer agreement “supersedes Rule 12200,” whereas the Fourth Circuit has ruled that “a nearly identical forum selection clause” to the one at issue in the Golden Empire case “does not supersede Rule 12200.” Id. (citing Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733 (9th Cir. 2014); UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013)). The Second Circuit expressly disagreed with the Fourth Circuit and held that “a forum selection clause requiring ‘all actions and proceedings’ to be brought in federal court supersedes an earlier agreement to arbitrate.” Golden Empire, 764 F.3d 210.
The Second Circuit has since issued a stay of its decision to allow the parties to petition the Supreme Court for certiorari on the question of whether forum selection clauses may supersede FINRA’s arbitration rules.
Second Circuit Defines Who Constitutes a “Customer” for Purposes of the FINRA Code
On August 1, 2014, the Second Circuit defined the term “customer” for purposes of the right to arbitration under Rule 12200 of the FINRA Code. Citigroup Global Markets Inc. v. Abbar, 761 F.3d 268 (2d Cir. 2014) (Jacobs, J.). The court ruled that 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 Second Circuit explained that “[b]y agreeing to accept ‘a fee for its services’ or by selling securities to an entity, a FINRA member understands that it may be compelled to arbitrate if a dispute arises with that entity.” The court further stated that “[a]n account holder has a reasonable expectation to be treated as a customer, whether or not goods or services are purchased directly from the FINRA member.” The court clarified that “even if the FINRA member executes all securities transactions through an affiliate or provides services without fee, the account-holder can compel arbitration under Rule 12200.”
The Second Circuit observed that “[i]n most cases, this definition of ‘customer’ can be readily applied to undisputed facts.” The court noted that “[t]he only relevant inquiry in assessing the existence of a customer relationship is whether an account was opened or a purchase made; parties and courts need not wonder whether myriad facts will ‘coalesce into a functional concept of the customer relationship’” for purposes of entitlement to arbitration under Rule 12200 of the FINRA Code.
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