Providing some much needed clarity to an often litigated issue regarding who may initiate arbitrations pursuant to the rules of the Financial Industry Regulatory Authority (“FINRA”), the Second Circuit recently adopted a bright line definition of “customer” in rejecting an investor’s attempt to arbitrate his claims. In Citigroup Global Markets, Inc. v. Abbar, No. 13-2172 (2d Cir. Aug. 1, 2014), the court held that a “customer” under FINRA’s rules 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 court’s holding establishes an efficient framework for determining if an investor is a “customer,” whether that determination is made by a court presented with the threshold arbitrability question, or by an arbitration panel presented with a motion to dismiss. See FINRA Rule 12504(a)(6)(B) (allowing a motion to dismiss to be filed by a respondent claiming to be “not associated with the account(s), security(ies), or conduct at issue”).
FINRA members are required to arbitrate claims if (1) there is a written agreement requiring arbitration, or (2) the claims involve disputes with their “customers.” FINRA Rule 12200. The FINRA rules, however, do not specifically define “customer,” and FINRA Rule 12100(i) raises more uncertainty as it merely states that a “customer shall not include a broker or dealer.” This has given rise to a host of questions: Does the giving of financial advice or the underwriting of a security (without more) amount to a brokerage or investment relationship? Do investors become “customers” if they receive services without paying for same? Is maintaining an account with the broker-dealer required to establish a customer relationship? The court decisions have provided no consistent guidance, which has been problematic given the preference of many claimants to seek the resolution of their investment-related disputes in arbitration, rather than through the court system.
These types of questions were presented to the court in Citigroup, a case filed by Citigroup Global Markets, Inc. (“Citi NY”), a FINRA member, seeking to enjoin a FINRA arbitration filed against it by a Saudi businessman and related parties (“Abbar”) who lost $383 million through investments made through Citi NY’s United Kingdom affiliate (“Citi UK”). The United States District Court for the Southern District of New York enjoined the arbitration, finding that Abbar was not a customer of Citi NY because he did not purchase any goods or services from it, nor did he hold an account there. In making its decision, the district court delved deeply into the facts surrounding the investments, the parties’ interactions and the tasks involved with the investment transactions. Ultimately, after a nine-day trial and almost two years after the case was filed, the district court determined that Citi NY’s involvement was only “ancillary and collateral to those central core transactions” that Abbar entered into with Citi UK.
In affirming the district court’s injunction, the Second Circuit established “precise boundaries of the FINRA meaning of ‘customer,'” noting the necessity of a definition to prevent the type of “sprawling litigation” that occurred in the Citigroup case. By defining “customer” as one who purchases goods or services from, or has an account with, a FINRA member, the Second Circuit reasoned that its definition could “be readily applied to undisputed facts.” In situations where there may be a dispute as to the facts, the court recognized that discovery and even a trial may be necessary; but reasoned that there would be no need to undergo a detailed, costly and time consuming examination of the facts. The relevant inquiry is more simply: “whether an account was opened or a purchase made.”
In an environment where investors frequently make arbitration demands in the absence of an agreement to arbitrate, the Second Circuit has created a framework that provides more certainty, and less of a prospect of expensive litigation, in determining if the investor is a “customer” with the right to demand arbitration against a FINRA member.