By John Benson
The Second Circuit Court of Appeals recently explored the precise boundaries of the term “customer” as it is used in the Financial Industry Regulatory Authority’s (FINRA) rules when determining whether an individual could compel arbitration. Less than one month later, a Florida state court delivered an opinion on the same issue.
In Citi Global v. Abbar, 761 F.3d 268 (2d Cir. 2014), Abbar, trustee of the Abbar family trusts, lost $383 million of trust assets that had been invested through Citi UK. Citi UK was a foreign affiliate of Citigroup Global Markets Inc. (Citi NY), a FINRA member incorporated in New York. Although Abbar paid only Citi UK for brokerage services, some of the investment bankers who helped Abbar manage the investments were employed by Citi NY. When the investments lost value, Abbar commenced a FINRA arbitration against Citi NY. Citi NY filed an action in court to enjoin the arbitration, arguing that FINRA rules mandate arbitration only if the claimant is a “customer” of Citi NY. The district court concluded Abbar was not a customer of Citi NY and, therefore, not entitled to arbitrate the dispute pursuant to the FINRA dispute resolution process. The Second Circuit affirmed, reasoning that: A “customer” under FINRA Rule 12200 is one who: “(1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member.” Id. at 275. Although Citi NY employees provided services to Abbar, all fees for those services were paid to Citi UK, not Citi NY. The court concluded that Abbar’s customer relationship with Citi UK did not permit him to compel arbitration against a corporate affiliate. Id.
Florida's Fifth District Court of Appeal recently followed suit in Grant v. Rotolante, 2014 WL4249753 (Fla. 5th DCA August 29, 2014). Grant, a FINRA-registered representative, and Rotolante were friends and neighbors. Rotolante solicited Grant’s advice regarding her finances. Grant gave her advice and accompanied her to meetings with her financial advisor. After suffering investment losses, Rotolante commenced an arbitration against Grant. Relying on the language of FINRA Rule 12200, the court concluded Rotolante was not Grant’s customer. She “never opened an account with Mr. Grant, deposited any money or securities with Mr. Grant, purchased or sold any securities from or through Mr. Grant, or paid Mr. Grant any compensation.” Id. at 6.
“The [Federal Arbitration Act] reflects the fundamental principle that arbitration is a matter of contract,” Rent-A-Center v. Jackson, 561 U.S. 63, 67 (2010), and whether a customer relationship has been established under FINRA regulations hinges, in part, on the existence of common law contract consideration. In both Citi Global and Grant, the would-be customer received services from a FINRA member but never paid that member for those services and, therefore, was not a customer.
