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Fourth Circuit: Financial Industry Regulatory Authority (FINRA) Rule Is For Customers Only

In a recent opinion, the Fourth Circuit affirmed the district court’s judgment permanently enjoining FINRA arbitration proceedings initiated by defendants against Morgan Keenan & Company, Inc. (“Plaintiff”) on the grounds that under the controlling FINRA Rule, the defendants were not “customers” of Morgan Keenan and were therefore not entitled to compel arbitration of their dispute. 

Defendants Louise and Max Silverman and the Louise Silverman Trust, (collectively, the “Defendants”) had brought the underlying FINRA arbitration claim against Plaintiff, alleging that Morgan Keenan “engaged in misconduct relating to the valuation and marketing of certain bond funds purchased by the [D]efendants through their brokerage firm, Legg Mason Investor Services, LLC.”   Thereafter, Plaintiff filed suit in district court to enjoin the arbitration proceedings, arguing that the Defendants were not Plaintiff’s “customers” under the applicable FINRA Rule because Defendants purchased the bonds at issue through a third-party broker, Legg Mason, rather than directly from Plaintiff, during an initial public offering.  Plaintiff claimed that Defendants were therefore not entitled to invoke the mandatory arbitration provision in the FINRA Rule.  The district court agreed with Plaintiff, and the Fourth Circuit affirmed.  In sum, the Fourth Circuit stated, “FINRA Rule is FOR CUSTOMERS ONLY.”

Read Fourth Circuit opinion.

http://www.ca4.uscourts.gov/opinions/Published/121208.p.pdf

Read The Daily Record article regarding the case. 

http://thedailyrecord.com/2013/02/20/opinions-22113-4th-u-s-circuit-court-of-appeals/

Copyright © 2023 Womble Bond Dickinson (US) LLP All Rights Reserved.National Law Review, Volume III, Number 69
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