February 4, 2023

Volume XIII, Number 35

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February 03, 2023

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February 02, 2023

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Yet Another Reaffirmation That Financial Industry Regulatory Authority (FINRA) Is For Customers Only

If it was not clear from our March 6, 2013 post that courts in the Fourth Circuit really mean it when they say FINRA is "for customers only" then the Fourth Circuit's decision in Raymond James Financial Services, Inc. v. Cary, 709 F.3d 382 (4th Cir. 2013) will make the issue crystalline. 

Raymond James involved the application of FINRA Rule 12200 which controls who has standing to arbitrate.  Raymond James held that an investor cannot bring a FINRA arbitration under Rule 12200 if that investor only dealt with a business partner of a FINRA representative even if there was coordination among the partners and the sharing of referral fees.  That type of partnership is "insufficient" to establish the relationship necessary for FINRA Rule 12200 to apply.

The holding of Raymond James may be limited because, in this case, the investors had “no personal contact” with the FINRA representative, did not hold “any accounts including trade accounts” with the actual FINRA member “at any time,” and the investors had no understanding that they were purchasing securities from the true FINRA member.  In other words, there was no issue of agency as there would be where an investor believes that the investor is actually dealing with a FINRA member or if the FINRA member had given someone else actual or apparent authority to conduct business.

Nonetheless, if investors cannot compel a FINRA arbitration against a business partner who shares referral fees, one can conclude that the Fourth Circuit is serious when it states that FINRA arbitrations are FOR CUSTOMERS ONLY.

Read the whole opinion here. http://www.ca4.uscourts.gov/opinions/Published/121053.p.pdf

Copyright © 2023 Womble Bond Dickinson (US) LLP All Rights Reserved.National Law Review, Volume III, Number 109
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