Courts Lining Up in Favor of Broad Definition of Customer Under FINRA Rules


Last week, the U.S. Court of Appeals for the 4th Circuit issued a favorable ruling on the arbitrability of suits against FINRA members. Traditionally, under FINRA Rule 12200 any “customer” may request arbitration of a dispute with a FINRA member. UBS and Citi argued that Carilion was an issuer of securities, not a customer, and thus did not have the right to arbitrate their claims against the banks, both of which are FINRA members. The 4th Circuit joins the U.S. Court of Appeals for the 2nd Circuit and several district courts that have recently defined “customer” broadly in the FINRA context. The case is UBS Financial Services v. Carilion Clinic, (3:12-cv-00424-JAG).


Carilion is a non-profit hospital administration group based in West Virginia that issued $308 million of municipal bonds through UBS/Citi to finance a series of renovations and improvements. $234 million of that debt was issued in the form of auction rate securities (“ARS”).

UBS/Citi provided various services for Carilion in relation to the ARS issuances, acting as an underwriter, lead broker-dealer and seller of interest-rate swaps, as well as in an advisory capacity. Neither of the series of governing agreements between the parties contained an arbitration clause; one of the two contained a forum selection clause requiring that any related proceedings be filed in the Southern District of New York.

Legal Holdings

When a dispute arose, Carilion initiated a FINRA arbitration and UBS/Citi responded with a suit in federal court seeking to enjoin the arbitration on two grounds: (1) that Carilion was not a “customer” and therefore not eligible to bring a FINRA arbitration and (2) that the forum selection clause constituted a waiver of the right to arbitrate.

UBS/Citi argued that Carilion was, in this instance, acting as an issuer of securities, not as a customer receiving investment or brokerage services. UBS/Citi cited to a 2001 8th Circuit case holding that a party receiving banking and investment services was not a “customer” under NASD rules (note: this 2001 case involved a party receiving purely advisory services). In rejecting this argument, the court held that for purposes of FINRA, a customer is anyone “not a broker or dealer, who purchases commodities or services from a FINRA member in the course of the member’s business activities” and that those activities include “investment banking and the securities business.” The opinion cites a couple of similar holdings by federal courts in New York and California, noting that no court faced with a similar situation found a customer relationship lacking.

The court further held – as a matter of pure contractual law – that the forum selection clause was too ambiguous to constitute a waiver of the right to arbitrate. The court noted that although an unambiguous waiver clause would be honored, the language at issue here (“all actions and proceedings arising out of this transaction… shall be brought” in New York federal court) left doubt as to whether it was intended to cover all disputes, or merely non-arbitrable ones.

Take Away

UBS Financial Services v. Carilion Clinic provides two valuable lessons:

  1. FINRA members and their “customers” should choose their words carefully if they wish to avoid arbitration, and
  2. member parties acting as a jack-of-all-trades for their clients are unlikely to find courts receptive to arguments that the services they provided fall outside of FINRA’s jurisdiction. Conversely, FINRA member customers should feel confident in filing arbitration claims, no matter how large or complex the dispute.
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