Second Circuit Adopts Bright-Line Rule For Determining Customer Status For Mandatory FINRA Arbitration: Court Rules that for Purposes of Demanding FINRA Arbitration, “Customers” of FINRA Members Are Those Who Either Purchase a Good or Service from a FINRA Member or Have an Account with a FINRA Member

Sullivan & Cromwell LLP - August 4, 2014

On Friday, August 1, 2014, the Second Circuit issued its decision in Citigroup Global Markets, Inc. v. Abbar, No. 13 2172 (2d Cir. Aug. 1, 2014), a case addressing the Financial Industry Regulatory Authority rule that FINRA members must consent to mandatory arbitration of disputes with any “customer” that arise in connection with the member’s business activities.  The case presented the question whether an investor’s extensive contacts with a FINRA member rendered that investor a “customer” of the FINRA member for purposes of demanding FINRA arbitration, even though the investor had not consummated a transaction or opened an account with the FINRA member.  Affirming the district court’s judgment, the Second Circuit ruled that for purposes of FINRA arbitration, a “customer” of a FINRA member 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.  In the past, courts have taken a variety of approaches to defining customer status for purposes of FINRA arbitration, often involving fact-intensive inquiries and leading to uncertain outcomes.  The decision provides a clear and administrable bright-line rule for when a party is a customer of a FINRA member and thus entitled to compel arbitration.  The Second Circuit’s decision provides greater predictability as to the dispute resolution mechanism and forum applicable to securities-industry disputes, while acknowledging that exceptions may be compelled in rare instances to avoid injustice.