Opinion ID: 616266
Heading Depth: 2
Heading Rank: 2

Heading: The FINRA Code's Meaning of Customer

Text: FINRA was created in 2007 through a consolidation of the National Association of Securities Dealers, Inc. (NASD)a self-regulatory organization registered under the Securities Exchange Act of 1934 (1934 Act)and the regulatory arm of the New York Stock Exchange Group, Inc. See, e.g., Standard Investment Chartered, Inc. v. National Association of Securities Dealers, Inc., 637 F.3d 112, 114-15 (2d Cir. 2011). FINRA is a registered SRO under the 1934 Act, see 15 U.S.C. §§ 78c(a)(26), 78s(b), and has the authority to, inter alia, create and enforce rules for its members in order to provide regulatory oversight of all securities firms that do business with the public, Securities and Exchange Commission Release No. 34-56145, 72 Fed.Reg. 42169, 42170 (Aug. 1, 2007). The FINRA By-Laws define a `member' as, inter alia, any broker or dealer admitted to membership in [FINRA], FINRA By-Laws art. I(ee); they provide that `broker' means an entity that is engaged in the business of effecting transactions in securities for the account of others, but does not include a bank, id. art. I(e); and that `dealer' means an entity that is engaged in the business of buying and selling securities for [its] own account, through a broker or otherwise, but does not include a bank, id. art. I(k). The Rules set out in the FINRA Code require a member to arbitrate a dispute if  Arbitration under the Code is either: (1) Required by a written agreement, or (2) Requested by the customer;  The dispute is between a customer and a member or associated person of a member; and  The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company. FINRA Rule 12200 (emphases added). The Rules define a `person associated with a member' in part as a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member. Id. Rule 12100(r)(2). A brokerage-house account representative is such an associated person. See, e.g., John Hancock, 254 F.3d at 51 (sales representative authorized to sell certain life insurance and annuities on behalf of the brokerage firm was an associated person under the NASD Rules). The FINRA Code definition of customer states only that [a] customer shall not include a broker or dealer. FINRA Rule 12100(i). An online FINRA glossary (to which no reference is made in the FINRA Rules) describes a customer as [a] person or entity (not acting in the capacity of an associated person or member) that transacts business with any member firm and/or associated person. FINRA Glossary of Arbitration Terms, http://www.finra.org/ ArbitrationMediation/Glossary/ (last visited October 25, 2011). Where there is a genuine dispute as to the role played by the FINRA member in connection with a credit default swap, a trial will be required. Thus, in Citigroup v. VCG , VCG entered into a credit default swap with Citibank, N.A. (Citibank), a deal that VCG asserted had been recommended to VCG and negotiated by Citigroup Global Markets, Inc. (CGMI), a Citibank sister-affiliate that was a member of FINRA; VCG asserted that it had a brokerage services agreement with CGMI and had received advice from CGMI, see 598 F.3d at 33. While this Court affirmed the district court's grant of a preliminary injunction against VCG's attempt to proceed with a FINRA arbitration against CGMI, we noted that there was conflicting evidence in the record raising serious factual questions, warranting a trial as to whether VCG was a customer of CGMI within the meaning of FINRA, see 598 F.3d at 32-33, 39. On the other hand, where the undisputed facts show that the party attempting to proceed with a FINRA arbitration was a customer of the FINRA member, there is no need for further court proceedings. In UBS, in which we noted that the plaintiff UBS was a FINRA member, 660 F.3d at 645, the undisputed facts showed, inter alia, that the defendants (WVUH) structured their bond offerings as auction rate securities in accordance with UBS's suggestions and recommendations, see id. at 645-46, and agreed to pay UBS a fee for its services in facilitating the auctions at which the bonds were resold and their interest rates set, id. at 650. We concluded as a matter of law, id. at 645, that [w]ith respect to services UBS rendered in its capacity as a broker-dealer charged with facilitating the ARS auctions, ... WVUH was UBS's customer under the applicable FINRA rules, id. at 648; see, e.g., id. at 650 (WVUH was UBS's customer because WVUH purchased a service, specifically auction services, from UBS.). In the present case, the record shows that there was no relationship between VCG and WCM such as the relationship between WVUH and UBS; nor were there any material factual questions such as existed in Citigroup v. VCG . Here, there is no claim that VCG had a brokerage agreement with WCM. Indeed, in response to plaintiffs' statement of undisputed material facts submitted in support of their motion for summary judgment, VCG agreed that Wong, Vanquish Capital's employee who negotiated the terms of the specific trade, acknowledged that neither Wachovia Bank nor WCM recommended the CDS Trade to VCG. (Plaintiffs' Statement of Material Facts in Support of Their Motion for Summary Judgment ¶ 18; VCG response agreeing with ¶ 18.) Wong acknowledged that this was a major difference between VCG's claim in the present case and VCG's parallel litigation with Citibank's broker dealer, in which, as Wong testified, we asked Citi to recommend something for us that they would transact on.... Citi's behavior in this wascase was they actually did recommend a deal. It is not unlikeit is very different than the Forge situation where we went out and said we are accessing [ sic ] Forge. So this was different. This involved a recommendation from Citi's team. Q. Just so we are clear, what you are saying is that the deal with Citi was different from the deal with Wachovia because Wachovia did not recommend the deal to VCG? A. That is correct. I mean, it is a completely different case. (Plaintiffs' Statement of Material Facts in Support of Their Motion for Summary Judgment ¶ 18; VCG response agreeing with ¶ 18.) Further, where the parties to the relevant agreements and transactions have expressly disclaimed any sort of advisory, brokerage, or other fiduciary relationship, there is no need to grapple with the precise boundaries of the FINRA meaning of customer. Here, there is no factual issue as to whether WCM provided advice, recommendations, or other services to VCG, for as noted in Part I.A. above, VCG expressly acknowledged in the Agreement that the Forge credit default swap was an arm's length transaction and that neither Wachovia Bank nor any of its affiliates had provided VCG or any of VCG's affiliates with any agency, brokerage, advisory or fiduciary services with respect to the Forge swap Agreement or any agreement relating to it. (ISDA Schedule Part 5(c).) On this record, no rational factfinder could infer that VCG was a customer of WCM. Wachovia Bank and WCM were thus entitled to summary judgment in their favor. In light of this conclusion, we need not reach other arguments advanced by plaintiffs.