Opinion ID: 1702553
Heading Depth: 1
Heading Rank: 6

Heading: Does a Form U-4 Affect Interstate Commerce?

Text: A party who moves to compel arbitration bears the initial burden of establishing by substantial evidence (1) the existence of an agreement to arbitrate in (2) a contract or transaction substantially affecting interstate commerce. Ex parte Cain, 838 So.2d 1020, 1026 (Ala. 2002). This Court has had four occasions to consider arbitration issues arising out of a Form U-4: Ex parte McKinney, 515 So.2d 693 (Ala.1987); Ex parte Hagan, 721 So.2d 167 (Ala.1998); SouthTrust Sec., Inc. v. McClellan, 730 So.2d 620 (Ala.1999); and Allmerica Fin. Life Ins. & Annuity Co. v. Miller, 775 So.2d 132 (Ala.2000). No issue of interstate involvement was addressed in McKinney. The Court did note, however, that by executing a Form U-4, among other contracts, McKinney agreed to comply with and be bound by the constitution and rules of the New York Stock Exchange and to submit to its jurisdiction. 515 So.2d at 697. No question of interstate involvement was addressed in Hagan. In McClellan, the Court noted in a footnote that [n]either party has alleged that the transaction did not involve interstate commerce. 730 So.2d at 621 n. 1. Finally, in Allmerica Financial there was no question raised concerning the effect of the transaction in that case on interstate commerce. Thus, this Court has not been squarely presented with the issue whether registration by a securities broker with national securities organizations pursuant to a Form U-4 affects interstate commerce as a given. Merrill Lynch was correct in its assertion to the trial court that numerous jurisdictions have held that a Form U-4 per se affects interstate commerce (although the initial broad statements of that proposition in the earliest of those cases could properly be interpreted in a more narrow fashion, given the precise issue being dealt with). See Legg, Mason & Co. v. Mackall & Coe, Inc., 351 F.Supp. 1367, 1370 (D.D.C.1972) (There is no doubt that the contract between the parties to arbitrate controversies under the Constitution and Rules of the New York Stock Exchange evidences a `transaction involving commerce' within the meaning of section 2 of the [Federal Arbitration] Act.); Austin Mun. Sec., Inc. v. National Ass'n of Sec. Dealers, Inc., 757 F.2d 676 (5th Cir.1985); Smiga v. Dean Witter Reynolds, Inc., 766 F.2d 698, 704 (2d Cir.1985) (In addition, since Smiga's contract with the NYSE contemplates using interstate communication facilities and engaging in interstate activities, in our view, the arbitration clause in Smiga's agreement with the NYSE was part of a `contract evidencing a transaction involving commerce' within the meaning of 9 U.S.C. § 2. ) (emphasis added); Willis v. Dean Witter Reynolds, Inc., 948 F.2d 305, 307 (6th Cir.1991) (In Gilmer [v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) ] the Supreme Court held that the same arbitration clause, contained in the same securities registration form [Form U-4] and New York Stock Exchange rule [Rule 347], was enforceable under the Federal Arbitration Act....); Salvano v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 85 N.Y.2d 173, 180, 647 N.E.2d 1298, 623 N.Y.S.2d 790 (1995) (Under settled law, the arbitration of disputes concerning employment in the securities industry and the enforceability of the arbitration clause embodied in the petitioners' U-4 Form applications are governed by the Federal Arbitration Act....); Bradford v. J.C. Bradford & Co. (In re Bradford ), 181 B.R. 910, 913 (Bankr.E.D.Tenn.1995) (Pursuant to the [Form] U-4 when a person registers with the NYSE or the NASD, the registrant becomes a party to a contract among the members (`membership agreement'). The membership agreement includes the organization's arbitration rules. The membership agreement also evidences a transaction in interstate commerce. That makes the membership agreement and the parties to it subject to the Federal Arbitration Act.) (citations omitted); Williams v. Cigna Fin. Advisors, Inc., 56 F.3d 656, 659 (5th Cir.1995) (Williams' [Form] U-4 Registration is a contract involving the sale of securities and thus involves commerce.); Hart v. Canadian Imperial Bank of Commerce, 43 F.Supp.2d 395, 399 (S.D.N.Y.1999) (It is well established that a signed Form U-4 constitutes an express arbitration agreement enforceable under the FAA.). Although this Court has thus far declined to adopt a per se interstate-involvement rule in other contexts, see, e.g., Liberty National Life Insurance Co. v. Douglas, 826 So.2d 806 (Ala.2002), and Jim Burke Automotive, Inc. v. McGrue, 826 So.2d 122 (Ala.2002), we are here presented with a contract evidencing a transaction that is quintessentially interstate in nature. Lewis was a stockbroker employed by Merrill Lynch, a nationwide securities firm and a member of both the NASD and NYSE. We take judicial notice of the fact that they are national securities organizations. By virtue of his registration with them, pursuant to the Form U-4, Lewis was authorized to trade securities on a nationwide basis. In that regard, he was able to continue working as a stockbroker for Merrill Lynch, which he characterizes in his complaint as a foreign corporation. In his affidavit, he acknowledges that he became affiliated with both the NASD and the NYSE. Thus, the record supplies adequate proof that the Form U-4 executed by Lewis and the transaction it evidenced substantially affected interstate commerce. Lewis, as a result of his 1990 Form U-4 registrations, was put in a position to continue his activities as a stockbroker with Merrill Lynch for another eight years, until he voluntarily retired. As he stated in his complaint, his career with Merrill Lynch was so successful that, by the time of his retirement, he had developed a book of accounts of approximately $182,000,000. He could not have engaged in that career had he not become affiliated with the NASD and the NYSE through the Form U-4. Thus, the transaction evidenced by the Form U-4 had a substantial effect on interstate commerce.