Second Circuit Draws a Bright-line Rule to Determine Who Is a Customer Under Rule 12200


The decision in Citigroup Global Markets Inc. v. Abbar, Docket No. 13–2172 (August 1, 2014), by the U.S. Court of Appeals for the Second Circuit, has important implications for broker-dealers, particularly those dealing with product-related as opposed to suitability-related arbitrations. FINRA rules on arbitrability require that absent an express agreement to arbitrate, claimants must be “customers” of the broker-dealer they wish to haul into arbitration. But FINRA Rule 12200 does not define “customer.” Instead, FINRA Rule 12100(i) states merely that a “customer shall not include a broker or dealer.”

In affirming the decision from the U.S. District Court for the Southern District of New York, the Court of Appeals for the Second Circuit, in CGMI v. Abbar, has short-circuited a claimant’s ability to argue that anyone who is not a broker or dealer is a customer. Despite fairly complicated facts relating to various business relationships in London and New York among the parties, the Second Circuit arrived at a simple bright-line rule. The Court defined “customer” under FINRA Rule 12200 as “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.” Therefore, if a claimant has neither purchased a good or service from that FINRA member nor opened an account with that FINRA member, then that member cannot expect to be hauled into arbitration by the claimant. Conversely, the Court found: “By agreeing to accept ‘a fee for its services’ or by selling securities to an entity, a FINRA member understands that it may be compelled to arbitrate if a dispute arises with that entity. … Likewise, the FINRA member should anticipate that accountholders may avail themselves of the arbitration forum to dispute transactions arising from the account.”

What remains to be seen is whether the Public Investors Arbitration Bar Association (PIABA) will be able to convince FINRA to amend Rule 12100 or 12200 to expressly broaden the definition of “customer” and override the Second Circuit.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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