Eighth Circuit Rules Business Partners of Broker-Dealer Cannot Compel FINRA Arbitration, Agrees Partner Not a “Customer” Under FINRA Rules

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Plaintiff, Principal Securities Inc., filed suit in Iowa federal court seeking to enjoin a FINRA arbitration proceeding commenced by the defendants. Despite there being no arbitration agreement between the parties, the defendants claimed Principal was subject to arbitration based on FINRA Rule 1200, which states that parties must arbitrate a dispute if “requested by the customer.” The district court found the defendants were not “customers,” and enjoined the arbitration. The Eighth Circuit affirmed. The court explained that the defendants were at all relevant times business partners with a former Principal financial adviser and that the defendants relied on their own independent expertise when making investment decisions. The court found no evidence to suggest that the former Principal adviser ever actually provided investment advice or brokerage services to the defendants, or that the relationship between the parties was directly related to investment or brokerage services. As such, the court agreed with the district court that the defendants did not qualify as “customers” under applicable Eighth Circuit precedent. 

Principal Securities, Inc. v. Agarwal, No. 20-3312 (8th Cir. Jan. 31, 2022).

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