Commercial Division Blog

Posted: December 27, 2020 / Categories Commercial, Arbitation, Mediation and Other ADR

FINRA Rules Held to Create Obligation to Arbitrate

On December 9, 2020, Justice Friedman of the New York County Commercial Division issued a decision in TD Ameritrade, Inc. v. Purshe Kaplan Sterling Invs., Inc., 2020 NY Slip Op. 34120(U), holding that the FINRA rules constituted an agreement to arbitrate, explaining:

Under the FAA, arbitration is contractual by nature—a party cannot be required to submit to arbitration any dispute which he has not agreed to submit. Under New York law, similarly, a party may not be compelled to arbitrate its dispute with another unless the evidence establishes the parties’ clear, explicit and unequivocal agreement to arbitrate.

Here, the parties do not dispute that the arbitrability of this matter is an issue for the court to decide. Nor could they do so, as the parties did not clearly and unmistakably evidence their intention to have the arbitrator decide issues of arbitrability.

. . .

The parties do not dispute that there is no written agreement between them to arbitrate. FINRA members are, however, required by FINRA Rules to arbitrate certain disputes. As both TD Ameritrade and PKSI are members of FINRA, resolution of TD Ameritrade’s petition turns on whether FINRA Rules require arbitration of PKSI’s crossclaim. That this determination requires interpretation of the Financial Industry Regulation Authority (FINRA) Code does not make it any less a matter for the court. The arbitration rules of an industry self-regulatory organization such as FINRA are interpreted like contract terms; the organization’s arbitration provision should thus be interpreted to give effect to the parties’ intent as expressed by the plain language of the provision.

FINRA Customer Code Rule 12200 provides: Parties must arbitrate a dispute under the Code 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 Industry Code Rule 13200 provides, in relevant part:

Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:

• Members;
• Members and Associated Persons; or
• Associated Persons.

FINRA Customer Code Rule 12303 provides, in relevant part: The answer to the statement of claim may include any counterclaims against the claimant, cross claims against other respondents, or third party claims, specifying all relevant facts and remedies requested, as well as any additional documents supporting such claim.

Petitioner argues that FINRA Rule 12200 is inapplicable because there is no written arbitration agreement between TD Ameritrade and PKSI, and PKSI is not and has never been a customer of TD Ameritrade. This argument ignores that Rule 12303 expressly provides for third party claims, without limiting such claims to disputes between a customer and a member. Significantly also, TD Ameritrade cites no authority in support of its contention that in an arbitration initiated by customers against a broker-dealer, the named broker-dealer may not assert third party claims related to the transaction against another member broker-dealer. Merrill Lynch, Pierce, Fenner & Smith, Inc. v Cantone Research, Inc. (427 NJ Super 45 [App. Div. 2012]), on which TD Ameritrade relies, is factually inapposite. In that case, the defendants were broker-dealers and associated persons against which the claimant-investors had brought the arbitration, and the plaintiffs were a broker-dealer and associated person against which the defendants sought to assert a third party claim in the arbitration for contribution or indemnification. The court stayed the arbitration against the plaintiffs, holding that the defendants were not authorized by the FINRA Customer Code to bring the third party claim. The court reasoned that the Customer Code does not apply to plaintiffs because neither defendants nor the investors are customers, as defined by the Customer Code, of plaintiffs. Here, in contrast, by petitioner’s own admission, the Claimants were customers of TD Ameritrade.

Moreover, the arbitration in fact involves claims by the claimants not only against PKSI, but also against TD Ameritrade. At the time the petition was initially briefed, claimants in the arbitration had not asserted any claims against TD Ameritrade. By letter dated September 8, 2020, PKSI informed the court that claimants had filed a motion to amend their Statement of Claim to include TD Ameritrade in the arbitration, and that the motion had been granted. In a September 14, 2020 letter to the court, TD Ameritrade acknowledged that claimants had submitted claims against it, but still sought a stay. In a further letter, dated November 30, 2020, TD Ameritrade informed the court that it had settled the arbitration with the claimants. TD Ameritrade cites no authority that the third party claims in the arbitration may no longer be properly arbitrated under FINRA’s Customer Code as a result of its settlement with the claimants, or that the third party claim is otherwise improper under the circumstances.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have a question regarding a dispute that is subject to an arbitration agreement.