The circuit courts continue to refine the definition of the term “customer” under FINRA Rule 12200. A “customer” can compel a broker-dealer to arbitrate a dispute even in the absence of a pre-dispute arbitration agreement. FINRA does not define “customer,” except for its mention in Rule 12100(i) (a “customer shall not include a broker or dealer”).
I previously blogged (here) about a recent case in which the Ninth Circuit Court of Appeals adopted the Second Circuit’s 2011 definition: a customer is “a non-broker and non-dealer who purchases commodities or services from a FINRA member in the course of the member’s FINRA-regulated business activities.” This definition necessarily required a detailed examination of the facts and circumstances of the parties’ relationship. (In the Ninth Circuit case, the court concluded that a municipal issuer purchasing advisory services for an auction-rate security issuance from an investment bank was a “customer.”)
Now the Second Circuit has come up with what it calls “the precise boundaries of the FINRA meaning of ‘customer.'” In Citigroup Global Markets Inc. v. Abbar, Docket No 13-2172 (Aug. 1, 2014), the Second Circuit concluded that a Saudi businessman who managed family trusts that lost $383 million invested with a U.K. affiliate of Citigroup, Inc. (“Citi UK), was not a “customer” of Citigroup Global Markets, Inc. (“Citi NY”) under Rule 12200, and thus could not compel Citi NY to arbitrate their dispute. The Court of Appeals issued “a bright-line rule” and held that “a ‘customer’ under FINRA Rule 12200 is 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.” The Court reasoned that a “simple, predictable and suitably broad definition of ‘customer'” is “necessary” to avoid a “sprawling litigation” that its previous definition required, which “defeats the express goals of arbitration to yield economical and swift outcomes.” Because Abbar purchased no goods or services from Citi NY (though some of its employees helped develop trading strategies for his accounts) and had no account with it, he was not a “customer” of Citi NY.
Of course, the Court recognized that, as with all legal definitions, exceptions exist for “rare instances of injustice.” This exception seems to swallow the rule, however, as it should still call for a detailed examination of the facts to mine for injustices.