Second Circuit Clarifies FINRA Rule 12200


As discussed at the ADR Prof Blog, the Second Circuit held that an issuer who purchases auction-facilitating services for its auction rate securities from a broker-dealer is a “customer” of that broker-dealer within the meaning of the Financial Industry Regulatory Authority(“FINRA”) Rule 12200FINRA Rule 12200 governs whether FINRA members must submit to FINRA arbitration.

In UBS Financial Services Inc. v. West Virginia University Hospitals Inc. No. 11-235-cv (2nd Cir. Sept. 22, 2011), UBS Financial Services, Inc. and UBS Securities LLC (“UBS”) are FINRA member entities (subject to FINRA’s Code of Arbitration Procedure for Customer Disputes) engaged in a range of finance-based businesses. West Virginia University Hospitals, Inc. (“WVUH”) is a not-for-profit health consortium that has issued bonds to finance capital improvements and refinance existing debt.

UBS appeals the denial of their motion for a preliminary injunction enjoining the defendants from proceeding with an arbitration before FINRA and require that the arbitration proceed in New York County. In the arbitration, the defendants seek damages for UBS’s alleged fraud in connection with the defendants’ issuances of auction rate securities. The District Court for the Southern District of New York denied the requested injunction and held that a forum selection clause in one of the agreements between the parties was unenforceable because it conflicts with FINRA’s rules, and ordered that the arbitration proceed in West Virginia.

The Second Circuit held that:

  1. The defendants are entitled to arbitration because they became UBS’s “customer” under FINRA’s rules when they undertook to purchase auction services from UBS; and
  2. The enforceability of the forum selection clause is a procedural issue for FINRAarbitrators to address and that the District Court lacked jurisdiction to resolve it.

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