Court Compels Arbitration Without Direct Account Relationship With Customer

If selling broker is associated person, and claimant is his customer, BD compelled to arbitrate

BMA Financial Services, Inc. v. Guin, 2001 U.S. Dist. LEXIS 18556 (W.D. La., 9/27/01): In the absence of a direct account relationship, a court will compel a firm to arbitration, if the selling broker is an associated person and Claimant is his customer.

BMA filed an action seeking a declaratory judgment of non-arbitrability and an order enjoining a NASD arbitration filed against it by Defendants. Defendants filed a cross-motion to compel arbitration. The underlying dispute involved the purchase by Defendants from Thomason of an unregistered security.

In granting the motion to compel and in dismissing the declaratory judgment action, the Court engages in a three-step analysis to determine whether the parties agreed to arbitrate the claims. It first looks to whether the Defendants were “customers” under Code of Arbitration Rule 10301(a). Rejecting a narrow definition, the Court adopts the broader interpretation of the Second Circuit, finding that “customer” plainly refers to either the member’s or the associated person’s customer.

The second step requires a look at whether Thomason was an associated person of BMA. Although the Court’s decision is unclear and in fact is confusing on this point, it appears that Thomason never became a registered representative of BMA. BMA filed a Form U-4 on behalf of Thomason, but it does not appear to have become effective. That fact notwithstanding, the Court finds Thomason to be an associated person of BMA by looking to the definition contained in the NASD By-Laws, which includes persons who filed an application for registration.

Lastly, the Court examines whether the claims were sufficiently connected to the business of BMA or Thomason to fall within the scope of Rule 10301(a). Under the broad federal policy favoring arbitration, the Court concludes that the claims at issue had a sufficient nexus to BMA to fall within the scope of the rule. (SLC Ref. No. 2001-49-02)

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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

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