Court Upholds Injunction Against FINRA Arbitration of Claims Against Member’s Affiliate

The Eleventh Circuit recently upheld a permanent injunction against arbitration of claims by investors against a FINRA member and its overseas affiliates on the basis that the arbitration did not concern the affiliates’ relevant business activitiesPictet Overseas, Inc. v. Helvetia Trust, 2018 WL 4560685 (11th Cir. Sept. 24th, 2018).

In Pictet, two trusts had opened custodial accounts at Banque Pictet, a Swiss bank, through an asset manager who was unaffiliated with the bank.  The asset manager then stole the trusts’ money.  The trusts commenced a FINRA arbitration to recover the money against Banque Pictet, the partners who owned the bank, and a Canadian broker-dealer, Pictet Overseas, Inc., which was also owned by the partners.  The only Pictet entity that was a FINRA member—and thus the trusts’ only “hook” for FINRA arbitration—was Pictet Overseas.

The Pictet entities secured a permanent injunction of the arbitration in federal district court, which the Eleventh Circuit affirmed despite the courts’ strong presumption in favor of arbitration.  Under FINRA Rule 12200, a dispute between a “customer” against a member or “associated person” must be arbitrated when it “arises in connection with the business activities of the member or the associated person.”  Assuming that the trusts were the partners’ customers and the partners were an “associated person” of Pictet Overseas, the court held that an associated person’s relevant business activities for the purposes of Rule 12200 were that person’s “business activities as an associated person” rather than any business activities, as the trusts had argued.  The court reasoned that the partners’ business activities in owning a Swiss Bank that held funds in custodial accounts had no connection to their association with Pictet Overseas, an execution broker that was not licensed to (and did not) maintain custodial accounts.

Judge William Pryor wrote separately to explain in more detail that it was appropriate as a matter of textual interpretation for the panel to limit the “business activities” of an associated person to business activities as an associated person because that limitation was clear from the context of the statute surrounding the phrase in question.

The case is perhaps less interesting for its outcome than for its method of arriving there.  Other federal courts have reached similar results by holding that the entity seeking arbitration is not the FINRA member’s “customer.”  See, e.g., Citigroup Glob. Markets Inc. v. Abbar, 761 F.3d 268, 276 (2d Cir. 2014); Morgan Keegan & Co., Inc., 706 F.3d 562 (4th Cir. 2013).  The Pictet panel did not reach this question.  It remains to be seen whether the court’s “business activities” approach will take it out of line with other circuits in practice.

Submitted by Nick Boyd

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