The California Court of Appeals reversed a lower court's refusal to compel a dissatisfied investor to arbitrate its dispute with a former associated person of a now defunct FINRA member firm. See Ronay Family Limited Partnership v. Tweed, Cal. App., D062195, 5/23/13.
A FINRA rule rendering a claim against a former member ineligible for arbitration does not apply to the former member's APs. According to the court, the dispute arose after plaintiff lost money on investments it made through the broker-dealer based on the advice of a defendant and his firm, a former FINRA member firm. At all relevant times, the individual was registered with FINRA as a broker-dealer associated person. FINRA Code of Arbitration Rule 12202, states that certain actions are ineligible for arbitration claims by or against inactive members. The court said FINRA Rule 12202 applies only to claims against former members, and an associated person in good standing with FINRA.
The appeals court concluded that there are exceptions to the rule. In this case, the court explained the rights and duties of the parties regarding arbitration initially were defined by the arbitration agreement, the right to enforce it as parties, and the right to compel arbitration of certain controversies. The court agreed that the arbitration would proceed in accordance with the parties' agreement to abide by FINRA arbitration rules, including Rule 12202, and the court must apply FINRA Rule 12202, not the general rules governing an agent's or a third party beneficiary's contractual rights. The court noted that by its terms, Rule 12202 makes claims " 'by or against a member' whose FINRA membership has lapsed" ineligible for arbitration, says nothing about arbitrating for customer's claims against associated persons or others. Concluding that FINRA Rule 12202 applies only to members, the court said if FINRA had wanted to deprive both members and associated persons of the right to compel arbitration when a member loses its membership, it could have done so.
This case demonstrates the strong presumption for arbitration.
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