Meikle Law Firm Articles -- Investment Bankers and Arbitration


	TED S. MEIKLE

The conventional wisdom says a customer always can bring an arbitration against a securities broker, whether or not there is an arbitration agreement. No longer trust conventional wisdom.

Originally published October 19, 2001
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Investment Banking: Arbitration

The Eighth Circuit Court of Appeals now says that clients who only receive investment banking advice cannot force arbitration of disputes. Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc., No. 00-3816 (8th Cir. Aug 30, 2001). The logic is questionable but the ruling governs in Minnesota and other states in the Eighth Circuit.

The broker/dealer Robertson Stephens "provided financial advice and assistance to AdFlex in ADFlex's merger with Innovex" but did not act as a broker or dealer in the sale of AdFlex stock. A dispute arose and Robertson Stephens sued for its fees. AdFlex and Innovex moved to compel arbitration, arguing that they were customers and that NASD members are required to arbitrate claims against customers.

The court correctly summarized why NASD members must submit to customer demands to arbitrate:

As a member of the NASD, Robertson Stephens is bound to follow the rules and regulations of the NASD, including the NASD Code. That Code, in pertinent part, requires NASD members to arbitrate disputes if they "aris[e] out of or in connection with the business of any member" and are "between or among members or associated persons and public customers." NASD Code of Arbitration Proc., §10101. The Code further provides that the matter shall be submitted to arbitration upon the demand of the customer. Id. §10301(a).

However, the court's logic then falters. It holds that a customer who "received banking and financial advice" as opposed to "investment or brokerage services" is not really a customer and thus cannot compel arbitration.

To reach this conclusion the court must ignore some pretty clear NASD rules. NASD Rule 0120(g) defines "customer" merely by saying: "The term 'customer' shall not include a broker or dealer." The court discounts this broad statement by declaring that it is too broad. The court "does not believe that the NASD Rules were meant to apply to every sort of financial service an NASD member might provide...."

The court lists a number of NASD Rules that use the term "customer" in the context of someone buying or selling stocks, and concludes from those that the definition is limited to customers involved those types of activities. However, to reach that conclusion the court also must ignore NASD Rule 1120(b)(1), which, it admits, "defines a 'customer' to include those receiving investment banking services." The court brushes off this Rule because it is "isolated" and because it "does not specifically deal with customer protection or relations." The only way the court can say the rule does not deal with "customer protection or relations" is by already assuming that "customer" is narrowly defined.

Whether or not I like the logic, the ruling stands. What does it mean for brokerage firms?

First, if your relationship has soured with an investment banking client, you may be able to sue the client in court and keep the dispute there.
Second, if an investment banking client starts an arbitration against you, you may be able to move the dispute to the court if you desire.

Ted Meikle has served as an attorney since 1980, including 4 ½ years as general counsel for a securities broker/dealer. He is now in private practice. This column is provided as general educational material and not as legal advice.