Second Circuit Rules on Contested FINRA Jurisdiction Issue
On September 22nd, 2011, the Second Circuit handed down its decision in
UBS Financial Services Inc. v. West Virginia University Hospitals Inc., Docket No. 11-235-cv (Sept. 22, 2011) and, in so doing, has potentially expanded FINRA's jurisdiction as a dispute resolution forum.
FINRA Rule 12200, provides in relevant part, that parties must arbitrate if the arbitration is either "required by a written agreement," "requested by the customer" or the dispute is "between a customer and a member."
In the case before the Second Circuit, UBS served as the broker-dealer responsible for facilitating auctions for certain auction rate securities (ARS) issued by West Virginia University Hospitals (WVUH). WVUH is a not-for-profit health consortium that issued the bonds structured as ARS - at UBS's suggestion - in order to finance capital improvements and refinance its existing debt. WVUH issued the bonds via three offerings, totaling $329 million. For each offering, UBS served as both the lead underwriter and the main broker-dealer.
When the ARS market collapsed in 2008, WVUH filed a FINRA arbitration claim against UBS alleging fraud in connection with the disclosures made my UBS regarding the ARS market. UBS sought an injunction from the district court, arguing that WVUH was not a "customer" pursuant to the FINRA Rules. The district court denied their injunction, and UBS appealed to the Second Circuit.
In its September 22nd, decision, the Second Circuit affirmed the district court's holding, finding that FINRA Rule 12200 is intended to be interpreted broadly and thus the term "customer" includes any entity that purchases services from a broker-dealer.
The decision has had garnered interest in the industry because the relationship between WVUH and UBS was not a typical broker-customer relationship. The broad interpretation of the term "customer" adopted by the Second Circuit has some commentators wondering if this will result in an extension of FINRA's jurisdiction.