UBS and Citigroup’s Appeal Denied; Nonprofit Considered Banks’ “Customer” for FINRA Arbitration Purposes
In UBS Fin. Servs., Inc. v. Carilion Clinic, the United States District Court for the Eastern District of Virginia affirmed a district court ruling that UBS Financial Services, Inc. (“UBS”) and Citigroup Global Markets, Inc. (“Citi”), as members of the Financial Industry Regulatory Authority, Inc. (“FINRA”), must arbitrate a securities dispute with the Carilion Corporation (“Carilion”) under FINRA Rule 12200. 706 F.3d 319 (4th Cir. 2013).
According to the allegations, Carilion in 2005 sought to finance renovation and expansion of one of its hospitals and to refinance existing debt by issuing municipal bonds. To effectuate this, Carilion engaged UBS and Citi to advise a structure for and assist in implementing the bond issuance. UBS and Citi recommended a bond issuance composed of a majority of auction-rate bonds. Heeding UBS and Citi’s advice, Carilion issued $234,225,000 in auction-rate bonds and $74,240,000 in daily rate bonds. Throughout this process, UBS and Citi served as underwriters, broker-dealers, sellers of interest rate swaps, agents in dealing with rating agencies and in discussions with bond insurers, and provided monitoring and advisory services, all on Carilion’s behalf. The parties memorialized the various agreements in broker-dealer agreements and underwriting agreements. For their services, UBS and Citi were compensated with a management fee, including an underwriter’s discount, and annual broker-dealer fees.
In February 2008, UBS and Citi ceased submitting support bids for the bonds at auctions and the auction-rate bond market collapsed, forcing Carilion to refinance at a cost of millions. Carilion initiated arbitration proceedings, and UBS and Citi filed this action seeking an injunction of the arbitration proceedings.
FINRA Rule 12200 requires FINRA members to arbitrate disputes with customers when (1) the customer requests arbitration and (2) the dispute arises in connection with business activities of the member. UBS and Citi argued that the rule did not apply to Carilion because it was not a customer and that the parties’ contracts waived any right to arbitrate. The court disagreed on both counts.
First, UBS and Citi argued that Carilion was not a customer because the definition of customer should have been limited to “persons who received investment or brokerage services.” The court concluded that Carilion was a customer under Rue 12200 because it was not a broker or dealer, it purchased commodities or services related to investment banking and securities covered by FINRA, and it purchased them from FINRA members in the course of the members’ business activities. The court dismissed UBS and Citi’s contention that this definition would cause confusion with the definition of “customer” by the Municipal Securities Rulemaking Board, stating that any difference did not rise to the level of an irreconcilable conflict.
Second, the court reasoned that the parties’ agreements were not sufficiently specific to create a reasonable expectation that arbitration was being waived, displaced or superseded. The court noted that the language in question did not mention arbitration, and that it only created specific forum choice obligations that most logically applied to court and jury trials, as opposed to any tenuous type of proceeding, including arbitration; therefore, the court declined to impute what was not unequivocally there
The court affirmed the district court ruling that Carilion was a customer of UBS and Citi, and could obligate them, as members of FINRA, to arbitrate the dispute.
The primary materials for this case may be found on the DU Corporate Governance website.