The Financial Industry Regulatory Authority, more commonly known as FINRA, has adopted a Code of Arbitration for Customer Disputes (FINRA has a separate code for industry disputes). Under FINRA’s Customer Code, a claim by or against an inactive member is ineligible for arbitration unless, after the claim arises, the customer agrees in writing to arbitrate. Rule 12202. In other words, a pre-claim arbitration agreement can’t be enforced by a defunct broker.

Arbitration clauses in brokerage account agreements often extend beyond the broker to its officers, directors, agents and registered representatives. If the broker is defunct, does Rule 12202 prevent a third party from compelling arbitration? In Ronay Family Limited Partnership v. Tweed, Cal. Ct. Appeal Case No. D062195 (May 23, 2013), the Fourth District Court of Appeal answered no.

Justice Joan K. Irion writing for the court noted that the general rule is that only a party to an arbitration agreement may enforce it. DMS Services, Inc. v. Superior Court, 205 Cal. App. 4th 1346, 1352 (2012). However, she found that a registered representative of a defunct broker could enforce an arbitration agreement under both the third party beneficiary and agency exceptions to the general rule. [Readers may remember that Justice Irion also wrote the opinion in Douglas E. Barnhart, Inc. v. CMC Fabricators, Inc., 211 Cal. App. 4th 230 (2012) which I discussed in Defendant Prevails On Non-Existent Contract.]

Although this opinion is concerned with the FINRA arbitration rules, it will likely be cited in other cases involving third party attempts to enforce arbitration agreements. For those concerned with FINRA rules, the opinion also provides guidance on how California courts will interpret those rules:

  • “Courts interpret FINRA arbitration rules the same way they interpret contracts, giving effect to the parties’ intent as expressed by the plain an ordinary meaning of the language they used.”
  • “Although the NASD’s [FINRA's predecessor] interpretation of its own arbitration rule is not binding on a court, it is entitled to substantial deference.”

In this observance no form of ceremony is prescribed . . .

Please take time to read the end of this post regarding the “sacred charge” of Memorial Day.