Arbitration – Labor & Employment – Wealth Management Firm – Securities Dealers Registration

United States Trust Co., N.A. v. Rich. (Lawyers Weekly No. 11-07-0419, 13 pp.) (Sanford L. Steelman Jr., J.) Appealed from Mecklenburg County Superior Court. (Richard D. Boner, J.) N.C. App. Click here for the full text of the opinion.

Holding: Where the plaintiff-employer was not a member of the Financial Industry Regulatory Authority, and where only a natural person can be an “associated person” under FINRA rules, the arbitration clause in defendants’ Uniform Application for Securities Industry Registration or Transfer Form does not apply to plaintiff.

We affirm the trial court’s denial of defendants’ motion to dismiss or to compel arbitration.

Background

Plaintiff provides wealth management services. When defendants went to work for plaintiff, they were allegedly required to register with the National Association of Securities Dealers, Inc., now called the Financial Industry Regulatory Authority (NASD/FINRA).

Each defendant completed a Uniform Application for Securities Industry Registration or Transfer Form (Form U-4), listing UST Securities, a subsidiary of plaintiff, as his or her member firm.

Form U-4 includes an arbitration clause: “I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer. …”

Defendants went to work for a competitor, and plaintiff filed this action. Defendants moved to dismiss or to compel arbitration.

Discussion

On a prior appeal, this court remanded for findings of fact as to whether a valid arbitration agreement existed between the parties. Given the trial judge’s familiarity with the case, he did not abuse his discretion when he denied defendants’ motion for re-hearing upon remand.

Defendants challenge three of the trial court’s findings of fact:

“13. There is no evidence that the [defendants] sold securities on behalf of UST Securities.

“15. There is no evidence that UST Securities ever employed any of the defendants.

“17. There Is no evidence that [plaintiff] reaped any more than a de minimis benefit from the relationship between the [defendants] and UST Securities.”

We hold these findings are supported by competent evidence. The affidavit of Charlene Barrett, Vice President of Human Resources for plaintiff, states “The Individual Defendants were employed by [plaintiff],” and “were not employed by UST Securities Corp. and never received any compensation from UST Securities Corp.”

The affidavit of Scott Barber, the Chief Compliance Officer for UST Securities Corp., states, “The Individual Defendants were not authorized to hold themselves out as registered representatives of UST Securities Corp., or use the name of [UST Securities Corp.] on their business cards.” These affidavits support the findings of fact above.

Defendants also argue that plaintiff qualifies as an “associated person” under NASD/FINRA Rules, and is therefore required to arbitrate under the provisions of Form U-4. We disagree.

Section 13200(a), entitled Required Arbitration, of the FINRA Code of Arbitration Procedure for Industry Disputes provides: “Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among: Members; Members and Associated Persons; or Associated Persons.”

It is undisputed that plaintiff was not a “member” under NASD/FINRA Rules, and we hold that the term “associated person” refers only to natural persons.

This case is distinguishable from LSB Financial Services, Inc. v. Harrison, 144 N.C. App. 542, 548 S.E.2d 574 (2001); in that case, the Form U-4 was executed prior to the 1999 NASD By-Law Amendment to the definition of “associated person” making clear that “associated persons” had to be natural persons.

Plaintiff is not an “associated person” as defined by FINRA By-Laws and Code of Arbitration Procedure, and therefore is not required to arbitrate the instant dispute.

Finally, plaintiff is not a third-party beneficiary of defendants’ Form U-4s.

The language of the Form U-4 and related NASD/FINRA Rules do not demonstrate any intent on the part of the contracting parties to directly benefit plaintiff.

The circumstances surrounding the transaction also reveal the lack of intent of the contracting parties to directly benefit plaintiff. As found by the trial court, there is no evidence that the defendants were employed in any way by UST Securities or that plaintiff received any more than a de minimums benefit from the relationship created by the Form U-4 between defendants and UST Securities.

The trial court properly determined that plaintiff was not a third-party beneficiary of defendants’ Form U-4s, and that plaintiff was therefore not required to arbitrate its dispute with defendants.

Affirmed.