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Who Are Your Customers?

Do you know who your customers are? FINRA only provides a vague definition for the word “customer.” Under Rule 12100(i), FINRA defines “customer” only as “any person other than a broker or dealer.” Recently, however, the definition became clearer. According to the Fourth Circuit, the definition of “customer” does not include investors who initiated investments on the advice of an individual who was connected indirectly to a FINRA firm. Raymond James Financial Services, Inc. v. Cary, No. 12-1053 (4th Cir. March 9, 2013).

In Cary, the individual investors sought to arbitrate claims against Raymond James Financial Services (“RJFS”), after the investors bought “allegedly fraudulent securities.” The investors had purchased securities directly from Inofin, Inc. (“Inofin”). Inofin’s president, Michael Cuomo, recruited his college roommate, Kevin Keough, a registered representative of Morgan Stanley, and David Affeldt, Keough’s friend and tax attorney, to refer investors to Inofin. Because Keough was employed by Morgan Stanley at the time, Cuomo and Keough agreed that Inofin would pay Keogh’s wife for the referrals. Affeldt and Keough’s wife agreed to equally share referral fees from Inofin.  Keough later joined RJFS, which is a FINRA member.

The investors brought claims against RJFS, which alleged violations of state securities laws, FINRA conduct rules, and that Keough assured them of their investments and sought to arbitrate their claims pursuant to FINRA Rule 12200.   Under Rule 12200 of the FINRA Code of Arbitration, a “customer” is allowed to bring arbitration proceedings against a FINRA member if the dispute arises in connection with the business activities of the member or its associated persons. 

In Cary, the investors argued that they were customers because they bought Inofin securities on the advice of an attorney who was a business and personal acquaintance of RJFS’ registered representative, Keough.  Because FINRA’s definition of “customer” is not instructive, the court, instead, relied on its previous definition of “customer” stating: “customer” means “an entity that is ‘not a broker or dealer, who purchases commodities or services from a FINRA member in the course of the member’s business activities,’ namely, ‘the activities of investment banking and the securities business.’”

The court determined that the Inofin investors had no direct customer relationship with RJFS, or the registered representative. As a result, because the investors did not purchase the securities from RJFS, did not have any accounts at RJFS, and did not have any personal contact with the registered representative, the court determined that the investors did not fall within the definition of “customer.”