ARS Issuer Can Arbitrate Claims Against Broker-Dealer Related to Auction Services

The Second Circuit recently held that an issuer of auction rate securities (ARS) could arbitrate claims against the financial services firm that advised the issuer on the offerings and acted as the lead underwriter and the main broker-dealer responsible for facilitating the auctions that set the interest rates.  UBS Financial Services, Inc. v. West Virginia University Hospitals (No. 11-235-cv, 9/22/11).  There was no arbitration agreement between the parties, but a majority of the panel held that the issuer was a "customer" under the FINRA arbitration rules with respect to the services provided by the firm in its capacity as a broker-dealer and therefore could compel arbitration.  While the district court had concluded that the issuer was a customer with respect to the underwriting services, the majority of judges declined to address that issue, although they made a point of stating that they disagreed with the dissenting judge's assertion that issuers can never be customers of underwriters.

This litigation thus offers another illustration of broker-dealers resisting arbitration when requested by the customer.  Indeed, while the definition of "customer" is largely undefined at the borders and, in particular, whether the issuer is a customer of the underwriter that provides it underwriting services is unresolved, some of the arguments made by UBS's attorneys against arbitration were frivolous.  Thus, they argued that FINRA rules do not contemplate arbitration for sophisticated parties, that FINRA has a narrow "investor-protection" mandate, and that a customer relationship requires a fiduciary relationship and cannot be founded on arm's length transactions.  None of these arguments has ny basis in the FINRA rules, practice or policy.

Thus, we have another example of a situation where the securities industry believes that they will achieve a more favorable result in the law-oriented judicial forum than in the equity-based arbitration forum.