There is a strong policy favoring arbitration, particularly the arbitration of customer claims against securities broker-dealers. Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987) (The Supreme Court has consistently stated that the Federal Arbitration Act “establishes a federal policy favoring arbitration.”)(quoting, Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983). Arbitration is quick, it is relatively inexpensive, and perhaps most importantly, it provides a forum for the resolution of claims that may otherwise consume scarce judicial resources, (if these matters, particularly arising under the federal securities laws, were heard in federal court).
As one Court has recently observed, “herculean efforts” by securities broker-dealers “to avoid resolution of disputes through arbitration” is not new. Smoothline Ltd. v. N. Am. Foreign Trading Corp., 249 F.3d 147,148 (2d Cir. 2001)(“Arbitration is intended to provide the parties to a dispute with a speedy and relatively inexpensive trial before specialists. Despite this well-recognized fact, courts continue to be confronted with herculean efforts to avoid resolution of disputes through arbitration.”).
Once the “threshold” question of arbitrability has been raised, it is incumbent on the
party seeking arbitration to seek “judicial determination” by a Court as to whether or not the dispute is arbitrable. See, e.g. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-45 (1995)(the “question of arbitrability,” is “an issue for judicial determination”); See also, AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986)(same); Painewebber Inc. v. Hartmann, 921 F.2d 507, 510 (3d Cir.1990)(The Federal Arbitration Act, 9 U.S.C. § 1, et seq. “enables a litigant to invoke the authority of a federal district court in order to force a reluctant party to arbitrate a dispute.”).
However, FINRA Rules, as a condition of membership, require all stockbrokers and securities broker-dealers to arbitrate disputes with customers. These Rules are “contractual in nature” and are binding on its members. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Georgiadis, 903 F.2d 109, 113 (2d Cir. 1990)(“The rules of a securities exchange are contractual in nature”); Scobee Combs Funeral Home, Inc. v. E.F. Hutton & Co., Inc., 711 F. Supp. 605, 606 (S.D. Fla. 1989); See also Paine, Webber, Jackson & Curtis, Inc. v. Chase Manhattan Bank, N.A., 728 F.2d 577, 580 (2d Cir. 1984) (the arbitration rules of the New York Stock Exchange can be binding on NYSE members); Kidder, Peabody & Co., Inc., v. Zinsmeyer Trusts Partnership, 41 F.3d 861 (2d Cir. 1994)(As a member of the NASD, Kidder is bound to adhere to the organization’s rules and regulations); Drexel Burnham Lambert, Inc. v. Pyles, 701 F. Supp. 217, 220 (N.D. Ga. 1988).
FINRA Rule 12200 provides that:
Parties must arbitrate a dispute under the Code if:
• Arbitration under the Code is either:
(1) Required by a written agreement, or
(2) Requested by the customer; and
The dispute is between a customer and a member or associated person of a member; and The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.
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