Law Is "Clearly Defined": Investors Have No Private Right of Action for Violation of FINRA Rules

Financial Institutions Law Alert

 

The U.S. District Court for the Eastern District of Virginia recently issued an opinion that directly refutes arguments from claimants’ counsel that a violation of a FINRA rule somehow provides claimants with a cause of action. In Interactive Brokers LLC v. Saroop, No. 3:17-cv-127, 2018 U.S. Dist. LEXIS 214023, 2018 WL 6683047 (E.D. Va. Dec. 19, 2018), the District Court held that a FINRA arbitration panel’s award demonstrated a manifest disregard of the law when it based its award of damages on a purported violation of a FINRA rule. In vacating the panel’s award and after a thorough examination of case law, the District Court determined that “[t]he clear weight of authority holds that a violation of the rules of a financial self-regulatory entity like FINRA (or its predecessor, NASD) does not give rise to a private right of action.” Therefore, it was “beyond dispute” that a violation of a FINRA rule does not give rise to a private right of action.

The District Court also rejected the investors’ “nuanced” argument that a violation of FINRA rules can provide the basis for a common law claim. It recognized that while FINRA rules may be used to define the scope of a common law duty or to provide evidence of whether that duty was met, a violation of FINRA rules may not, standing alone, establish “the predicate for liability in the first place.”

Relying on Gurfein v. Ameritrade, Inc., 312 Fed. App’x 410 (2d Cir. 2009), the District Court likewise rejected the investors’ argument that a violation of FINRA rules could support a claim for breach of contract. The District Court determined that language in the investors’ Customer Agreement stating that all transactions in their accounts were subject to “rules and policies of relevant markets and clearinghouses, and applicable laws and regulations” was a notice provision that did not impose contractual obligations on the firm. This language did not create a distinct claim for breach of contract based on a violation of a FINRA rule, and “an investor may not create a private right of action for the violation of financial regulatory rules . . . by refashioning his claim as a breach of contract claim.”

The investors have appealed the ruling to the Court of Appeals for the Fourth Circuit.