In its recent decision in Oppenheimer & Co. Inc. v. Mitchell, 135 F.4th 837 (9th Cir. 2025), the Ninth Circuit clarified the scope of FINRA member firms’ obligation to arbitrate with “customers.” The Court concluded that defendants—investors who were defrauded through a Ponzi scheme allegedly perpetrated by an associated person—were not “customers” of the member firm under the plain language of FINRA Rules. In so holding, the Ninth Circuit expressly rejected the Public Investor Arbitration Bar Association’s (“PIABA”) proposed interpretation that “customer” encompasses both direct and indirect dealings with an associated person of a FINRA member. Instead, the Court held that a direct relationship—specifically, a purchase of a security or an account with the member or its associated person—is required to qualify as a “customer.” Thus, the Court affirmed the district court’s order enjoining the pending FINRA arbitration.
Background
The defendants invested in Horizon Private Equity, III, LLC, an alleged Ponzi scheme orchestrated by John Woods, a registered representative at Oppenheimer. However, the investments were not made directly through the firm. Rather, the defendants invested through a registered representative from Southport Capital, an advisory firm that allegedly collaborated with Horizon to defraud elderly investors. Although Woods had a controlling interest in both Horizon and Southport, he had no direct interaction with the defendants beyond a single phone call where he confirmed information already conveyed to them by the Southport representative. The defendants did not have accounts with Oppenheimer or any other contact with the firm.
They filed arbitration claims with FINRA Dispute Resolution, purporting to require the firm to arbitrate their claims pursuant to FINRA Rule 12200, which requires member firms to arbitrate disputes if “requested by the customer.”
FINRA Definition of “Customer”
FINRA Rule 12100(k) defines a “customer” in the negative, stating that “[a] customer shall not include a broker or dealer.” The Ninth Circuit analyzed the definition within the context of Rule 12200, establishing that “a ‘customer,’ for purposes of Rule 12200, includes any non-broker and non-dealer who purchases commodities or services from a FINRA member or its associated person.” Under this “bright-line definition of ‘customer,’” the central inquiry is whether an individual has engaged in a direct transaction with a FINRA member or its associated person—specifically, “whether an account was opened or a purchase made.” The Court emphasized this interpretation aligns with the holdings of the Second, Fourth, Fifth, Sixth, Seventh, Eighth, and Eleventh Circuits, and “further serves the purposes of Rule 12200 by ensuring that access to arbitration is guided by a clear and administrable rule.”
In so ruling, the Ninth Circuit expressly rejected the more expansive interpretation advocated by PIABA. In its amicus brief, PIABA urged the Ninth Circuit to define “customer” broadly to include any individual who receives securities-related service, even indirectly, from a FINRA member or its associated person. Specifically, PIABA argued that “customer” should include individuals who only dealt with an associated person’s agent rather than directly with the associated person. The Court declined to adopt this expansive interpretation, finding instead that only those who directly transact with a FINRA member or its associated person qualify as customers entitled to arbitration under Rule 12200.
Court’s Analysis and Ruling
Applying this bright-line definition, the Ninth Circuit concluded the defendants were not “customers” of the firm’s associated person. The Court emphasized that the defendants had not purchased any services or commodities from either the firm or the associated person because the associated person did not solicit, facilitate, or cause the defendants’ investments in Horizon. The Court further noted that the defendants’ sole interaction with Woods—a single, brief phone call—was insufficient to establish a “customer” relationship with him as a matter of law.
The Court found that the purchase of the investment occurred primarily through the Southport advisor, who was not an associated person of Oppenheimer. As a result, the defendants were not customers of either the firm or the associated person and were not entitled to arbitrate their claims under FINRA Rule 12200.
Implications for FINRA Members
The Ninth Circuit’s decision in Mitchell firmly rejects PIABA’s expansive and amorphous definition of “customer”, instead reinforcing a more narrow, transactional definition that hinges on a direct relationship involving a purchase or account with the FINRA member or associated person. By expressly declining to adopt PIABA’s position, the Court established clarity in the interpretation of FINRA Rules and avoided a standard that would impose impractical supervisory burdens on FINRA members. Instead, the Court drew the same bright line as its sister Circuits: only those with a direct relationship involving a purchase or account with a member or its associated person may arbitrate in FINRA.
This ruling provides further support to firms who challenge FINRA arbitration demands from individuals based on allegations that lack a direct transactional nexus with the FINRA member firm. Moreover, the decision demonstrates federal courts’ continued willingness to enforce bright-line interpretations of FINRA rules, resisting vague, fact-intensive standards that would undermine the efficiency of the arbitration process. Keeping claims from non-customers in court allows firms to make use of dismissal and summary judgment motions to resolve these claims as a matter of law, which can be particularly helpful given the lack of duties owed to non-customers.
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