Federal Court Considers FINRA Arbitrability of Insurance Claims

June 18, 2020

Four investors share the same registered representative. Except only three of them executed a New Account Form with the rep's brokerage firm. Except all four investors want to sue the brokerage firm over insurance and annuities sales that didn't occur at that firm. All of which begins with the investors filing a Statement of Claim with FINRA Arbitration. All of which then moves on to federal court. 

Outside Business Activity: Wesselt Capital Group

Susan Stagliano, Blythe Stagliano, Joseph Cordone, and Cynthia Currie hired Richard M. Wesselt to provide them with investment strategies for their retirement assets. Wesselt was a licensed insurance agent, who operated through the Wesselt Capital Group. Additionally, from March 2014 to September 2017, Wesselt was registered with FINRA member firm The O.N. Equity Sales Company ("ONESCO"), which approved him to engage in an outside business activity through Wesselt Capital Group. Susan and Blythe Stagliano, and Cordone executed ONESCO new account documents; however, Currie did not. Although the ONESCO New Account documents did not contain a mandatory arbitration clause, as a FINRA member firm it was obligated via that self-regulatory-organization's rules to arbitrate disputes with their public customers. 

During the course of the four investors' relationship with Wesselt, he recommended, in part, that they fund purchases of whole and term life insurance policies, and annuities via sales of various securities. ONESCO did not pay Wesslet commissions/fees for the sales of any life insurance products or of any annuities because, in part, the firm is not in the life insurance business, not licensed for said sales, and does not appoint any life insurance agents. Notably, during the period of time at issue, ONESCO did not submit any invoices to the four customers and they did not pay that firm anything. 

The FINRA Statement of Claim

On December 11, 2019, the four investors filed a FINRA Arbitration Statement of Claim against ONESCO. Notwithstanding ONESCO's seemingly remote role with the four customers, their theory of liability appears to have been predicated upon ONESCO's alleged failure to supervise Wesselt. The firm conceded FINRA Arbitration jurisdiction over any securities claims filed by the Staglianos and Cordone; however, the firm moved FINRA's Director of Arbitration to deny the forum for any insurance-related claims, and, given the absence of any executed ONESCO New Account form with Claimant Currie, they sought to have her claims dismissed on that additional basis. 

The FINRA Director of Arbitration granted ONESCO's Motion to Dismiss as against Currie and as to all insurance-related claims by the three other Claimants; however, the Director allowed the securities claims of the three remaining investors to proceed.


FINRA Code of Arbitration for Customer Disputes Rule 12200. Arbitration Under an Arbitration Agreement or the Rules of FINRA

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;
    • 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.

FINRA Code of Arbitration for Industry Disputes Rule 13200. Required Arbitration

(a) Generally
Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:
    • Members;
    • Members and Associated Persons; or
    • Associated Persons.
(b) Insurance Activities
Disputes arising out of the insurance business activities of a member that is also an insurance company are not required to be arbitrated under the Code.


On appeal to the United States District Court for the Eastern District of Pennsylvania ("EDPA"), all four investors filed a Motion to Compel the FINRA arbitration of their insurance claims, and, also, of Currie's claims. Susan Stagliano, et al. v. The O.N. Equity Sales Company (Memorandum, United States District Court for the Eastern District of Pennsylvania, 20-CV-1760)

EDPA characterized the issues before it as whether the Court was empowered to decide the threshold question of arbitrability; and, if "yes," are the insurance-related claims properly subject to FINRA arbitration.

Who Determines "Arbitrability?"

EDPA agreed with the investors' argument that the threshold determination of arbitrability was for the Court and not, as urged by ONESCO, an issue that the investors had agreed to present to FINRA arbitrrators to the exclusion of the Court:

The Investors' claim is based on the language in the FINRA rules and the Uniform Submission Agreement. Neither includes language "clearly and unmistakably" expressing the parties' intent to have arbitrators instead of the court decide the question of arbitrability. Like the agreement in Chesapeake Appalachia, the agreement here does not delegate arbitrability and thus the question of arbitrability is for us. In line with Next Financial Group, the Investors' filings in the FINRA proceedings are not sufficiently clear and unmistakable evidence of the Investors' intent to delegate the gateway question of arbitrability to the arbitrator.

The parties did not delegate the question of arbitrability to FINRA. We have jurisdiction to decide the arbitrability of the Investors' claims.  

at Page 5 of the EDPA Memorandum

Currie's Claims

EDPA then addressed whether Currie could force ONESCO to arbitrate both her securities and insurance claims before FINRA's arbitration forum notwithstanding that she had never executed a New Account Agreement. In denying Currie's Motion to Compel FINRA Arbitration, in part EDPA finds that [Ed: footnotes omitted]:

FINRA Rules of arbitration only apply to customers.FINRA Rule 12200 requires parties to arbitrate only under circumstances related to customers of FINRA members. The United States Court of Appeals for the Second Circuit defines a customer for purposes of FINRA Rule 12200 as one who either (1) purchases a good or service from a FINRA member; or (2) has an account with a FINRA member. The United States Court of Appeals for the Fourth Circuit defined a customer as one "who purchases commodities or services from a FINRA member in the course of the member's business activities insofar as those activities are regulated by FINRA- namely investment banking and securities business activities."

The Investors' counsel concedes Ms. Currie did not have an account with ONESCO. ONESCO's President swore, "Cynthia Currie was not a customer of ONESCO and ONESCO did not enter into any agreement whatsoever with Cynthia Currie." Ms. Currie did not purchase a good or service from ONESCO and did not open an account with ONESCO. 

The FINRA Rules do not require arbitration of claims of a non-customer. Cynthia Currie is not a customer under FINRA Rule 12200. Ms. Currie's claims are not subject to FINRA arbitration. 

at page 6 of the EDPA Memorandum

Insurance Claims

In determining whether the investors' insurance claims are arbitrable under FINRA Rules, EDPA concluded that there was a valid and enforceable arbitration agreement in place; however, the insurance claims fell outside the scope of said agreement and are not arbitrable. As to the first prong of its findings, EDPA stated in part that [Ed: footnotes omitted]:

Investors Joseph Cordone, Blythe Stagliano, and Susan Stagliano are customers of ONESCO. They requested arbitration of a dispute arising in connection with ONESCO's business activities through its registered agent Mr. Wesselt. Under Rule 12200, ONESCO is bound to arbitrate. ONESCO signed the Uniform Submission Agreement agreeing to arbitrate according to the FINRA Rules. The Uniform Submission Agreement is a separate valid and enforceable arbitration agreement. 

at page 8 of the EDPA Memorandum

In offering its rationale for not deeming the insurance claims as arbitrable, in part, EDPA finds that [Ed: footnotes omitted]:

FINRA Rule 12200 does not require arbitration of "disputes involving the insurance business activities of a member that is also an insurance company." Furthering this principal, Rule 13200 of the FINRA code provides, "disputes arising out of the insurance business activities of a member that is also an insurance company are not required to be arbitrated under the Code." In re Prudential Ins. Co. of Am. Sales Practice Litig. All Agent Actions, our Court of Appeals interpreted similar insurance language regarding arbitration agreements in relation to an employment dispute. The Court examined a National Association of Securities Dealers rule which excluded "disputes involving the insurance business of any members of any member which is also an insurance company" and noted in these situations "there is a clear intent not to arbitrate but rather to leave the matter with in the province of the courts." Our Court of Appeals concluded the rule is ambiguous as to employment claims and did not define insurance business. FINRA Rule 13200 contains similar language to the National Association of Securities Dealers rule. 

at page 9 of the EDPA Memorandum

SIDE BAR: I would note that the posture of the disputed arbitration before EDPA would seem to fall under the ambit of an alleged "customer" of a FINRA member firm, and, as such, should be adjudicated under FINRA's 12000 series rules, which are part of the "FINRA Code of Arbitration for Customer Disputes." In contrast, the 13000 series rules are part of the "FINRA Code of Arbitration for Industry Disputes." 

Given the above distinction between customer and industry dispute, and given the separate 12000 and 13000 series of FINRA rules, I'm not quite sure why or how EDPA is citing Rule 13200 in support of its rationale for denying FINRA's arbitration forum to "customers," whose disputes would seem to be subject to the 12000 series of rules. Similarly, I'm not quite following the Court's point when it references Rule 13200 as "furthering" a principal enunciated in Rule 12200.

EDPA Order

EDPA found that ONESCO had never agreed to arbitrate the insurance claims at issue and FINRA's Rules do not so compel. Further, given that Currie is not an ONESCO customer, she cannot compel the firm to arbitrate her dispute before FINRA. In conclusion, EDPA denied Plaintiffs' Amended Petition to Compel Arbitration. Susan Stagliano, et al. v. The O.N. Equity Sales Company (Order, United States District Court for the Eastern District of Pennsylvania, 20-CV-1760)