Jurisdictional Issues to Consider When Confirming an Expungement Award
in Federal Court Pursuant to FINRA Rule 2130
by
Jonah A. Toleno, Esq., Partner
SHUSTAK FROST & PARTNERS, P.C.
May, 2008
I. INTRODUCTION
The Financial Industry Regulatory Authority ("FINRA", formerly the "NASD") Conduct Rule 2130 requires members or associated persons seeking to expunge customer dispute-related information from the CRD system to obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief. This confirmation requirement applies to stipulated awards.
The petitioner seeking expungement relief or judicial confirmation of an award containing expungement relief must name FINRA as a party to the action or obtain from FINRA a waiver of the requirement to name FINRA. The criteria on which FINRA bases its decisions to waive the obligation to name it as a party are set forth in detail in Rule 2130. 1
Under Rule 2130, parties are generally free to obtain confirmation from either state or federal courts, provided (a) the choice of court is consistent with any arbitration agreements between the parties and (b) jurisdiction exists in the court. If filing in federal court, the petitioning party must establish both personal jurisdiction over the parties and subject matter jurisdiction. The following are a few jurisdictional issues to consider when confirming an arbitration award for expungement relief in federal court.
II. PERSONAL JURISDICTION
Parties may consent to personal jurisdiction by agreement. For instance, customer agreements and independent contractor agreements may contain forum selection clauses that require the parties to submit to personal jurisdiction before a specific state or federal court. In our firm's experience, courts have given substantial weight to forum selection clauses in valid contracts.
If personal jurisdiction is not obtained by consent amongst the parties, then personal jurisdiction must be established in compliance with the Federal Rules of Civil Procedure.
III. SUBJECT MATTER JURISDICTION
A. Diversity Jurisdiction
In addition to personal jurisdiction, federal subject matter jurisdiction must also exist over the confirmation action. Subject matter jurisdiction exists (a) pursuant to diversity jurisdiction or (b) where a substantial question of federal law exists. Petitions filed on the basis of diversity jurisdiction must comply with procedural requirements such as establishing the parties' diverse citizenship and an amount in controversy exceeding $75,000. 2
B. Federal Question Jurisdiction
If no diversity jurisdiction exists, then the petitioner must show federal question jurisdiction. Federal question jurisdiction exists if the action arises under the Constitution, laws, or treatises of the United States. 3
The Federal Arbitration Act (the "FAA") provides that venue is appropriate for confirming an award in any jurisdiction to which the parties have agreed. 4 While the provisions of the FAA generally govern petitions to confirm arbitration awards in federal court, it does not automatically confer federal question (subject matter) jurisdiction on such an action. This means that either diversity must exist amongst the parties as described above, or the subject matter of the petition must arise out of a federal question.
1. Establishing Federal Question Jurisdiction in General
Federal courts are split as to the establishment of federal question in petitions for confirmation. Generally speaking, courts will not infer subject matter jurisdiction over the petition simply because such jurisdiction exists in the underlying arbitration. An independent basis for jurisdiction must exist over the subject of the petition action itself. Depending on the venue of the petition, establishing subject matter jurisdiction outside of diversity can be tricky.
It has been our firm's experience, in Rule 2130 proceedings naming FINRA as a respondent, that FINRA does not object to federal question jurisdiction where a petition to confirm is brought in federal court. Moreover, we have presented the argument below for potentially exclusive federal jurisdiction, to which FINRA has yet to state an objection in our petitions where FINRA is named as a respondent. The reasoning of the argument, which asserts jurisdiction under the federal Securities Exchange Act, is as follows:
2. The Argument for Exclusive Federal Jurisdiction
FINRA is a non-governmental agency subject to oversight by the Securities Exchange Commission ("SEC"). FINRA is registered as a self-regulating securities exchange with the SEC pursuant to 15 U.S.C. § 78o-3. Every new FINRA rule proposal and amendment proposal must be presented to the SEC for final approval. The SEC may abrogate or amend FINRA rules at any time. Thus, all rules enacted by FINRA are promulgated under the SEA.
Congress has granted broad subject matter jurisdiction in the area of securities regulation. The Securities Exchange Act ("SEA", 15 U.S.C. § 78 et seq.) provides "The district courts of the United States ... shall have exclusive jurisdiction ... of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder." 5
Rule 2130, a rule promulgated under the Securities Exchange Act, imposes a duty upon FINRA to comply with any court-ordered arbitration award. 15 U.S.C. § 78(g)(1) requires every self-regulatory organization such as FINRA to comply with its own rules. Where a petition to confirm names FINRA, essentially the action is brought to enforce FINRA's duties under its own rules – namely, under Rule 2130. Accordingly, § 78aa of the Securities Exchange Act conceivably provides for exclusive jurisdiction over petitions to confirm naming FINRA as a party pursuant to Rule 2130. Our firm has yet to obtain a conclusive determination on this assertion in federal court. Nor have we encountered statutory or common law precedent on this narrow issue. But by the same token, neither has FINRA counsel objected to our reasoning in this regard.
While the potential for exclusive federal jurisdiction exists over petitions to confirm naming FINRA, given the courts' split on establishing federal jurisdiction in such petitions, it undoubtedly is simpler to establish subject matter jurisdiction through a showing of diversity.
On March 17, 2008, the United States Supreme Court granted a petition for a writ of certiorari in the matter of Vaden v. Discover Bank, 128 S.Ct. 1651 (2008), agreeing to review the issue of possible federal subject matter jurisdiction over petitions for arbitration under the Federal Arbitration Act. Until the Supreme Court makes a definitive ruling on whether subject matter jurisdiction exists in certain federal petitions, including those filed to compel arbitration and to confirm FINRA awards, if diversity jurisdiction does not exist, one should give extra consideration to the procedural benefits of filing in state court before proceeding with a federal action to confirm a FINRA expungement award.
1 See FINRA's Conduct Rules at www.finra.org.
2 28 U.S.C. § 1332.
3 U.S.C. § 1331.
4 9 U.S.C. § 9.
5 15 U.S.C. § 78aa.
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