The Fourth Circuit Court on June 21st held that to have indirect control of a person, such that he is an “associated person” under FINRA Rule 12200, a member firm need only have the potential power to influence the person, rather than exercise any actual control over him. The case involved two broker-dealers. First was Waterford Investment Services ("Waterford"), which is a Florida corporation and is a registered securities broker-dealer with the Securities and Exchange Commission ("SEC") and has been a FINRA member since March 1999. Community Bankers Securities ("CBS") is a Virginia corporation and is also a registered broker-dealer with the SEC and was a member of FINRA from July 1997 to February 2010. In 2005, AIC became the majority owner of both Waterford and CBS. Investors alleged that they received bad advice from George Gilbert and they named Waterford and CBS, which were his current firm and prior firm, respectively.
Waterford argued that it should not be required to arbitrate an investor dispute because the adviser who allegedly gave the bad advice was an associated person with CBS and not Waterford. In this case, Waterford and CBS had a common majority of owner, officers and directors, and shared resources, which the Court found to be a significant overlap. Thus, Waterford had the potential power to control the advisor at issue and can be compelled to arbitrate the investor dispute.
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