The dissolution of an investment advisory firm does not need to be arbitrated before a Financial Industry Regulatory Authority panel even though the firm’s members are FINRA-registered advisers, the Pennsylvania Superior Court has ruled, reversing a Delaware County trial court’s ruling.
In Fitzgerald v. Comyns, a three-judge appellate panel said the lower court erred in sending the dissolution of the Wharton Advisory Group to FINRA arbitration because the firm itself is not regulated by FINRA.
The panel said that while plaintiff David Fitzgerald and defendant Mark Comyns, both founding members of Wharton, engaged in FINRA-governed activities, including providing commission-based advisory services, they did so under a separate entity called LPL Financial.
“[Fitzgerald]’s and Comyns’ role as members of the LLC is to manage and hold an ownership interest in Wharton,” Judge Alice Beck Dubow wrote for the panel in an unpublished memorandum. “When [Fitzgerald] and Comyns engage in FINRA-related activities, they do so through an entity other than Wharton. Thus, the trial court erred in imputing onto Wharton attributes of its owners who do not engage in FINRA-regulated activities through Wharton.”
Dubow added that “the business activities of LPL Financial are equally irrelevant when analyzing whether the parties must arbitrate the dissolution of Wharton through FINRA.”
The ruling reversed the trial court’s decision sustaining Comyns’ preliminary objections to Fitzgerald’s request to have the court dissolve Wharton.
According to the opinion, Fitzgerald and Comyns formed Wharton as a limited liability company in 2000 with a third co-founder who later sold his ownership interest. Wharton is regulated by the U.S. Securities and Exchange Commission and the Pennsylvania Department of Securities. As an RIA, it is permitted only to provide fee-based, rather than commission-based, advisory services.
In August 2010, Dubow said, Wharton, Comyns and Fitzgerald entered into three agreements with the intention of giving Wharton clients access to commission-based advisory services.
“The three agreements make clear distinctions between the parties’ rights and obligations when providing fee-based advisory services provided through Wharton and commission-based services provided through a separate entity—LPL Financial,” Dubow said.
The master services agreement between Wharton and LPL says they are separate entities and that LPL is regulated by FINRA, which allows it to provide commission-based advisory services that Wharton is not authorized to provide, according to Dubow. The branch office manager agreement between Fitzgerald and LPL required Fitzgerald to set up and manage a branch office for LPL. And the hybrid representative agreement between Comyns and LPL authorized Comyns to sell commission-based services through LPL and fee-based services through Wharton.
“In sum, these agreements demonstrate a clear delineation between the fee-based advisory services provided through Wharton and the commission-based advisory services provided through LPL Financial,” Dubow said, noting that there was no arbitration agreement.
Fitzgerald filed a complaint in July 2016 asking the court to dissolve Wharton. Comyns filed preliminary objections arguing that the parties were required to arbitrate any disputes between them before a FINRA panel and the trial court agreed.
But Dubow said the trial court disregarded the fact that the three agreements clearly distinguish between the parties’ rights and obligations when engaging in FINRA-regulated activities and SEC-regulated activities.
“Since the trial court erred in not respecting the corporate structure of Wharton and imputing onto Wharton business activities of Wharton’s LLC members as well as FINRA-regulated activities engaged in by an entity separate and distinct from Wharton, the trial court erred in sustaining the appellant’s preliminary objections and finding that FINRA has jurisdiction over the dissolution of Wharton,” Dubow said.
Dubow was joined in the ruling by Judge Jack A. Panella and Senior Judge James J. Fitzgerald III.
Counsel for David Fitzgerald, Joshua Horn of Fox Rothschild in Philadelphia, said he and his client “firmly believe it was the right decision.”
Counsel for Comyns and Wharton, Eric Milby of Lundy, Beldecos & Milby in Narbeth, could not be reached for comment.