984 F.3d 575
8th Cir.2020Background
- Five former RBC clients purchased reverse convertible notes (RCNs) through RBC and sued for breach of contract after losses on those RCNs.
- Each client signed a Client Account Agreement stating in first-person that transactions "shall be subject to" applicable laws and self-regulatory rules, including FINRA; clients also completed Client Account Information forms listing investment objectives and experience.
- RCNs are complex, high-risk structured products; FINRA issued NTMs requiring heightened supervision and suitability analysis for structured products and RCNs specifically.
- FINRA previously fined RBC after finding numerous unsuitable RCN approvals and RBC paid fines and restitution; plaintiffs relied on FINRA standards in their breach claims.
- Plaintiffs alleged the Agreement (Paragraph 16) created contractual duties that RBC must (1) comply with FINRA rules and (2) "know your customer;" the district court granted summary judgment for RBC and this appeal followed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Agreement’s "subject to" language creates a contractual duty for RBC to comply with FINRA rules | Luis: "I agree" + "subject to" means RBC contractually promised to follow FINRA rules | RBC: language is a client acknowledgment that transactions are governed by external rules, not an RBC promise | Court: "subject to" is an acknowledgment by clients, not a contractual duty on RBC; summary judgment for RBC affirmed |
| Whether Agreement + account form create an implied contractual "know your customer" duty | Luis: combined documents imply RBC must learn clients’ profiles and use them when recommending products | RBC: no express duty in Agreement; any KYC obligation derives from FINRA rules, not contract | Court: no implied contractual KYC duty; cannot rewrite agreement to add such an obligation; summary judgment for RBC affirmed |
Key Cases Cited
- Burgmeier v. Farm Credit Bank of St. Paul, 499 N.W.2d 43 (Minn. Ct. App. 1993) ("subject to" language insufficient to create contractual obligations)
- Gurfein v. Ameritrade, Inc., 312 Fed. Appx. 410 (2d Cir. 2009) ("subject to" clause is client acknowledgment, not broker obligation)
- Interactive Brokers LLC v. Saroop, 969 F.3d 438 (4th Cir. 2020) (contract could arguably be read to incorporate FINRA rules; distinguished)
- Storms, Inc. v. Mathy Const. Co., 883 N.W.2d 772 (Minn. 2016) (interpret contract as whole; give unambiguous words their plain meaning)
- Residential Funding Co. v. Terrace Mortg. Co., 725 F.3d 910 (8th Cir. 2013) (courts must not rewrite unambiguous contracts)
- Torgerson v. City of Rochester, 643 F.3d 1031 (8th Cir. 2011) (standard of review for summary judgment on appeal)