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FINRA Proposes Rule Limiting Motions to Dismiss in Arbitration

ADR World

The Financial Industry Regulatory Authority (FINRA) has issued a rule proposal aimed at limiting the number of motions to dismiss filed in its arbitration forum by restricting the grounds arbitrators could use to grant such motions.

The proposed rule change to FINRA’s Industry and Customer Codes would authorize arbitrators to grant a dispositive motion prior to a customer completing the presentation of their claim only where the claim is factually impossible, the case had been settled, or it was filed beyond the six-year time limit for filing a claim.

FINRA Dispute Resolution President Linda Fienberg said the rule proposal should limit dispositive motions “in way that is fair to everybody” involved in arbitration before a FINRA panel. The rule proposal is slated for filing with the Securities and Exchange Commission after October 2.

“We do not want to discourage [parties from] filing a dispositive motion after a claimant finishes” presenting their case, but FINRA has seen it increasingly used as tactic to delay resolution of a claim in arbitration, she said. The filing of dispositive motions is primarily used by regulated firms to delay claims in arbitration, she noted.

In addition, the rule proposal provides that if a party files a dispositive motion prior to the completion of the customer’s case and it is denied, arbitrators would be authorized to assess forum fees against the moving party, she said. If an arbitration panel determines that the motion was frivolous, it could also award attorneys fees and costs to the party that opposed the motion, she added.

FINRA “thinks this is very fair and generally would improve the forum for investors who are mostly required to be here,” she said. The rule proposal also should make the arbitration forum more cost- and time-efficient for investors, she added.

The rule proposal says in essence that “claimants get to present their entire case” except in situations where the wrong party was named or the claim was barred on eligibility grounds (the six-year time limit), he said. Importantly, however, the rule also would require that an arbitration panel make a definitive ruling on eligibility before dismissing a case or allowing it to proceed, he noted.

Steven B. Caruso, an attorney with Maddox Hargett & Caruso in New York, said “if the actual rule filing comports with the press release, then my opinion would be that it would end the ability of the securities industry to embrace motions to dismiss as a tactic of intimidation and coercion that have, for far too long, deprived public investors of a fair and equitable opportunity to present their claims.”

Rule Proposal Detailed

The FINRA notice to parties detailing the proposed rule change provides that if a party “(typically a respondent firm)” files a dispositive motion prior to the completion of a claimant presenting their case, an arbitration panel’s authority to grant the motion would be severely restricted.

A dispositive motion could only be granted “if the parties previously had settled their dispute in writing; (2) ‘factual impossibility,’ meaning the party could not have been associated with the conduct at issue; or (3) the existing six-year time limit on the submission of arbitration claims has tolled.” It also provides that an arbitration panel would have to hold a hearing on the dispositive motion, and any decision to grant it would have to be unanimous and be in writing.

“The proposed amendments also would require the panel to assess against the filing party all forum fees associated with hearings on dispositive motions if the panel denies the motion, and would require the panel to award costs and attorneys’ fees to the party that opposed a dispositive motion deemed frivolous by the panel,” the notice says. However, if a dispositive motion is filed after a claimant completes their case, the proposed rule would not apply.

The notice goes on to warn parties that if they are found to have filed a motion in “bad faith” they could be subject to sanctions.

“Sanctions may include assessing monetary penalties, precluding a party from presenting evidence, making an adverse inference against a party, assessing postponement and/or forum fees, and assessing attorneys’ fees, costs and expenses,” the notice says.

“Finally, FINRA reminds parties and members that a panel may dismiss a claim, defense, or arbitration with prejudice as a sanction for material and intentional failure to comply with an order of the panel if prior warnings or sanctions have proven ineffective.”

Fienberg said FINRA has been working to “build a consensus that both sides [industry and investors] could endorse.” She noted that the rule proposal garnered unanimous support from the National Arbitration & Mediation Committee (NAMC), the Small Firms Advisory Board, and the FINRA Board.