[Federal Register: January 7, 2009 (Volume 74, Number 4)]
[Notices]
[Page 731-743]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ja09-61]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-59189; File No. SR-FINRA-2007-021]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, Relating to Amendments to the Code of
Arbitration Procedure for Customer Disputes and the Code of Arbitration
Procedure for Industry Disputes To Address Motions To Dismiss and To
Amend the Eligibility Rule Related to Dismissals
December 31, 2008.
I. Introduction
The Financial Industry Regulatory Authority, Inc. (``FINRA'') (f/k/
a National Association of Securities Dealers, Inc. (``NASD'')) filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
on November 2, 2007, and amended on February 13, 2008 (Amendment No.
1), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change
relating to amendments to the Code of Arbitration Procedure for
Customer Disputes (``Customer Code'') and the Code of Arbitration
Procedure for Industry Disputes (``Industry Code,'' and together with
the Customer Code, the ``Codes'') to address motions to dismiss and to
amend the eligibility rule related to dismissals. The proposed rule
change was published for comment in the Federal Register on March 20,
2008.\3\ The Commission received 119 comments in response to the
proposed rule change.\4\ This order approves the
[[Page 732]]
proposed rule change, as modified by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 57497 (March 14,
2008), 73 FR 15019 (March 20, 2008) (SR-FINRA-2007-021) (notice).
\4\ See Joseph C. Korsak, Esq., dated November 4, 2007 (``Korsak
Letter''); Will Struyk, dated December 10, 2007 (``Struyk Letter'');
Michael Thurman, Esq., Loeb & Loeb LLP, dated February 29, 2008
(``Thurman Letter''); Prof. Seth E. Lipner, Esq., Baruch College
dated March 18, 2008 (``Lipner Letter''); Leonard Steiner, Esq.,
dated March 18, 2008 (``Steiner Letter''); Laurence S. Schultz,
Esq., Public Investors Arbitration Bar Association, dated March 18,
2008 (``PIABA Letter''); Steven J. Gard, Esq., Gard Law Firm, dated
March 20, 2008 (``Gard Letter''); Steven B. Caruso, Esq., Maddox
Hargett Caruso, P.C., dated March 20, 2008 (``Caruso Letter'');
Philip M. Aidikoff, Esq., dated March 21, 2008 (``Aidikoff
Letter''); Charles W. Austin, Jr., Esq., dated March 21, 2008
(``Austin Letter''); Gail E. Boliver, dated March 22, 2008
(``Boliver Letter''); Steve A. Buchwalter, Esq., dated March 23,
2008 (``Buchwalter Letter''); Ryan K. Bakhtiari, Esq., Uhl and
Bakhtiari, dated March 24, 2008 (``Bakhtiari Letter''); Mark E.
Maddox, Esq., Maddox Hargett Caruso, P.C., dated March 24, 2008
(``Maddox Letter''); Robert W. Goehring, Esq., dated March 24, 2008
(``Goehring Letter''); John J. Miller, Esq., Swanson Midgley, LLC,
dated March 24, 2008 (``Miller Letter''); Richard A. Lewins, dated
March 24, 2008 (``Lewins Letter''); Howard Rosenfield, Esq., dated
March 24, 2008 (``Rosenfield Letter''); Sam Edwards, Esq., dated
March 24, 2008 (``Edwards Letter''); Noah H. Simpson, Esq., Simpson
Woolley, LLP, dated March 24, 2008 (``Simpson Letter''); Robert A.
Uhl, Esq., March 25, 2008 (``Uhl Letter''); David Harrison, Esq.,
dated March 26, 2008 (``Harrison Letter''); Jeffrey Sonn, Esq., Sonn
Erez, PLC, dated March 26, 2008 (``Sonn Letter''); Brian N. Smiley,
Esq., Smiley Bishop Porter LLP, dated March 26, 2008 (``Smiley
Letter''); Thomas A. Hargett, Esq., dated March 27, 2008, (``Hargett
Letter''); Jay Salamon, Esq., Hermann, Cahn and Schneider LLP, dated
March 27, 2008 (``Salamon Letter''); J. Pat Sadler, Esq., dated
March 31, 2008 (``Sadler Letter''); Keith L. Griffin, Esq., Maddox
Hargett Caruso, P.C., dated April 1, 2008 (``Griffin Letter'');
Scott R. Shewan, Esq., Born, Pape & Shewan LLP, dated April 1, 2008
(``Shewan Letter''); Alan S. Brodherson, Esq., dated April 3, 2008
(``Brodherson Letter''); W. Scott Greco, Esq., Greco & Greco, P.C.,
dated April 3, 2008 (``Greco Letter''); David P. Neuman, Esq.,
Stoltmann Law Offices, P.C., dated April 4, 2008 (``Neuman
Letter''); Edward G. Turan and Martha E. Solinger, Securities
Industry and Financial Markets Association, dated April 7, 2008
(``SIFMA Letter''); Curt H. Mueller, Esq., Schwab & Co., Inc., dated
April 7, 2008 (``Schwab Letter''); Erin Linehan, Esq., Raymond James
Financial, Inc., dated April 8, 2008 (``Raymond James Letter'');
Barry D. Estell, Esq., dated April 8, 2008 (``Estell Letter'');
Robert C. Port, Esq., dated April 8, 2008 (``Port Letter'');
Jonathan W. Evans, Esq., dated April 8, 2008 (``Evans Letter'');
Kevin A. Carreno, dated April 8, 2008 (``Carreno Letter''); Vincent
J. Imbesi, Esq., The Avelino Law Firm, dated April 9, 2008 (``Imbesi
Letter''); John E. Lawlor, Esq., dated April 9, 2008 (``Lawlor
Letter''); Jonathan Schwartz, Esq., dated April 9, 2008 (``Schwartz
Letter''); Andrew Dale Ledbetter, dated April 9, 2008 (``Ledbetter
Letter''); Theodore A. Krebsbach, Esq., Krebsbach & Snyder, dated
April 9, 2008 (``Krebsbach Letter''); Raymond W. Henney, Esq.,
Honigman Miller Schwartz and Cohn LLP, dated April 9, 2008 (``Henney
Letter''); Randall R. Heiner, Esq., dated April 9, 2008 (``Heiner
Letter''); Inge Selden III, Esq., Maynard Cooper & Gale PC, dated
April 9, 2008 (``Selden Letter''); Eric G. Wallis, Esq., Reed Smith
LLP, dated April 9, 2008 (``Wallis Letter''); Robert H. Rex, Esq.,
Dickenson Murphy Rex and Sloan, dated April 9, 2008 (``Rex
Letter''); Bradley R. Stark, Esq., Florida International University,
dated April 9, 2008 (``Stark Letter''); Robert N. Rapp, Esq.,
Calfee, Halter Griswold LLP, dated April 9, 2008 (``Rapp Letter'');
Richard J. Babnick, Esq., Sichenzia Ross Friedman Ference LLP, dated
April 9, 2008 (``Babnick Letter''); Joseph F. Myers, Esq., dated
April 9, 2008 (``Myers Letter''); Anne T. Cooney, Esq., Morgan
Stanley, dated April 9, 2008 (``Morgan Stanley Letter''); Jonathan
Kord Lagemann, Esq., dated April 9, 2008 (``Lagemann Letter'');
Frederick S. Schrils, Esq., GrayRobinson, dated April 9, 2008
(``Schrils Letter''); Andrew Stoltmann, Esq., dated April 9, 2008
(``Stoltmann Letter''); Richard M. Layne, Esq., dated April 9, 2008
(``Layne Letter''); Herb Pounds, Jr., Esq., dated April 9, 2008
(``Pounds Letter''); Alan F. Hartman, CLU, ChFC, dated April 9, 2008
(``Hartman Letter''); Brian F. Amery, Esq., Bressler, Amery Ross,
P.C., dated April 9, 2008 (``Amery Letter''); Michael G. Shannon,
Esq., Thelen Reid Brown Raysman & Steiner LLP, dated April 9, 2008
(``Shannon Letter''); Carl J. Carlson, Esq., Carlson & Dennett,
P.S., dated April 9, 2008 (``Carlson Letter''); Matthew Farley,
Esq., Drinker Biddle & Reath LLP, dated April 9, 2008 (``Farley
Letter''); Joel E. Davidson, Esq., Davidson & Grannum, LLP, dated
April 9, 2008 (``Davidson Letter''); Al Van Kampen, Esq., dated
April 10, 2008 (``Van Kampen Letter''); Theodore M. Davis, Esq.,
dated April 10, 2008 (``Davis Letter''); Lawrence R. Gelber, Esq.,
dated April 10, 2008 (``Gelber Letter''); Pearl Zuchlewski, Esq.,
Kraus Zuchlewski LLP, dated April 10, 2008 (``Zuchlewski Letter'');
Rob Bleecher, Esq., dated April 10, 2008 (``Bleecher Letter'');
Thomas C. Wagner, Esq., dated April 10, 2008 (``Wagner Letter'');
John V. McDermott, Esq., Holme Roberts Owen LLP, dated April 10,
2008 (``McDermott Letter''); Peter J. Mougey, Esq., Beggs & Lane,
dated April 10, 2008 (``Mougey Letter''); Christopher Gibbons/Lisa
A. Catalano, Securities Arbitration Clinic, St. John's University
Law School, dated April 10, 2008 (``St. John's Letter''); John W.
Shaw, Esq., Berkowitz, Oliver, Williams, Shaw Eisenbrandt, dated
April 10, 2008 (``Shaw Letter''); Audrey Venezia, Esq., dated April
10, 2008 (``Venezia Letter''); H. Nicholas Berberian, Esq., Gerber &
Eisenberg LLP, dated April 10, 2008 (``Berberian Letter''); Michael
N. Ungar, Esq., and Kenneth A. Bravo, Esq., Ulmer & Berne LLP, dated
April 10, 2008 (``Ungar/Bravo Letter''); Jody Forchheimer, Esq.,
Fidelity Investments, dated April 10, 2008 (``Forchheimer Letter'');
Jill I. Gross, Barbara Black and Teresa Milano, dated April 10, 2008
(``Gross/Black Letter''); Michael Weissmann, Esq., Bingham McCutchen
LLP, dated April 10, 2008 (``Weissmann Letter''); Thomas P.
Willcutts, Esq., Willcutts Law Group, LLC, dated April 10, 2008
(``Willcutts Letter''); Mark A. Tepper, Esq., Mark A. Tepper, P.A.,
dated April 10, 2008 (``Tepper Letter''); Joe Soraghan, Principal,
Danna McKitrick, P.C., dated April 10, 2008 (``Soraghan Letter'');
Bryan T. Forman, Esq., dated April 10, 2008 (``Forman Letter'');
Rodney Acker, Esq., Fulbright & Jaworski LLP, dated April 10, 2008
(``Acker Letter''); Birgitta Siegel, Esq., Securities Arbitration &
Consumer Law Clinic, Syracuse University, dated April 10, 2008
(``Syracuse Letter''); Brett A. Rogers and Jill E. Steinberg, Esq.,
Rogers & Hardin, dated April 10, 2008 (``Rogers/Steinberg Letter'');
Jeffrey Kruske, Esq., dated April 10, 2008 (``Kruske Letter''); John
Taft, RBC Wealth Management, dated April 10, 2008 (``RBC Letter'');
Thomas V. Dulcich, Esq., Schwabe, Williamson & Wyatt, dated April
10, 2008 (``Dulcich Letter''); Harry T. Walters, Esq., Citigroup,
dated April 10, 2008 (``Citigroup Letter''); Craig Gordon, RBC
Correspondent Services, dated April 10, 2008 (``Gordon Letter'');
William A. Jacobson, Esq., Cornell Securities Law Clinic, dated
April 10, 2008 (``Cornell Letter''); Bradford D. Kaufman, Greenberg,
Taurig, P.A., dated April 10, 2008 (``Kaufman Letter''); Tim
Canning, Esq., Law Offices of Timothy A. Canning, dated April 10,
2008 (``Canning Letter''); Peter R. Boutin, Esq., Keesal, Young &
Logan, dated April 10, 2008 (``Boutin Letter''); Christian T.
Kemnitz, Esq., Katten Muchin Rosenman, dated April 10, 2008
(``Kemnitz Letter''); Scot Bernstein, Esq, dated April 10, 2008
(``Bernstein Letter''); John S. Burke, Esq., Higgins Burke, P.C.,
dated April 10, 2008 (``Burke Letter''); Dayton P. Haigney, Esq.,
dated April 10, 2008 (``Haigney Letter''); Robert J. Anello, Esq.,
Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., dated
April 10, 2008 (``Anello Letter''); Brad S. Karp, Esq., Paul, Weiss,
Rifkind, Wharton & Garrison LLP, dated April 10, 2008 (``Karp
Letter''); Andrew L. Weinberg, Esq., Deutsche Bank Securities Inc.,
dated April 10, 2008 (``DBSI Letter''); Harry A. Jacobowitz, Esq.,
Securities Arbitration Commentator, dated April 10, 2008
(``Jacobowitz Letter''); Jenice L. Malecki, Esq., Malecki Law, dated
April 10, 2008 (``Malecki Letter''); Stephen Krosschell, Esq., dated
April 10, 2008 (``Krosschell Letter''); Abe Lampart, Esq., Offices
of Abe Lampart, dated April 10, 2008 (``Lampart Letter''); Mark J.
Astarita, Esq., dated April 10, 2008 (``Astarita Letter''); Robert
S. Banks, Esq., Banks Law Offices, dated April 10, 2008 (``Banks
Letter''); Debra G. Speyer, Esq., dated April 10, 2008 (``Speyer
Letter''); Joseph Fogel, Sherman Oaks, CA (``Fogel Letter''); Harry
J. Buckman, Jr., dated April 11, 2008 (``Buckman Letter''); Jan
Graham, Esq., dated April 11, 2008 (``Graham Letter''); Patricia
Cowart, Esq., Wachovia Securities, LLC, dated April 11, 2008
(``Wachovia Letter''); Stuart D. Meissner, Esq., dated April 12,
2008 (``Meissner Letter''); Debra B. Hayes, Esq., dated April 15,
2008 (``Hayes Letter''); William P. Torngren, Esq., dated April 16,
2008 (``Torngren Letter''); Laurence S. Schultz, Public Investors
Arbitration Bar Association, dated April 25, 2008 (``PIABA 2
Letter'').
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II. Description of the Proposed Rule Change
FINRA \5\ proposed to provide specific procedures to govern motions
to dismiss, and to amend the provision of the eligibility rule related
to dismissals. The proposal is designed to ensure that parties would
have their claims heard in arbitration, by significantly limiting the
grounds for filing motions to dismiss prior to the conclusion of a
party's case in chief and by imposing stringent sanctions against
parties for engaging in abusive practices under the rule.
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\5\ Although some of the events referenced in this rule filing
occurred prior to the formation of FINRA through consolidation of
NASD and the member regulatory functions of NYSE Regulation, the
rule filing refers to FINRA throughout for simplicity.
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Background
The Code of Arbitration Procedure that was in use prior to April
16, 2007, did not address motions practice.\6\ Because motions were
becoming increasingly common in arbitration, FINRA proposed to include
in its revision of the entire Code of Arbitration Procedure (``Code
Revision'') some guidance for parties and arbitrators with respect to
motions practice.
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\6\ The Codes became effective on April 16, 2007, for claims
filed on or after that date; the old Code continues to apply to
pending cases until their conclusion.
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The Code Revision, as initially filed with the SEC in 2003,
contained a rule that would have permitted a panel to grant a motion to
decide claims before a hearing on the merits (a ``dispositive motion'')
only under extraordinary circumstances. FINRA proposed this rule in an
attempt to address concerns raised by investors' counsel, SEC staff and
other constituent groups about abusive and duplicative filing of
dispositive motions. Specifically, FINRA received complaints that
parties (typically respondent \7\ firms) were filing dispositive
motions routinely and repetitively in an apparent effort to delay
scheduled hearing sessions on the merits, increase investors' costs
(typically claimants \8\), and intimidate less sophisticated
parties.\9\ In some cases, if a party did not receive a favorable
ruling on a dispositive motion filed at a particular stage in an
arbitration proceeding, that party would re-file the same or a similar
dispositive motion at a later time, which often served only to increase
investors' costs and delay the hearing and the issuance of any award.
Moreover, FINRA learned through various constituent and focus groups
that some respondents' attorneys were being counseled by their law
firms that an acceptable and useful tactic was to file multiple
dispositive motions at various stages of an arbitration proceeding.
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\7\ A respondent is a party against whom a statement of claim or
third party claim has been filed.
\8\ A claimant is a party that files the statement of claim and
other documents that initiate an arbitration.
\9\ For example, the Securities Arbitration Commentator
published a study in Fall 2006 on motions to dismiss in customer
cases, which concludes that, in the universe of cases that went to
award, there were motions to dismiss in 28% of the cases in 2006 as
compared to 10% in 2004. Securities Arbitration Commentator, Nov.
2006 (Vol. 2006, No. 5), at 3.
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When the Code Revision was published for comment in the Federal
Register, commenters opposed the dispositive motions rule for a variety
of reasons. Therefore, FINRA removed the rule from the Code Revision
and re-filed it separately.\10\ The SEC then approved the Code Revision
without the dispositive motions rule.\11\
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\10\ See Securities Exchange Act Release No. 54360 (August 24,
2006), 71 FR 51879 (August 31, 2006) (SR-NASD-2006-088) (notice).
\11\ See Securities Exchange Act Release No. 55158 (January 24,
2007), 72 FR 4574 (January 31, 2007) (SR-NASD-2003-158 and SR-NASD-
2004-011) (approval order).
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Prior Dispositive Motions Proposal
As re-filed with the SEC, the dispositive motions proposal would
[[Page 733]]
have permitted a panel to grant a dispositive motion prior to an
evidentiary hearing only under extraordinary circumstances.\12\ The SEC
published the proposal for public comment on August 31, 2006, and
received over 60 comment letters,\13\ the majority of which opposed the
proposal.
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\12\ See note 10, supra.
\13\ See Comments on File No. SR-NASD-2006-088, Notice of Filing
of Proposed Rule Change Relating to Motions To Decide Claims Before
a Hearing on the Merits, available at http://www.sec.gov/comments/
sr-nasd-2006-088/nasd2006088.shtml (last visited December 5, 2008).
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Based on the comments, FINRA recognized that the proposal did not
provide effective guidance on how dispositive motions would be handled
in the forum. Because the comments indicated that various issues
involving dispositive motions required more guidance, FINRA withdrew
the dispositive motions proposal, and filed a new proposed rule change
to provide specific procedures that would govern motions to dismiss. In
its new proposed rule change, FINRA also proposed to amend the separate
rule governing dismissals made on eligibility grounds.
Motions To Dismiss on Other Than Eligibility Grounds
FINRA filed the proposed rule change to provide specific procedures
that would govern motions to dismiss. Generally, FINRA stated that it
believes that parties have the right to a hearing in arbitration. In
certain very limited circumstances, however, FINRA indicated that it
would be unfair to require a party to proceed to a hearing. The
proposal is designed to balance these competing interests. In FINRA's
view, the proposal should ensure that parties \14\ have their claims
heard in arbitration, by significantly limiting the grounds for filing
motions to dismiss prior to conclusion of a party's case in chief and
by imposing stringent sanctions against parties for engaging in abusive
practices under the rule. The proposal would permit parties to file a
motion to dismiss at the conclusion of a party's case in chief, based
on any theory of law.
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\14\ For purposes of the proposal, a party could be an initial
claimant, respondent, counterclaimant, cross claimant, or third
party claimant and his or her motion to dismiss would be subject to
Rules 12206 and 12504 of the Customer Code or Rules 13206 and 13504
of the Industry Code.
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The proposed rule change would govern motions to dismiss filed
prior to the conclusion of a party's case in chief (under the Customer
Code or Industry Code, as applicable), as discussed in further detail
below.
Discourage Motions To Dismiss a Claim Prior to Conclusion of a Party's
Case in Chief
The proposal would clarify that motions to dismiss a claim prior to
the conclusion of a party's case in chief are discouraged in
arbitration. FINRA stated that it believes that parties have the right
to a hearing in arbitration, and only in certain very limited
circumstances should that right be challenged. This policy statement
would not apply to motions filed on the basis of eligibility grounds,
as discussed below.
Require That Motions To Dismiss Be Filed in Writing, Separately From
the Answer, and After the Answer Is Filed
FINRA stated that it believes that requiring a party to file a
motion to dismiss in writing separately from the answer and only after
the answer is filed would deter parties from filing these motions
routinely in lieu of an answer, and would prevent parties from
combining a motion to dismiss with an answer. This provision should
ensure that parties receive an answer that responds directly to the
statement of claim.
Filing Deadlines
The proposed rule change would require parties to serve motions
under this provision at least 60 days before a scheduled hearing and
would provide 45 days to respond to a motion unless the parties agree
or the panel determines otherwise. FINRA stated that it believes that
requiring a motion to dismiss to be served at least 60 days before a
scheduled hearing and providing 45 days for a party to respond to such
a motion would prevent the moving party from filing a motion shortly
before a hearing as a surprise tactic to force a delay in the
arbitration process.
Require the Full Panel To Decide Motions To Dismiss
The proposal would require the full panel to decide motions to
dismiss. Given the ramifications of granting a motion to dismiss, FINRA
stated that it believes that each member of the panel should be
required to hear the parties' arguments, so that each panel member may
make an informed decision when ruling on the motion.
Require an Evidentiary Hearing
Under the proposal, the panel would not be permitted to grant a
motion to dismiss prior to the conclusion of a party's case in chief
unless the panel holds an in-person or telephonic prehearing conference
on the motion that is recorded in accordance with Rule 12606 of the
Customer Code or Rule 13206 of the Industry Code, unless such
conference is waived by the parties. FINRA stated that it believes this
requirement would ensure that the panel holds a hearing on the motion
and that the panel has sufficient information to make a ruling.
Limited Grounds on Which a Motion May Be Granted
FINRA proposed to limit the grounds on which a panel may act upon a
motion to dismiss prior to the conclusion of the party's case in chief.
The proposal states that a panel may act upon a motion to dismiss only
after the party rests its case in chief unless the panel determines
that:
The non-moving party previously released the claim(s) in
dispute by a signed settlement agreement and/or written release; or
The moving party was not associated with the account(s),
security(ies), or conduct at issue.\15\
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\15\ A motion to dismiss on eligibility grounds would be
governed by Rules 12206 and 13206 of the Customer and Industry Code,
respectively; the amendments to those rules are discussed below.
FINRA stated that it believes that limiting the grounds on which a
motion to dismiss may be granted prior to the conclusion of the party's
case in chief would minimize the potential for abusive practices and
ensure that most parties' claims would be heard in the forum.
Require a Unanimous, Explained, Written Decision To Grant a Motion To
Dismiss
The proposal would require a unanimous decision by the panel to
grant a motion to dismiss as well as a written explanation of the
decision in the award. Under the proposal, each member of the panel
must agree to grant a motion to dismiss. FINRA stated that it believes
that because these decisions are an integral part of the arbitration
process, all panel members should agree to dismiss a claim; otherwise
the case should continue. Moreover, the provision that requires the
panel to provide a written explanation of its decision would help
parties understand the panel's rationale for its decision.
Require Permission From the Arbitrators To Re-File a Denied Motion To
Dismiss
Under the proposal, a party would be prohibited from re-filing a
denied motion to dismiss, unless specifically permitted by a panel
order. FINRA stated that it believes this limitation would serve to
expedite the arbitration process and minimize parties' costs.
[[Page 734]]
Require Arbitrators To Award Fees Associated With Denied Motions To
Dismiss and To Award Fees and Costs Associated With Frivolously Filed
Motions To Dismiss
The proposal would also require that the panel assess forum fees
associated with hearings on the motion to dismiss against the party
filing the motion to dismiss, if the panel denies the motion. Further,
if the panel deems frivolous a motion filed under this rule, the panel
must award reasonable costs and attorneys' fees to a party that opposed
the motion. FINRA stated that it believes that imposing monetary
penalties would minimize abusive practices involving motions to dismiss
and would deter parties from filing such motions frivolously.
Permit Sanctions for Motion To Dismiss Filed in Bad Faith
If the panel determines that a party filed a motion under this rule
in bad faith, the panel also may issue sanctions under Rule 12212 of
the Customer Code or Rule 13212 of the Industry Code. FINRA stated that
it believes that these stringent sanction requirements would provide
panels with additional enforcement mechanisms to address abusive
practices involving motions to dismiss if other deterrents prove
ineffective.
When a moving party (governed by the Customer Code or Industry
Code, as applicable) files a motion to dismiss at the conclusion of a
party's case in chief, the provisions governing motions to dismiss
filed prior to the conclusion of a party's case in chief discussed
above would not apply. Thus, a moving party could file a motion to
dismiss at the conclusion of a party's case in chief, based on any
theory of law. The rule, however, would not preclude the panel under
this scenario from issuing an explanation of its decision if it grants
the motion, or awarding costs or fees to the party that opposed the
motion if it denies the motion.
FINRA stated that it believes that permitting a moving party to
file a motion to dismiss at the conclusion of a party's case in chief
should balance the goal of ensuring that non-moving parties have their
claims heard by a panel against the rights of moving parties to
challenge a claim they believe lacks merit or has not been proved.
Moreover, FINRA stated that it believes that arbitrators should be
permitted to entertain and act upon a motion to dismiss at this stage
of a hearing to minimize the moving parties' incurring unnecessary
additional attorneys' fees and forum fees. If a claimant has presented
its case in chief and clearly failed to present sufficient evidence to
support a claim, then the moving party should not be forced to incur
the additional expenses and costs associated with unnecessary hearings.
The proposal provides that motions to dismiss based on failure to
comply with the code or an order of the panel under Rule 12212 of the
Customer Code or 13212 of the Industry Code, as applicable, would be
governed by that rule. Further, the proposal provides that motions to
dismiss based on discovery abuse filed under Rule 12511 of the Customer
Code or Rule 13511 of the Industry Code, as applicable, would be
governed by that rule.
Amendments to the Dismissal Provision of the Eligibility Rule
FINRA proposed to amend Rules 12206(b) and 13206(b) of the Customer
and Industry Codes, respectively, to address motions to dismiss made on
eligibility grounds. Under this proposal, a party would be permitted to
file a motion to dismiss on eligibility grounds at any stage of the
proceeding (after the answer is filed), except that a party would not
be permitted to file this motion any later than 90 days before the
scheduled hearing on the merits. FINRA also proposed to amend the rule
to address the res judicata defense claimants could encounter when they
attempt to pursue in court a claim dismissed in arbitration, when the
grounds for the dismissal are unclear.
First, FINRA proposed to amend Rules 12206(b) of the Customer Code
and Rule 13206(b) of the Industry Code to establish procedures for
motions to dismiss made on eligibility grounds. In light of the new
motions to dismiss proposal, FINRA stated that it believes that similar
changes should be incorporated into the existing eligibility rule to
provide procedures and guidance for dealing with motions to dismiss
made on eligibility grounds. The proposed changes to the eligibility
rule contain most of the same provisions as those contained in the
proposed motions to dismiss rule (discussed above), except for those
criteria that are not applicable to eligibility motions, that is, the
two other grounds on which a panel may grant a motion to dismiss before
a party has presented its case in chief (i.e., signed settlement and
written release and factual impossibility).
In addition, the filing deadlines would be different from those in
the motions to dismiss proposal. Under the proposed rule, a party would
be permitted to file a motion to dismiss on eligibility grounds at any
stage of the proceeding (after the answer is filed), except that a
party would not be permitted to file this motion any later than 90 days
before the scheduled hearing on the merits. FINRA stated that it
believes that this requirement would encourage moving parties to
determine in the early stages of the case whether to pursue their
claims in court or to proceed with the arbitration. Further, FINRA
stated that this requirement would prevent the moving party from filing
this motion shortly before a hearing as a surprise tactic to force a
delay in the arbitration process.
The proposal also would provide parties with 30 days to respond to
an eligibility motion. If a panel grants a motion to dismiss a party's
claim based on eligibility grounds, that party must re-file the claim
in court to pursue its remedies, which could further delay resolution
of the dispute. Therefore, FINRA proposed the 30-day timeframe to
respond to eligibility motions to expedite the process, so that the
time between filing a claim and resolution of the dispute is shortened.
Second, FINRA addressed potential problems in the implementation of
the eligibility rule since it was last amended in 2005. Currently, the
eligibility rule makes clear that dismissal of a claim on eligibility
grounds in arbitration does not preclude a party from pursuing the
claim in court; it provides that, by requesting dismissal of a claim
under the rule, the requesting party is agreeing that the non-moving
party may withdraw any remaining related claims without prejudice and
may pursue all of the claims in court.\16\
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\16\ Rule 12206(b) of the Customer Code and Rule 13206(b) of the
Industry Code.
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In certain situations, when a claim is dismissed under the
eligibility rule, FINRA understands that claimants have had difficulty
proceeding with their claims in court, because respondents have
asserted a res judicata defense when the panel's grounds for dismissing
the arbitration claim were unclear. For example, if a respondent files
a motion to dismiss based on several grounds, including eligibility,
and the panel issues an order dismissing a claim, but without citing
reasons, the claimants would not know whether or not they are afforded
the right to pursue the claim in court, as provided by the rule. If the
claimants proceed to file the dismissed claim in court, the respondents
may argue that the panel's decision on the claim is the final decision,
and that claimants are barred from having the court decide the same
claim again. In such a case, claimants would be required to prove that
the dismissal was based on eligibility, not the other
[[Page 735]]
grounds for dismissal that the respondents raised. This would be
difficult or impossible if the arbitrator or panel did not explain the
reasons for the dismissal.
FINRA proposed to amend the eligibility rule to address this issue.
As amended, the rule would provide that when a party files a motion to
dismiss on multiple grounds, including eligibility, the panel must
consider the threshold issue of eligibility first. First, the rule
would be amended to require that if the panel grants the motion to
dismiss on eligibility grounds on all claims, it shall not rule on any
other grounds for the motion to dismiss. Second, the rule would be
amended to require that if the panel grants the motion to dismiss on
eligibility grounds, on some, but not all claims, and the non-moving
party elects to move the case to court, the panel shall not rule on any
other ground for dismissal for 15 days from the date of service of the
panel's decision to grant the motion to dismiss on eligibility grounds.
Third, the rule would be amended to require that, when arbitrators
dismiss any claim on eligibility grounds, that fact must be stated on
the face of their order and any subsequent award the panel may issue.
And fourth, the rule would provide that if the panel denies the motion
to dismiss on the basis of eligibility, it shall rule on the other
bases for the motion to dismiss the remaining claims in accordance with
the motions to dismiss rule. FINRA stated that it believes that the
proposed amendments will close a loophole that has resulted from
implementing the rule by eliminating the res judicata defense that
claimants could face when they attempt to pursue claims in court that
were dismissed in arbitration on eligibility grounds.
III. Comment Letters
The Commission received 119 comments relating to FINRA-2007-021
concerning amendments to arbitration procedures for pre-hearing motions
to dismiss and dismissals on eligibility grounds. The Commission also
received FINRA's response to comments, which is discussed below.\17\ Of
the 119 letters: (i) Sixteen commenters \18\ (consisting of professors
and attorneys representing investors) opposed the proposed rule change
on the basis that it does not go far enough to end the abuse in motions
to dismiss, (ii) forty-four commenters \19\ (consisting of SIFMA,
broker-dealers and attorneys representing the financial industry)
opposed the rule principally because of the narrow scope of the grounds
for filing pre-hearing motions to dismiss; (iii) two commenters \20\
(an attorney representing investors and a professor of finance) opposed
the proposed rule for other reasons; (iv) fifty-four commenters \21\
(including PIABA,\22\ attorneys representing investors, law school
clinics and professors) supported the proposed rule; and (vi) three
\23\ commenters did not express a definitive view.
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\17\ Letter from Mignon McLemore, FINRA, dated September 15,
2008 (``FINRA Letter'').
\18\ Burke, Canning, Estell, Fogel, Gard, Krosschell, Lipner,
Meissner, Port, Pounds, Rex, Simpson, Speyer, Steiner, Tepper and
Willcutts Letters.
\19\ Acker, Amery, Anello, Astarita, Babnick, Berberian,
Brodherson, Boutin, Buckman, Carreno, Citigroup, Davidson, DBSI,
Dulcich, Farley, Forchheimer, Gelber, Gordon, Hartman, Henney, Karp,
Kaufman, Kemnitz, Krebsbach, Lampart, McDermott, Morgan Stanley,
Rapp, Raymond James, RBC, Rogers/Steinberg, Schrils, Schwab, Selden,
Shannon, Shaw, SIFMA, Soraghan, Thurman, Ungar/Bravo, Venezia,
Wachovia, Wallis, and Weissman Letters.
\20\ Schwartz and Stark Letters.
\21\ Aidikoff, Austin, Banks, Bakhtiari, Bernstein, Bleecher,
Boliver, Buchwalter, Carlson, Caruso, Cornell, Davis, Edwards,
Evans, Forman, Graham, Griffin, Goehring, Greco, Gross/Black,
Haigney, Hargett, Harrison, Hayes, Heiner, Korsak, Kruske, Imbesi,
Lagemann, Lawlor, Layne, Ledbetter, Lewins, Maddox, Malecki, Miller,
Mougey, Myers, Neuman, PIABA, PIABA 2, Sadler, Salamon, Shewan,
Smiley, Sonn, St. John's, Stoltmann, Syracuse, Torngren, Uhl, Van
Kampen, Wagner and Zuchlewski Letters.
\22\ PIABA wrote two letters in support of the proposed rule.
\23\ Jacobowitz, Rosenfield and Struyk Letters.
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Of the 44 commenters that opposed the rule on the basis of the
narrow scope of grounds for filing pre-hearing motions to dismiss, 15
commenters \24\ expressed concern regarding many of the procedural
rules in the proposal, 11 commenters \25\ noted that they would support
the procedural rules in the proposal, while the remaining 18 commenters
did not state their views regarding the procedural rules. Of the 54
commenters who supported the proposal, two expressed unconditional
support.\26\ Many of the remaining supporters indicated that the
proposal should be approved, but also that all motions to dismiss
should be prohibited in FINRA's arbitration forum.\27\
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\24\ Astarita, Berberian, Berne, Carreno, DBSI, Forchheimer,
Gordon, Lampart, RBC, Selden, Shaw, SIFMA, Ungar/Bravo, Venezia and
Wachovia Letters.
\25\ Babnick, Berberian, Citigroup, Kaufman, Kemnitz, McDermott,
Morgan Stanley, Raymond James, Rogers, Schrils, and Thurman Letters.
\26\ Heiner and Korsak Letters.
\27\ See, e.g., Caruso, Kruske, Lewins, Shewan and St. John's
Letters.
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Detailed Discussion of Comments and FINRA Response
Policy Statement on Prehearing Motions
Proposed Rules 12504(a)(1) of the Customer Code and 13504(a)(1) of
the Industry Code would provide that motions to dismiss a claim prior
to the conclusion of a party's case in chief are discouraged in
arbitration. Many commenters addressed this statement of policy
regarding motions to dismiss in FINRA's arbitration forum and, in
particular, the use of the word ``discouraged.''
Several commenters supported the statement of policy, indicating
that it sets an appropriate tone for the rest of the proposal.\28\ One
commenter contended that the rule language does not sufficiently
discourage motions to dismiss and should indicate that motions to
dismiss should be granted only in extraordinary circumstances.\29\ One
commenter who opposed the proposal contended that, without this
language, the proposal would appear to authorize and encourage motions
to dismiss in the forum.\30\ A number of commenters opposed the policy
statement, arguing that it unfairly discourages motions to dismiss
prior to the conclusion of a party's case in chief in the forum, and
creates an unnecessary bias against these motions.\31\
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\28\ See, e.g., Carlson Letters, Lawlor and PIABA 2.
\29\ Black/Gross Letter.
\30\ Lipner Letter.
\31\ See, e.g., Forchheimer, SIFMA, Ungar/Bravo, and Wachovia
Letters.
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FINRA responded to these comments by stating that, generally, FINRA
believes that parties have the right to a hearing in arbitration and
that proposed Rules 12504(a)(1) of the Customer Code and 13504(a)(1) of
the Industry Code would reinforce this position by clarifying that
prehearing motions to dismiss are discouraged in arbitration. FINRA
stated its belief that the word ``discouraged'' is appropriately placed
in the rule language, and accurately describes its view of prehearing
motions to dismiss in the forum.
FINRA also disagreed with those commenters who contended that this
policy statement unfairly discourages all motions to dismiss in the
forum. FINRA pointed out that, while the proposal limits the exceptions
under which a prehearing motion to dismiss may be granted, proposed
Rules 12504(b) of the Customer Code and 13504(b) of the Industry Code
would permit parties to file a motion on any ground after the
conclusion of a party's case in chief. FINRA indicated its belief that
it would
[[Page 736]]
be unfair to require parties to incur additional hearing session fees
if there is a valid reason to dismiss after the claimant's case. In
those cases, FINRA suggested that a panel may grant a motion to
dismiss, under proposed subparagraph (b), if the moving party proves
such action is warranted.
FINRA emphasized that the proposed rules do not constitute an
invitation to parties to file prehearing motions to dismiss. Further,
FINRA noted that the fact that a motion may be filed under one of the
exceptions in the proposal does not mean that the panel should or will
grant the motion.
In a prior, withdrawn proposal, FINRA stated that motions to
dismiss should be granted only in extraordinary circumstances.\32\ Some
commenters suggested that the absence of that language in the current
proposal effectively authorizes or encourages motions to dismiss. FINRA
indicated that it disagrees, and believes that the current proposal
removes the ambiguity that the ``extraordinary circumstances'' concept
created, and expressly outlines FINRA's position concerning motions to
dismiss. FINRA reiterated that the current proposal would provide for
three limited exceptions under which a motion to dismiss may be granted
before the conclusion of a claimant's case-in-chief, thereby limiting
the timing and circumstances under which such a prehearing motion may
be filed. Moreover, FINRA pointed out that the proposal would require a
panel to impose strict sanctions against parties who file motions to
dismiss frivolously or in bad faith. Taken together, FINRA stated that
these provisions reinforce its position that prehearing motions to
dismiss in arbitration are discouraged and should be granted only under
the limited exceptions of the rule. Accordingly, FINRA declined to
amend the proposal to reintroduce the reference to ``extraordinary
circumstances.''
---------------------------------------------------------------------------
\32\ See note 10, supra.
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Scope of Proposed Rules 12504(a)(6)(B) of the Customer Code and
13504(a)(6)(B) of the Industry Code (``Not Associated'' Exception)
Proposed Rules 12504(a)(6)(B) of the Customer Code and
13504(a)(6)(B) of the Industry Code would provide that a prehearing
motion to dismiss may be granted prior to the conclusion of the
claimant's case, if the respondent was not associated with the account,
security, or conduct at issue.
Most commenters suggested that FINRA should clarify how proposed
Rule 12504(a)(6)(B) of the Customer Code would be applied. Many
commenters indicated their belief that the exception should be
interpreted broadly, so that senior executives, branch managers, and
other office personnel could be excluded under this provision.\33\
Conversely, a number of commenters contended that a broad
interpretation of the exception could wrongly exempt persons or
entities not directly associated with transactions but who are liable
under applicable statutes or case law (e.g., supervisors in ``selling
away'' \34\ cases).\35\
---------------------------------------------------------------------------
\33\ See, e.g., Raymond James, Selden, Shannon and SIFMA
Letters.
\34\ A ``selling away'' claim involves a dispute in which an
associated person is alleged to have engaged in securities
activities outside his or her firm.
\35\ See, e.g., Banks, Greco, Krosschell, PIABA 2 and Shewan
Letters.
---------------------------------------------------------------------------
FINRA responded to these comments by indicating that it intends
this exception to apply narrowly, such as in cases involving issues of
misidentification. Thus, under this exception, a prehearing motion to
dismiss could be granted if, for example, a party files a claim against
the wrong person or entity, or a claim names an individual who was not
employed by the firm during the time of the dispute, or a claim names
an individual or entity that had no control over or was not connected
to an account, security or conduct at the firm during the time of the
dispute. Under this interpretation, therefore, a panel would not grant
a motion to dismiss filed under this exception in cases in which a
respondent may be liable as a supervisor or control person under
applicable statutes \36\ or in ``selling away'' cases.\37\
---------------------------------------------------------------------------
\36\ See, e.g., Uniform Securities Act Sec. 509(g) (2002).
\37\ FINRA reiterated its position that ``selling away'' claims
are arbitrable under the Codes. Under the Codes, FINRA accepts cases
brought by customers against associated persons in selling away
cases, and cases by customers against the associated person's member
firm if there is any allegation that the member was or should have
been involved in the events, such as an alleged failure to supervise
the associated person. See, e.g., Multi-Financial Securities Corp.
v. King, 386 F.3d 1364 (11th Cir. 2004); see also In the Matter of
PFS Investments, Inc., 1998 SEC LEXIS 1547, (Exchange Act Rel. No.
42069) (July 28, 1998).
---------------------------------------------------------------------------
One commenter sought clarification concerning whether this
exception would exclude parties in a supervisory position, or under
control person liability when a broker-dealer is defunct.\38\
---------------------------------------------------------------------------
\38\ Burke Letter.
---------------------------------------------------------------------------
FINRA stated that if the claim involves a respondent who is liable
as a supervisor or control person and the cause of action arose before
the firm became defunct, a motion to dismiss filed under this exception
would be inappropriate. FINRA noted that under its By-Laws, an
associated person continues to be subject to FINRA's jurisdiction if
the conduct occurred while the person was associated or registered with
a firm.\39\ Moreover, FINRA pointed out that if a firm is defunct, a
claimant may request default proceedings against the firm, provided
certain criteria are met.\40\
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\39\ See FINRA By-Laws, Article V, Sec. 4(a) (Retention of
Jurisdiction).
\40\ Rule 12801 of Customer Code and Rule 13801 of Industry
Code.
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Additional Exceptions for Permissible Prehearing Motions
Numerous commenters, who opposed the proposal, argued that the
three exceptions to the general prohibition on prehearing motions to
dismiss \41\ are too narrow and fail to include certain situations in
which such motions would be appropriate.\42\ These commenters suggested
that FINRA expand the proposed rule to include the following
exceptions: Clearing brokers, senior executives, statutes of
limitation, and legal impossibility exceptions, such as defamation for
statements made on required forms (which some courts have held are
protected by an absolute privilege) and the doctrine of res
judicata.\43\ Several of these commenters focused on the lack of an
exception for clearing firms, arguing that, based on the nature of
their operations, clearing firms do not owe a legal duty to claimants
and, therefore, cannot be held liable for the wrongful acts of the
introducing firm.\44\
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\41\ The three exceptions, as described above under II.
Description of the Proposed Rule Change, are: (1) The non-moving
party previously released the claim(s) in dispute by a signed
settlement agreement and/or written release; (2) the moving party
was not associated with the account(s), security(ies), or conduct at
issue; or (3) the claim is not eligible for arbitration in FINRA's
forum, under Rule 12206 of the Customer Code or 13206 of the
Industry Code, as applicable.
\42\ For example, these commenters contend that claims involving
defamation on the Form U5 or those subject to the doctrine of res
judicata should be exceptions to the rule. See, e.g., SIFMA,
Thurman, Morgan Stanley, Rapp, Schrils, Kaufman, and Jacobowitz
Letters.
\43\ Id.
\44\ Id.
---------------------------------------------------------------------------
A large portion of the commenters who supported the proposal
contended that expanding the scope of prehearing motions to dismiss
would negate the intent of the proposal and encourage unnecessary and
unwarranted motions to dismiss.\45\ Indeed, many of these commenters
argued that the eligibility exception to the general prohibition on
prehearing motions to dismiss should be removed because eligibility
motions
[[Page 737]]
tend to be fact-based, and would, in most cases, require an evidentiary
hearing.\46\
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\45\ See, e.g., Banks, Lagemann, PIABA 2 and St. John's Letters.
\46\ See, e.g., Greco, Gross/Black, Ledbetter and PIABA 2
Letters.
---------------------------------------------------------------------------
FINRA responded by stating that it had considered these comments,
and concluded that expanding the exceptions to the rule would negate
its intent, which is to have clear, easily definable standards that do
not involve fact-intensive issues. FINRA stated that the suggested
additional exceptions would require fact-based determinations and,
thus, would be inappropriate for dismissal before claimants have
presented their cases. Although these exceptions would be inappropriate
for prehearing dismissal, FINRA noted that a party would be permitted
to file a motion addressing these issues at the conclusion of a
claimant's case-in-chief. FINRA stated that the proposal strikes an
appropriate balance by ensuring that claimants have their claims heard
in arbitration, while minimizing the parties' exposure to additional
fees in the event that the claimant does not prove the claims in its
case-in-chief. For these reasons, FINRA declined to amend the proposal
to expand the exceptions to the rule.
FINRA also specifically stated that it had considered the concerns
expressed by commenters regarding clearing firms and the impact the
proposal could have on their operations. FINRA indicated that it
understands the benefits that clearing firms provide to the operation
of the securities markets, but these benefits do not warrant an
exception to the rule. FINRA noted that courts have found that a
broker-dealer's status as a clearing firm does not immunize it from
liability.\47\ Further, FINRA stated that the courts have found that
clearing firms may be liable for the misdeeds of the introducing firm,
if the clearing firms become actively or directly involved in
fraudulent activity.\48\ Based on these findings, FINRA stated its
belief that claimants should have the opportunity to prove in an
evidentiary hearing whether a clearing firm's involvement rises to the
level of liability. As the issue of a clearing firm's liability in
arbitration would be a fact-intensive determination, FINRA stated that
issue would be inappropriate for prehearing dismissal. Based on these
findings, FINRA declined to amend the proposal to include an exception
for clearing firms.
---------------------------------------------------------------------------
\47\ See, e.g., McDaniel v. Bear Stearns Co., and Bear Stearns
Securities Corporation, 196 F.Supp. 2d 343 (S.D.N.Y. 2002); see
also, Koruga v. Fiserv Correspondent Services, Inc., 183 F.Supp.2d
1245 (D. Or. 2001), aff'd, 40 Fed.Appx. 364, 2002 WL 530548 (9th
Cir. 2002).
\48\ Id.
---------------------------------------------------------------------------
Expansion of the Exception for Prehearing Motions Under the Eligibility
Rule To Include Applicable Statutes of Limitation
The proposed changes to the eligibility rules, Rules 12206(b) of
the Customer Code and 13206(b) of the Industry Code, would not include
applicable statutes of limitation as an exception on which a prehearing
motion would be granted.
Many commenters argued that respondents should not be forced to
proceed to an evidentiary hearing against parties whose claims could be
deemed stale or time-barred under an applicable legal authority.\49\
Conversely, several other commenters contended that most statutes of
limitation matters raise issues of fact which would require an
evidentiary hearing.\50\ Some commenters urged FINRA to remove the
eligibility exception from the proposal for the same reasons.\51\
---------------------------------------------------------------------------
\49\ See, e.g., Babnick, Jacobowitz, Krebsbach, Rapp and SIFMA
Letters.
\50\ See, e.g., Greco, Gross/Black, Ledbetter and PIABA 2
Letters.
\51\ Id.
---------------------------------------------------------------------------
FINRA responded by stating that it included the eligibility rule
exception in the proposal because its eligibility standard is uniform
for all cases (six years from the occurrence or event giving rise to
the claim), and does not vary depending on a particular jurisdiction's
laws or the cause of action raised by the claim. In addition, FINRA
noted that claimants whose cases are dismissed on eligibility grounds
have an alternative to resolve their disputes because the current rule
gives them the right to take their cases to court.\52\ In light of the
uniform applicability of the eligibility exception and the additional
protections parties receive under the eligibility rule, FINRA declined
to amend the proposal to remove the eligibility exception.
---------------------------------------------------------------------------
\52\ Rule 12206(b) of the Customer Code and Rule 13206(b) of the
Industry Code.
---------------------------------------------------------------------------
Further, FINRA responded that it did not include applicable
statutes of limitation in the eligibility exception because such issues
involve fact-based determinations, depend on the law of the applicable
jurisdiction, and depend on the type of claims alleged. FINRA noted
that, in some jurisdictions, courts have found that statutes of
limitations do not apply to arbitration proceedings. For these reasons,
FINRA stated that it would be inappropriate to include an exception for
prehearing motions to dismiss on statute of limitations grounds, and
thus, declined to amend the proposal to include them in the eligibility
exception.
Motions Permitted at the Conclusion of Claimant's Case-in-Chief
Under Proposed Rules 12504(b) of the Customer Code and 13504(b) of
the Industry Code, a motion to dismiss after the conclusion of a
party's case-in-chief would not be limited to the three exceptions
described above.\53\
---------------------------------------------------------------------------
\53\ See note 41, supra.
---------------------------------------------------------------------------
Many commenters who supported the proposal argued that this
provision would shift abusive motions practice to the middle of the
hearing, because respondents would wait until the end of the claimant's
case to file their motions, and thus, this provision should be
deleted.\54\ Several commenters who opposed the proposal argued that
the ability to file a motion at the conclusion of a party's case-in-
chief does not address their interests effectively, because respondents
would have to prepare for and incur the costs of a full evidentiary
hearing.\55\
---------------------------------------------------------------------------
\54\ See, e.g., Banks, Bernstein, Caruso, Davis and Wilcutts
Letters.
\55\ See, e.g., Farley, Karp, Krebsbach and Walters Letters.
---------------------------------------------------------------------------
FINRA responded by stating that the proposal strikes a fair balance
by sharply limiting prehearing motions to dismiss, but permitting
motions to dismiss after the claimant's case-in-chief. FINRA stated
that it would be unfair to require the parties to continue with a
hearing if the claimant has not proved its case. FINRA indicated that
it expects such motions to be relevant to the case and based on
theories that are germane to the issues raised in the case-in-chief.
FINRA further stated that by the close of the claimant's case, the
panel would have heard enough to decide whether a motion filed at the
conclusion of a claimant's case should be considered, and, if
warranted, granted.
FINRA stated that it will monitor the frequency of motions filed
pursuant to this provision once the proposal is implemented. If this
analysis indicates potentially abusive behavior, FINRA stated that it
may amend the rule or take other appropriate action.
FINRA also stated it will inform arbitrators that, if a party files
a motion at the conclusion of a case-in-chief, the panel is not
required to consider or grant the motion merely because it was filed
pursuant to the rule; rather, arbitrators will continue to control the
hearing process. Furthermore, FINRA noted that the proposed rule would
not preclude a panel from assessing respondents with sanctions, costs
and
[[Page 738]]
attorney's fees, if the panel determines that a motion filed at this
time is frivolous or in bad faith.\56\
---------------------------------------------------------------------------
\56\ Rule 12212 of the Customer Code and Rule 13212 of the
Industry Code.
---------------------------------------------------------------------------
FINRA reiterated that the purpose of the proposal is to ensure that
claimants have their claims heard by a panel while permitting
respondents, after completion of a claimant's case-in-chief, to
challenge a claim they believe lacks merit or has not been proved.
FINRA suggested that because arbitrators currently deny most prehearing
motions to dismiss, the proposal to permit motions to dismiss at this
juncture should not have a significant impact on parties' costs in
preparing for a hearing. FINRA stated its belief that respondents'
exposure to attorneys' fees and forum fees should be minimized under
the proposal because additional hearing sessions will not be required
if the panel grants a motion to dismiss at the close of a claimant's
case. Further, FINRA stated that, similarly, claimants will not incur
additional forum costs if arbitrators believe they have not proved
their case and dismiss it before respondents present their case, rather
than at the conclusion of the respondents' case.
For these reasons, FINRA declined to amend the proposal.
Concerns Regarding the Procedural Safeguards in the Proposal
Several of the commenters who supported the procedural safeguards
in the proposal indicated that these provisions provide protection to
investors by creating an effective deterrent to abusive practices.\57\
However, multiple commenters opposed some of the proposed procedural
safeguards as too stringent. Each proposed procedural rule that
generated significant comment is addressed below.
---------------------------------------------------------------------------
\57\ See, e.g., Harrison, Mougey, PIABA 2 and St. John's
Letters.
---------------------------------------------------------------------------
Unanimous panel decision to grant a prehearing motion.
Proposed Rules 12504(a)(7) of the Customer Code and 13504(a)(7) of
the Industry Code would require a unanimous decision by the panel to
grant a prehearing motion to dismiss.\58\
---------------------------------------------------------------------------
\58\ See also Proposed Rules 12206(b)(5) and 13206(b)(5) of the
eligibility rule.
---------------------------------------------------------------------------
The commenters who opposed this provision stated that this
requirement is not necessary to ensure a fair decision concerning a
prehearing motion to dismiss.\59\ Further, these commenters argued that
the provision is inconsistent with other provisions of the Codes, which
only require a majority decision.\60\
---------------------------------------------------------------------------
\59\ See, e.g., Carreno, Forchheimer, Krebsbach, SIFMA and
Wallis Letters.
\60\ Id.
---------------------------------------------------------------------------
FINRA responded that the type of relief requested by a prehearing
motion to dismiss--the complete dismissal of a claim before an
evidentiary hearing--justifies the requirement that all arbitrators
agree, based on the moving party's proof, that the motion should be
granted. FINRA indicated that it recognizes that this standard is
different from the criteria for rendering other rulings and
determinations.\61\ In practice, however, FINRA noted that most awards
rendered in its forum are unanimous; thus, FINRA stated that this
requirement is not a significant change from current practice. For
these reasons, FINRA declined to amend the proposal to change this
provision.
---------------------------------------------------------------------------
\61\ Rule 12414(a) of the Customer Code and Rule 13414(a) of the
Industry Code provide that ``all rulings and determinations of the
panel must be made by a majority of the arbitrators, unless the
parties agree, or the Code or applicable law provides, otherwise.''
---------------------------------------------------------------------------
Mandatory assessment of forum fees.
Proposed Rules 12504(a)(8) of the Customer Code and 13504(a)(8) of
the Industry Code would require that, if a panel denies a prehearing
motion to dismiss, it must assess forum fees associated with hearings
on the motion against the moving party.\62\
---------------------------------------------------------------------------
\62\ See also Proposed Rules 12206(b)(8) and 13206(b)(8).
---------------------------------------------------------------------------
Commenters who opposed this provision stated that it is unfair to
penalize moving parties who file motions to dismiss based on the
exceptions available under the proposed rule, and who rely on a
claimant's pleadings being accurate and complete when filing these
motions.\63\
---------------------------------------------------------------------------
\63\ See, e.g., Amery, Jacobowitz, Karp, Shannon and SIFMA and
Letters.
---------------------------------------------------------------------------
FINRA responded by stating that this provision on mandatory
assessment of forum fees will deter parties from filing motions that
fall outside the scope of the three exceptions \64\ to the rule, and
will provide an incentive for parties to ensure that their prehearing
motions to dismiss comply with the intent of the rule.
---------------------------------------------------------------------------
\64\ See note 41, supra.
---------------------------------------------------------------------------
In response to those commenters who argued that the proposal would
punish respondents when a claimant's pleading lacks specificity, FINRA
reminded parties that there are no specific pleading requirements under
the Codes. FINRA noted that Rules 12302 of the Customer Code and 13302
of the Industry Code require a claimant to supply only ``[a] statement
of claim specifying the relevant facts and remedies requested'' along
with the required fees, copies, and signed submission agreement in
order to initiate an arbitration. Similarly, FINRA pointed out that the
answer must include only ``[an] answer specifying the relevant facts
and available defenses to the statement of claim.'' \65\ Further, FINRA
stated that parties may obtain further information and documents
through the discovery process.\66\
---------------------------------------------------------------------------
\65\ Rules 12303 and 13303.
\66\ See Rules 12500-12514 of the Customer Code and 13500-13512
of the Industry Code.
---------------------------------------------------------------------------
For these reasons, FINRA declined to amend the proposal to change
this provision.
Mandatory Assessment of Costs and Attorneys' Fees and Possible
Sanctions
Proposed Rules 12504(a)(10) of the Customer Code and 13504(a)(10)
of the Industry Code would require that, if a panel deems a prehearing
motion to dismiss to be frivolous, it must award reasonable costs and
attorneys' fees to any party that opposed the motion.\67\ Also,
proposed Rules 12504(a)(11) of the Customer Code and 13504(a)(11) of
the Industry Code would require that, if a panel deems that a
prehearing motion to dismiss was filed in bad faith, it may issue
sanctions against the moving party.\68\
---------------------------------------------------------------------------
\67\ See also Proposed Rules 12206(b)(9) and 13206(b)(9) of the
eligibility rule.
\68\ See also Proposed Rules 12206(b)(10) and 13206(b)(10) of
the eligibility rule.
---------------------------------------------------------------------------
Several commenters who opposed the proposal nevertheless supported
these provisions as sufficient deterrents against abusive motions
practices, and suggested that they would eliminate the need to restrict
prehearing motions to dismiss in the forum.\69\ Other commenters who
opposed the proposal argued that, as drafted, the provisions would
result in an increase in the number of motions for costs, fees, and
sanctions filed by claimants.\70\ These commenters suggested that FINRA
should amend the proposal to prohibit claimants from filing such
motions, and permit the panel, on its own initiative, to decide whether
a motion is frivolous or in bad faith and order relief
appropriately.\71\
---------------------------------------------------------------------------
\69\ See, e.g., Babnick, Kaufman, Krebsbach and Morgan Stanley
Letters.
\70\ See, e.g., Deutsche Bank, Lampart, SIFMA and Wachovia
Letters.
\71\ Id.
---------------------------------------------------------------------------
FINRA responded by stating that it ``anticipates that parties will
file fewer prehearing motions to dismiss once the proposal is
implemented, which should forestall any increase in the number of
motions for costs, fees, and sanctions.'' \72\ FINRA further stated its
belief that the risk of monetary penalties
[[Page 739]]
and sanctions, imposed either by the panel on its own initiative, or as
a result of a party's motion, should deter parties from filing such
motions frivolously or in bad faith. FINRA suggested that, taken
together, these enforcement mechanisms should ensure strict compliance
with the rules. For these reasons, FINRA declined to amend the proposal
to change these provisions.
---------------------------------------------------------------------------
\72\ FINRA Letter.
---------------------------------------------------------------------------
Clarification of the In-Person or Telephonic Prehearing Conference
Criteria
The proposed rule requires that a panel may not grant a motion
under the rule unless an in-person or telephonic prehearing conference
is held or waived by the parties.\73\ One commenter requested
clarification concerning what would satisfy the in-person or telephonic
prehearing conference requirement.\74\ The commenter was concerned that
the rules imply that the panel may grant the motion solely on the basis
of the submissions from the parties.\75\
---------------------------------------------------------------------------
\73\ Proposed Rules 12504(a)(5) of the Customer Code and
13504(a)(5) of the Industry Code. See also Proposed Rules
12206(b)(4) and 13206(b)(4) of the eligibility rule.
\74\ St. John's Letter.
\75\ Id.
---------------------------------------------------------------------------
FINRA responded by explaining that prehearing conferences conducted
under this provision would be subject to Rules 12501 of the Customer
Code and 13501 of the Industry Code. Further, FINRA explained that,
under the proposal, if the parties agree to waive the prehearing
conference, as is permitted currently under the Codes,\76\ the panel
may grant the motion based solely on the submissions of the parties.
FINRA also stated that, if, however, the parties do not agree to waive
the prehearing conference, then the panel must hold an evidentiary
hearing on the motion at which time the parties will have an
opportunity to present their arguments concerning the motion. In this
situation, FINRA explained that the panel will have received the
information necessary to make an informed decision.
---------------------------------------------------------------------------
\76\ Rule 12105(a) of the Customer Code and Rule 13105(a) of the
Industry Code.
---------------------------------------------------------------------------
Effect of the Proposal on the Parties' Costs
Many commenters argued that current practice permits respondents to
file numerous motions that are rarely granted, and that serve only to
delay the hearings, harass claimants, and increase claimants' costs
through higher forum fees and lower award amounts once expenses are
paid.\77\ In general, these commenters indicated that defending these
motions to dismiss is a waste of time and resources and, ultimately,
will result in the denial of access to the forum for investors with
small claims.\78\
---------------------------------------------------------------------------
\77\ See, e.g., Buchwalter, Haigney, Neuman and Stoltmann
Letters.
\78\ Id. See also, e.g., Estell, Forman and St. John's Letters.
---------------------------------------------------------------------------
A number of commenters argued that the proposal prohibiting most
prehearing motions to dismiss would increase all parties' costs,
particularly firms', because their attorneys charge on an hourly basis,
whereas claimants' attorneys charge on a contingency basis, so
claimants are not incurring any costs.\79\ Others contended that
prohibiting prehearing motions to dismiss nullifies their most
important objective--to avoid the expense of preparing for and
attending an evidentiary hearing.\80\
---------------------------------------------------------------------------
\79\ See, e.g., Hartman, Kemnitz, Morgan Stanley and Schrils
Letters.
\80\ See, e.g., Berberian, Davidson, Dulcich and McDermott
Letters.
---------------------------------------------------------------------------
FINRA responded by stating that it is not privy to the fee
structure used by investors' attorneys or counsel for brokerage firms.
However, based on internal data \81\ and other statistical studies
tracking motions to dismiss in FINRA's forum,\82\ FINRA noted that it
is aware that when motions to dismiss are filed, they serve to delay
the hearings and increase all parties' costs through higher forum fees.
As a result, FINRA stated its concern that the current practice by some
respondents of filing motions to dismiss, and sometimes multiple
motions in one case, could cause investors' attorneys not to take
smaller claims, because the costs incurred in defending these motions
could exceed the amount in dispute. FINRA stated that it anticipates
that the proposal will continue to make the forum accessible to
investors, particularly those with small claims, by minimizing the
number of motions to dismiss filed in the forum, and by shifting the
costs and fees associated with denied motions to dismiss to the moving
party. FINRA stated that the proposal's benefits protecting investors'
access to the forum and their ability to have claims heard in
arbitration outweigh the possibility of increased costs and expenses
firms might incur under the rule. For these reasons, FINRA declined to
amend the proposal to address this concern.
---------------------------------------------------------------------------
\81\ See Additional statistical support section below for
updated statistics on motions to dismiss filed in FINRA's forum.
\82\ See Securities Arbitration Commentator, Nov. 2006 (Vol.
2006, No. 5) (``Study'').
---------------------------------------------------------------------------
Additional Statistical Support
Several commenters who opposed the proposal argued that FINRA did
not provide enough objective evidence to support the changes
proposed.\83\ These commenters suggested that anecdotal evidence of
abuse is not sufficient proof that prehearing motions to dismiss should
be prohibited.
---------------------------------------------------------------------------
\83\ See, e.g., Astarita, Berberian, Davidson and Farley
Letters.
---------------------------------------------------------------------------
FINRA responded that it disagrees with these commenters. FINRA
stated that a significant number of changes to FINRA's arbitration
rules have begun with users of the forum expressing a concern or
complaint to FINRA. FINRA further stated that it relies on its
constituents to inform it of concerns with its rules, arbitrator
conduct, or abusive practices. Moreover, FINRA noted that once FINRA
staff members become aware of a problem, they investigate further, and
propose changes to the rules to address the concern, if necessary.
FINRA stated that, in the case of motions to dismiss, it received
many complaints from users of the forum documented with copies of
motions to dismiss, responses, and the panels' denials of those
motions. FINRA stated that it also learned through a Securities
Arbitration Commentator study that the number of motions to dismiss
filed in customer cases had begun to increase over a two year period,
starting in 2004.\84\ The Study was conducted on motions to dismiss in
customer cases and concluded that, of the cases that went to award in
2006, 28% had motions to dismiss as compared to 10% of cases that went
to award in 2004.\85\ FINRA found the results of the Study ``alarming''
not only because of the significant increase in the motions filed in
these cases, but also because the Study did not include cases that
settled during that time. As a result of this analysis, FINRA indicated
that it became concerned that, if left unregulated, this type of
motions practice would limit investors' access to the forum, which is
antithetical to FINRA's goals of investor protection and market
integrity.
---------------------------------------------------------------------------
\84\ See, note 82, supra, at 3.
\85\ Id.
---------------------------------------------------------------------------
In light of the Study and concerns raised by constituents, FINRA
began tracking motions to dismiss in 2007. FINRA noted that from
January 1, 2007 to July 1, 2008, there have been 6,079 arbitration
cases filed in the forum,\86\ and a total of 754 motions to dismiss
filed in these cases. Further, FINRA
[[Page 740]]
noted that in 10% of the 6,079 cases, parties filed one or more motions
to dismiss, and in 2% of the 6,079 cases, parties filed two or more
motions to dismiss. FINRA stated that these current statistics suggest
that the number of motions to dismiss filed in the forum may be
declining since the Study was conducted. FINRA opined that the
reduction in these motions reflects its focus on this issue, through
enhanced arbitrator training as well as a 2006 Notice to Parties to
remind parties of the forum's policy and parties' responsibilities when
filing motions to dismiss.\87\ FINRA indicated that even though the
number of motions filed appears to be declining in the forum, the
proposal will serve to reduce further the number of prehearing motions
to dismiss filed, and, in particular, should prevent parties from
filing multiple motions in a case. For these reasons, FINRA stated that
its statistical and anecdotal evidence is sufficient support for the
proposal, and that the proposal should be approved as drafted.
---------------------------------------------------------------------------
\86\ The data do not include cases filed in the NYSE Regulation
arbitration forum.
\87\ See Notice to Parties on Motions to Dismiss under the Code
of Arbitration Procedure for Customer and Industry Disputes
available at http://www.finra.org/ArbitrationMediation/
ResourcesforParties/NoticestoParties/p037078. The Notice continues
to be effective.
---------------------------------------------------------------------------
Alternate Criteria To Provide Specific Guidance to Arbitrators When
Deciding Motions To Dismiss
Several commenters suggested that the proposal should establish a
specific standard for arbitrators to use when deciding motions to
dismiss.\88\ Most of these commenters suggested that panels should deny
prehearing motions to dismiss whenever: (1) Credibility is an issue;
(2) there are disputed issues of material fact; or (3) the panel
believes a hearing is necessary in the interests of justice.\89\
---------------------------------------------------------------------------
\88\ See, e.g., Gross/Black, Honigman, Van Kampen and Wachovia
Letters.
\89\ Id.
---------------------------------------------------------------------------
FINRA responded by stating that it considered incorporating these
criteria into the rule but determined that this would be inconsistent
with the Codes, which do not contain such specific standards for
arbitrator decision making. FINRA further stated that because
arbitration is an equitable forum, the panel may consider any evidence
or use any method to achieve a fair result. FINRA indicated that it did
not intend for the proposal to change this practice.
Moreover, FINRA stated that establishing a specific approach for
arbitrators to follow would infringe on arbitrators' discretion to
decide arbitration cases. FINRA stated that the intent of the proposal
was to select a very limited number of exceptions for granting
prehearing motions to dismiss that would be relatively clear-cut for
the panel to apply at this stage of the proceedings. FINRA stated that
parties should argue their positions and arbitrators should be
permitted to use their discretion in determining how motions to dismiss
should be decided. For these reasons, FINRA declined to amend the
proposal to incorporate a specific standard for arbitrators to use when
deciding motions to dismiss.
Motion To Dismiss Policies of Other Securities Arbitration Forums
One commenter contended that the former New York Stock Exchange
(``NYSE'') arbitration forum did not permit prehearing motions to
dismiss.\90\ Another commenter stated that the NYSE Regulation
arbitration forum would not permit arbitrators to grant motions to
dismiss before an investor had the opportunity to present his or her
claims at an evidentiary hearing on the merits.\91\
---------------------------------------------------------------------------
\90\ Tepper Letter.
\91\ Canning Letter.
---------------------------------------------------------------------------
FINRA stated that it responded to this comment previously in regard
to the consolidation of the member firm regulatory functions of NASD
and NYSE Regulation, Inc.\92\ FINRA noted that the NYSE Regulation
arbitration forum had neither a rule nor a written policy on motions to
dismiss, and FINRA was not aware that motions to dismiss were
prohibited in the NYSE Regulation arbitration forum. Rather, FINRA
stated its understanding that, in the NYSE forum, the panel determined
whether and if so, when, a motion to dismiss would be heard.
---------------------------------------------------------------------------
\92\ See Supplemental Response to Comments from Linda D.
Fienberg, President, Dispute Resolution, dated May 29, 2007. The SEC
approved the consolidation of member firm regulatory operations of
NASD and NYSE on July 26, 2007. Securities Exchange Act Rel. No.
56145, 72 FR 42169 (Aug. 1, 2007) (SR-NASD-2007-023) (approval
order).
---------------------------------------------------------------------------
Proposal's Impact on the Parties' Negotiations
A number of commenters argued that the proposal would create
settlement value for claimants because respondents would have to
conduct a cost-benefit analysis to determine whether the cost of
settling the dispute is more beneficial than losing a prehearing motion
to dismiss and proceeding to evidentiary hearing.\93\ Generally, the
commenters who supported the proposal stated that it would reduce all
parties' costs because the parties would no longer waste resources
arguing frivolous prehearing motions to dismiss that are rarely
granted.\94\
---------------------------------------------------------------------------
\93\ See, e.g., Amery, Buckman, Gelber and Shannon Letters.
\94\ See, e.g., Buchwalter, Haigney, Neuman and Stoltmann
Letters.
---------------------------------------------------------------------------
FINRA responded that it agrees with those commenters who believe
the proposal would reduce all parties' costs because the number of
prehearing motions to dismiss in the forum should decrease once the
proposal is implemented. Moreover, FINRA stated that it believes that
respondents are more likely to conduct a cost-benefit analysis
concerning whether to proceed with an arbitration based on the strength
or weakness of their claims or defenses, not the existence of a motion
to dismiss rule. For this reason, FINRA declined to amend the proposal
at this time.
Proposal's Effect on Parties Who Settle Claim Before Hearing
Proposed Rules 12504(a)(3) of the Customer Code and 13504(a)(3) of
the Industry Code provide that, unless the parties agree or the panel
determines otherwise, parties must serve motions to dismiss at least 60
days before a scheduled hearing, and parties have 45 days to respond to
the motion.
The author of a February 2008 Securities Arbitration Commentator
(``SAC'') article suggested that, under the proposal, parties would not
be permitted to settle a claim and have it dismissed before the
evidentiary hearing, if the 60-day deadline has passed and the parties
have not yet filed a prehearing motion.\95\
---------------------------------------------------------------------------
\95\ Harry A. Jacobowitz, ``Roadblocks at the Exits: FINRA's
Proposed Dispositive Motions Rule,'' Securities Arbitration
Commentator, February 2008 (Vol. 2007, No. 4), at 1.
---------------------------------------------------------------------------
FINRA responded to the suggestion in the article by noting that the
proposal does not preclude parties from agreeing to settle at any time.
FINRA pointed out that Rules 12105 and 12207 of the Customer Code \96\
permit the parties to agree to extend the deadlines for filing or
responding to motions. FINRA stated that the proposal would not
prohibit the parties from taking these actions.
---------------------------------------------------------------------------
\96\ See also Rules 13105 and 13207 of the Industry Code.
---------------------------------------------------------------------------
Moreover, FINRA stated that the proposed rule is not intended to
apply to motions made jointly by all parties to dismiss a case because
of a settlement. FINRA pointed out that, under the Codes, if all
parties agree to settle a case, FINRA will close the case based on the
settlement agreement.\97\ FINRA stated that this process is different
from that contemplated by the proposal, in which a panel grants one
party's motion to
[[Page 741]]
dismiss a case before an evidentiary hearing is held.
---------------------------------------------------------------------------
\97\ Rule 12902(d) of the Customer Code and Rule 13902(d) of the
Industry Code.
---------------------------------------------------------------------------
Motions To Dismiss as Awards
The author of a different February 2008 SAC article argued that
arbitrator decisions on motions to dismiss are awards and should be
published as required under the Code.\98\
---------------------------------------------------------------------------
\98\ Richard P. Ryder, ``Disposing of Dispositive Motions: The
Process to Date,'' Securities Arbitration Commentator, February 2008
(Vol. 2007, No. 4), at 10; see also Jacobowitz Letter.
---------------------------------------------------------------------------
FINRA responded to the comments in this article by stating that,
under the Code, an award is a document stating the disposition of a
case.\99\ FINRA explained that, if a motion to dismiss all claims is
granted and disposes of all open issues, it would be reported as an
award. FINRA further explained that a decision to grant a motion to
dismiss that does not dismiss all of the parties or end the dispute
would not be an award; rather, it would be considered an order of the
panel and would not be made publicly available.
---------------------------------------------------------------------------
\99\ Rule 12100(b) of the Customer Code and Rule 13100(b) of the
Industry Code.
---------------------------------------------------------------------------
IV. Discussion and Findings
After careful review of the proposed rule change, the comments and
FINRA's response to the comments, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and the rules and regulations thereunder that are applicable to a
national securities association.\100\ In particular, the Commission
believes the proposed rule change is consistent with the provisions of
Section 15A(b)(6) of the Act,\ 101\ which requires, among other things,
that FINRA rules must be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. The Commission believes that the proposed rule change
would enhance investor confidence in the fairness and neutrality of
FINRA's arbitration forum by ensuring that non-moving parties have
their claims heard in arbitration, while preserving the moving parties'
rights to challenge the necessity of a hearing in certain limited
circumstances. Further, the Commission believes the proposed changes to
the eligibility rule would help prevent manipulative practices by
closing a loophole in the existing rule, so that parties may pursue
their claims in court without facing an unintended legal impediment, in
the event their claims are dismissed in arbitration on eligibility
grounds.\102\
---------------------------------------------------------------------------
\100\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition and capital
formation. See 15 U.S.C. 78c(f).
\101\ 15 U.S.C. 78o-3(b)(6).
\102\ As described above, under the existing rule, if a
respondent files a motion to dismiss based on several grounds,
including eligibility, and the panel issues an order dismissing a
claim, but without citing reasons, the claimants would not know
whether or not they are afforded the right to pursue the claim in
court. If the claimants proceed to file the dismissed claim in
court, the respondents may argue that the panel's decision on the
claim is the final decision, and that claimants are barred from
having the court decide the same claim again.
---------------------------------------------------------------------------
Policy Statement on Prehearing Motions
The Commission believes that FINRA has adequately responded to the
comments regarding FINRA's proposed policy statement on prehearing
motions. The Commission agrees that parties have the right to a hearing
in arbitration, and that prehearing motions to dismiss should be
limited. The Commission also agrees with FINRA that proposed Rules
12504(a)(1) of the Customer Code and 13504(a)(1) of the Industry Code
reinforce this position by clarifying that prehearing motions to
dismiss are discouraged in arbitration.
Further, the Commission believes that FINRA adequately responded to
the commenters who contend that this policy statement unfairly
discourages all motions to dismiss in the forum, by pointing out that
the proposal permits parties to file a motion to dismiss on any ground
after the conclusion of a party's case in chief.
Finally, given the comments that were received in response to the
original proposal, which stated that motions to dismiss should be
granted only in extraordinary circumstances, the Commission believes
that FINRA has appropriately refined the statement to reflect FINRA's
policy while eliminating any ambiguity created by the words
``extraordinary circumstances.''
The Commission's oversight of the securities arbitration process is
directed at ensuring that it is fair and efficient. As noted above,
FINRA had received complaints that parties were filing dispositive
motions routinely and repetitively in an apparent effort to delay
scheduled hearing sessions on the merits, increase investors' costs,
and intimidate less sophisticated parties. This type of abusive motions
practice undermines the fairness and efficiency of the securities
arbitration process. The proposed rules, which strictly limit the
grounds for filing pre-hearing motions to dismiss, and impose sanctions
on parties that engage in abusive practices, are designed to enhance
the fairness and efficiency of the process. The Commission believes
that FINRA's policy statement sets a clear tone that commands a narrow
reading of the provisions setting forth the grounds on which parties
may bring a motion to dismiss prior to the conclusion of a party's case
in chief. A narrow reading of those provisions is essential to help
achieve FINRA's overarching goal of the proposal: To enhance investor
confidence in the fairness and neutrality of FINRA's arbitration forum
by ensuring that non-moving parties have their claims heard in
arbitration, while preserving the moving parties' rights to challenge
the necessity of a hearing in certain limited circumstances.
Furthermore, this policy statement is consistent with other parts of
the Codes, where FINRA sets forth procedures that are only permitted to
be used in limited circumstances.\103\
---------------------------------------------------------------------------
\103\ See, e.g., NASD Rules 12507(a)(1), which states that
``interrogatories are generally not permitted in arbitration,''
while setting forth limited types of written discovery requests and
12510 (Depositions), which states that ``depositions are strongly
discouraged in arbitration,'' while setting forth a list of the
limited circumstances in which depositions are permitted.
---------------------------------------------------------------------------
Scope of Proposed Rules 12504(a)(6) of the Customer Code and
13504(a)(6) of the Industry Code With Respect to Clearing Firms
The Commission carefully considered a commenter's arguments that
when a statement of claim does not make factual allegations of direct
misconduct by a clearing firm, the clearing firm should be dismissed
from the case.\104\ Under applicable rules of self-regulatory
organizations, all clearing agreements must identify the division of
duties between the introducing and clearing brokers.\105\ Typically, an
introducing or correspondent broker deals directly with the public and
originates customer accounts \106\ while the clearing broker handles
functions related to the clearance and settlement of trades in the
accounts of its introducing broker.\107\ The clearing broker usually
has no direct contact with the customers of its introducing broker,
except for the periodic mailing of reports and other records relating
to their accounts.\108\ However, a clearing broker may expose itself to
liability with respect to the introducing broker's misdeeds ``where a
clearing firm moves beyond performing mere ministerial or routine
clearing functions [with actual knowledge] and becomes actively and
directly involved
[[Page 742]]
in the introducing broker's [fraudulent] actions. * * *'' \109\
Although findings of liability against clearing brokers are unusual,
courts have upheld arbitration awards against clearing brokers, finding
that the arbitrators did not act with ``manifest disregard of the
law.'' \110\
---------------------------------------------------------------------------
\104\ See SIFMA Letter.
\105\ See, e.g., NYSE Rule 382, NASD Rule 3230, Amex Rule 400.
\106\ See Katz v. Fin. Clearing & Serv. Corp., 794 F. Supp. 88,
90 (S.D.N.Y. 1992).
\107\ Dillon v. Militano, 731 F. Supp. 634, 636 (S.D.N.Y. 1990).
\108\ Stander v. Fin. Clearing & Serv. Corp., 730 F. Supp. 1282,
1285 (S.D.N.Y. 1990).
\109\ McDaniel v. Bear Stearns & Co., 196 F. Supp. at 353.
\110\ See, e.g., id; see also, Koruga, 183 F.Supp.2d at 1247.
---------------------------------------------------------------------------
Because claimants generally need to be able to develop the facts to
argue the liability of a clearing firm in a particular dispute, the
Commission agrees with FINRA's analysis that it would be inappropriate
for clearing firms to be eligible for prehearing dismissal based solely
on their status as clearing brokers. Under the proposed rule, however,
clearing firms will continue to be permitted to file motions to dismiss
for any reason after the conclusion of the claimant's case in chief.
The Commission believes that this strikes an appropriate balance
between providing claimants an opportunity to resolve factual disputes
and limiting clearing firms' needless involvement in disputes. The
Commission staff has asked FINRA to request that SIFMA provide it with
available statistics regarding all motions to dismiss filed by clearing
firms in the past and until the effective date of the proposed rule
change.\111\ Further, the Commission has asked FINRA to maintain
statistics on motions to dismiss filed by clearing firms for a period
of six months from the effective date of this proposed rule change, to
shed greater light on any burdens imposed on clearing firms. The
Commission has also asked FINRA to consider additional steps it could
take to inform parties of the distinction between introducing brokers
and clearing brokers.
---------------------------------------------------------------------------
\111\ To the extent that firms and other interested parties have
access to information or statistics that would be relevant, such
firms and parties are invited to send such information to the
attention of the staff of FINRA Dispute Resolution.
---------------------------------------------------------------------------
Scope of Proposed Rules 12504(a)(6)(B) of the Customer Code and
13504(a)(6)(B) of the Industry Code (``Not Associated'' Exception)
With respect to the comments regarding the ``not associated''
exception, the Commission believes that FINRA responded appropriately.
Specifically, FINRA indicated that it intends this exception to apply
narrowly, such as in cases involving issues of misidentification. FINRA
further clarified the meaning of ``not associated'' by providing
examples of ways in which the exception could be invoked. The
Commission agrees with FINRA that the ``not associated'' exception
would be inappropriate in cases in which a respondent may be liable as
a supervisor or control person under applicable statutes or in
``selling away'' cases.
The Commission recognizes that certain situations, such as cases
involving mistaken identity, would merit a prehearing dismissal, which
is why the Commission supports the existence of a ``not associated''
exception within the rules. However, as stated above, the Commission
believes that a narrow interpretation of the exceptions is appropriate.
Additional Exceptions for Permissible Prehearing Motions
With respect to the comments requesting that FINRA incorporate
additional exceptions for prehearing motions to dismiss, the Commission
believes that FINRA responded appropriately. Specifically, the
Commission agrees with FINRA's conclusion that expanding the exceptions
to the rule would negate its intent, which is to have clear, easily
definable standards for permissible prehearing motions to dismiss that
do not involve fact-intensive issues. Moreover, the Commission agrees
that the suggested additional exceptions would require fact-based
determinations and, thus, would be inappropriate for dismissal before a
claimant has presented its case. As FINRA pointed out, a party is
permitted to file a motion to dismiss on any basis after the conclusion
of a party's case in chief.
The Commission believes that, particularly with respect to the
limited exceptions to prehearing motions, the proposal strikes an
appropriate balance by ensuring that claimants have their claims heard
in arbitration, while minimizing the parties' exposure to additional
fees in the event that the claimant does not prove the claims in its
case-in-chief.
Expansion of the Exception for Prehearing Motions Under the Eligibility
Rule To Include Applicable Statutes of Limitation
With respect to the comments regarding statutes of limitations, the
Commission believes that eligibility is an appropriate ground for a
prehearing motion to dismiss because of its uniform application in all
cases, and because of the additional protections parties receive under
the eligibility rule. As FINRA explained, statutes of limitations
involve fact-based determinations, depend on the law of the applicable
jurisdiction, and depend on the type of claims alleged. Moreover, FINRA
noted that, in some jurisdictions, courts have found that statutes of
limitations do not apply to arbitration proceedings. For these reasons,
the Commission agrees with FINRA's conclusion that it would be
inappropriate to include an exception for prehearing motions to dismiss
on statute of limitations grounds.
Motions Permitted at the Conclusion of Claimant's Case-In-Chief
With respect to the argument that this provision will shift abusive
motions practice to the middle of the hearing, because respondents will
wait until the end of claimant's case to file their motions, the
Commission believes FINRA responded appropriately. In particular, the
Commission agrees with FINRA's assertion that it would be unfair to
require the parties to continue with a hearing if the claimant has not
proved its case.
The Commission staff has requested that FINRA gather statistics on
a going-forward basis, to determine whether abusive motions practice
becomes apparent in the post-hearing phase of arbitration. In response,
FINRA stated that it will monitor the frequency of motions filed
pursuant to this provision once the proposal is implemented. FINRA has
agreed to analyze the information to determine whether potentially
abusive behavior develops, and FINRA stated that it may propose further
amendments to the rules that are subject to this proposal or take other
appropriate action.
In addition, further to discussions with the Commission staff,
FINRA noted in its response that the proposed rule would not preclude a
panel from assessing respondents with sanctions, costs and attorney's
fees, if the panel determines that a motion filed at this time is
frivolous or in bad faith.
Concerns Regarding the Procedural Safeguards and Mandatory Assessment
of Costs and Attorneys' Fees and Possible Sanctions
With respect to the comments regarding the procedural safeguards
and mandatory assessment of costs and fees and possible sanctions, the
Commission believes FINRA responded appropriately. The Commission
believes that the proposal's procedural safeguards are carefully
designed to enhance the fairness and neutrality of FINRA's arbitration
forum. The Commission further believes that the mandatory assessment of
costs and attorneys' fees and possible sanctions serves the necessary
function of deterring parties from filing such motions frivolously or
in bad faith, and
[[Page 743]]
should ensure strict compliance with the rules.
Effect of the Proposal on the Parties' Costs
With respect to the comments suggesting that the proposal
prohibiting prehearing motions to dismiss except on limited grounds
would increase all parties' costs, particularly firms', because their
attorneys charge on an hourly basis (whereas claimants' attorneys
charge on a contingency basis, so claimants are not incurring any
costs),\112\ the Commission is unconvinced. The Commission believes
FINRA responded appropriately by highlighting the effect of motions to
dismiss on all parties' costs and the potential for claimants'
attorneys to be reluctant to take on small cases due to costs
associated with motions to dismiss. Furthermore, the Commission agrees
with FINRA's ultimate determination that the proposal's benefits of
protecting investors' access to the forum and their ability to have
claims heard in arbitration outweigh the possibility of increased costs
and expenses firms might incur under the rule.
---------------------------------------------------------------------------
\112\ See, e.g., Hartman, Kemnitz, Morgan Stanley and Schrils
Letters.
---------------------------------------------------------------------------
General
In general, the Commission believes that FINRA has responded to the
comments adequately and appropriately, and has explained how the
proposed rule change is consistent with the requirements of the Act,
and the rules and regulations thereunder that are applicable to a
national securities association. As noted above, the Commission
believes that the proposal would help achieve the overarching goal of
ensuring that parties would have their claims heard in arbitration, by
significantly limiting the grounds for filing motions to dismiss prior
to the conclusion of a party's case in chief and by imposing stringent
sanctions against parties for engaging in abusive practices under the
rule. At the same time, the Commission believes that the proposal would
not unduly limit the rights of parties to seek dismissal, because it
would allow prehearing motions to dismiss in certain limited
circumstances, and it would not affect the ability of parties to seek
dismissal after the conclusion of the claimant's case in chief. As
such, the Commission finds that the proposal would contribute to the
fairness and efficiency of the securities arbitration process.
V. Conclusions
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\113\ that the proposed rule change (SR-FINRA-2007-021), as
modified by Amendment No. 1, be, and hereby is, approved.
---------------------------------------------------------------------------
\113\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\114\
---------------------------------------------------------------------------
\114\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harmon
Acting Secretary.
[FR Doc. E9-12 Filed 1-6-09; 8:45 am]
BILLING CODE 8011-01-P