February 3, 2009
FINRA Limits Motions To Dismiss in Arbitration
January 16, 2009
This Bulletin reviews FINRA rule changes which will severely limit a respondent’s ability to file a motion to dismiss before a securities arbitration hearing. FINRA’s new Rule 12504 (12504 applies to customer disputes, a similar new Rule 13504 apples to industry disputes), now approved by the SEC, amends FINRA’s Code of Arbitration Procedure and reflects a FINRA belief that pre-hearing motions to dismiss have been misused to discourage investor claims (the rule specifically states: “Motions to dismiss a claim prior to the conclusion of a party’s case in chief are discouraged in arbitration.”).
At the heart of the rule changes, Rule 12504(a)(6) gives arbitration panels the discretion to dismiss at the pre-hearing stage in only two circumstances: (i) when the non-moving party has previously released the claim(s) in writing and (ii) when the moving party was not associated with the account(s).
In light of the rule changes, the Bulletin advises that “it becomes more important than ever that respondent set forth in its Answer and hearing brief the points on which it will be relying to seek dismissal at the close of the claimant’s case. Respondent should alert the panel to the prospect of a motion to dismiss being filed at the conclusion of claimant’s case-in-chief and ask that appropriate time be built into the hearing schedule for such a motion to be heard and considered.”.
This Alert warns firms in the financial services sector that the Financial Industry Regulatory Authority’s (“FINRA”) recent rule changes to its Code of Arbitration Procedure will “severely curtail a party’s right to file a pre-hearing motion to dismiss … and could often result in lengthier and costlier - arbitrations.”
The new NASD Rule 12504 of the Code of Arbitration Procedure for Customer Disputes and Rule 13504 of the Code of Arbitration Procedure for Industry Disputes were adopted by the SEC largely as proposed by FINRA, with the result that [citing the Alert] “arbitration panels will be powerless from dismissing even the most frivolous of claims that should be thrown out immediately because they are legally defective.”