On December 31, 2008, the Securities and Exchange Commission ("SEC") approved a proposed rule change filed with the SEC by the Financial Industry Regulatory Authority, Inc. ("FINRA") on November 2, 2007, and as amended on February 13, 2008. The proposed rule change was made pursuant to Section 19(b)(1) of the Securities and Exchange Act of 1934 and Rule 19b-4 thereunder, and relates to amendments to the Code of Arbitration Procedure for Customer Disputes ("Customer Code") and the Code of Arbitration Procedure for Industry Disputes ("Industry Code") to address motions to dismiss and to amend the eligibility rule related to dismissals.
The rule change is designed to ensure that parties will 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. FINRA proposed this rule change to address concerns about abusive and duplicative filing of dispositive motions. Specifically, the rule change attempts to address complaints that parties were routinely and repetitively filing dispositive motions in an effort to delay scheduled hearings on the merits, increase costs, and intimidate less sophisticated parties. Below are some of the important rule changes approved by the SEC.
Motions to Dismiss on Other Than Eligibility Grounds:
- The rule change clarifies that motions to dismiss a claim prior to the conclusion of a party's case in chief are discouraged in arbitration.
- The rule change requires that a party file a motion to dismiss in writing separately from the answer and only after the answer is filed.
- The rule change requires parties to serve motions to dismiss at least 60 days before a scheduled hearing, and provides 45 days for a party to respond. This is intended to prevent parties from filing motions to dismiss as a surprise tactic in order to delay the process.
- The rule change requires a full arbitration panel to decide the motion to dismiss.
- An arbitration panel will 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, unless the hearing is waived by the parties.
- The rule change limits the grounds upon which a panel may act upon a motion to dismiss prior to the conclusion of the party's case in chief except in two circumstances: (1) the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release; or (2) the moving party was not associated with the account(s), security(ies), or conduct at issue.
- The rule change requires a unanimous decision by the panel to grant a motion to dismiss, as well as a written explanation of the decision.
- A party will be prohibited from re-filing a previously denied motion to dismiss unless specifically permitted by a panel order.
- The rule change requires 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.
- If the panel deems a motion to dismiss to be frivolous, the panel must award reasonable costs and attorneys' fees to the party that opposed the motion.
- If the panel determines that a party filed a motion to dismiss in bad faith, the panel may issue sanctions under Rule 12212 of the Customer Code or Rule 13212 of the Industry Code.
- When a moving party 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.
Amendments to the Dismissal Provision of the Eligibility Rule:
- The changes to the eligibility rule contain most of the same provisions as those contained in the motion to dismiss rule discussed above, except for those criteria that are not applicable to eligibility motions, that is, the 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 agreement and written release and factual impossibility).
- Also, the filing deadlines are different from the motion to dismiss 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. The proposed rule change provides a party with 30 days to respond to an eligibility motion.
- FINRA also proposed to amend the dismissal provision of the eligibility rule to address the res judicata defense claimants could encounter when attempting to pursue in court a claim dismissed in arbitration when the grounds for dismissal are unclear. This scenario arises because a dismissal on eligibility grounds in arbitration does not preclude a party from pursuing the claim in court. The rule change provides that when a party files a motion to dismiss on multiple grounds, including eligibility, the panel must consider the threshold issue of eligibility first. This is intended to address claimants' difficulty proceeding with their claims in court when respondents have asserted a res judicata defense after the grounds for dismissing the arbitration claim were unclear.