FINRA recently issued two Regulatory Notices adopting new rules under the Code of Arbitration Procedure. These new rules severely limit the use of dispositive motions in arbitration prior to the close of a claimant’s case-in-chief and make obtaining expungement on behalf of registered persons more difficult.1  

Motions to Dismiss

On January 23, 2009, FINRA imposed a moratorium on all motions to dismiss pending the implementation on February 23, 2009 of Rule 12504 of the Code of Arbitration Procedure for Customer Disputes and Rule 13504 of the Code of Arbitration Procedure for Industry Disputes.2 These rules are designed to “ensure that parties have their claims heard in arbitration by significantly limiting motions to dismiss filed 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 rules.” (emphasis added) See Regulatory Notice 09-07 at 2. These rules establish new procedures when considering 1) prehearing motion to dismiss, 2) “eligibility motions” and 3) motions to dismiss at the conclusion of the claimant’s case.  

Click here for a full text of Rule 12504 and here for a full text of Rule 13504.  

Prehearing Motions to Dismiss

Rules 12504(a) and 13504(b) provide that motions to dismiss are discouraged prior to the conclusion of a party’s case-in-chief and limits a panel from acting on a motion to dismiss a party or claim, unless one of the following grounds is established:  

  • The non-moving party previously released the claim in dispute by a signed settlement and/or written release; or
  • The moving party was not associated with the account, securities, or conduct at issue (i.e., factual impossibility).  

These new Rules set forth the following procedural steps that must be met in considering a prehearing motion to dismiss:  

  • Motions must be in writing, separate from the answer, and submitted only after the answer is filed;
  • The motion must be served at least 60 days before a scheduled hearing, and parties have 45 days to respond to the motion;
  • The panel must hold a recorded hearing, by telephone or in person;
  • If the panel grants the motion, the decision must be unanimous and must be accompanied by a written explanation;
  • If the panel denies a motion, all forum fees must be assessed against the moving party and must award costs and attorneys’ fees to the opposing party if the motion is deemed frivolous.  

Motion to Dismiss Based on Eligibility Grounds

Rules 12206(b) and 13206(b) will govern motions to dismiss based on the six-year eligibility rule. An “eligibility motion” must be filed at least 90 days before a scheduled hearing, but otherwise may be considered and granted at any stage of the proceeding. Such motions must be decided by the full panel in a recorded hearing conducted in person or by telephone.  

Motions to Dismiss After Conclusion of Case-in-Chief

The hurdles set forth above do not apply to motions to dismiss after the close of a claimant’s case-in-chief. See Rule 12504(b) and Rule 13504(b). A motion to dismiss at this juncture in the proceedings may be based on “any applicable theory of law” and “based on theories that are germane to the issues raised in the non-moving party’s case.” See Regulatory Notice 09-07 at 7. FINRA recognizes that by the close of the claimant’s case, the arbitration panel will have heard enough evidence to decide whether a motion to dismiss is warranted. Id. The rule thus recognizes that a Panel has the authority to grant a motion to dismiss at the conclusion of the claimant’s case. The Panel, however, is authorized to award attorney fees and expenses if it finds the motion to be frivolous.  

Expungement  

In keeping with its previous position that it considers expungement to be “extraordinary relief,” FINRA adopted new procedures effective January 26, 2009, that will make expungement under Rule 2130 more difficult for registered representatives improperly named as respondents in arbitrations. With the adoption of Rule 12805 of the Code of Arbitration Procedure for Customer Disputes, FINRA set forth specific procedural requirements for arbitrators considering a request for expungement relief.3 The new rule adds the following significant procedural hurdles by requiring an arbitration panel to do the following before granting expungement:  

  • Hold a recorded hearing, by phone or in person, to consider the expungement request, even in a simplified arbitration;
  • If expungement is sought after the parties settled the underlying dispute, the panel must review the settlement agreement and consider the amount paid by parties, and the settlement terms;
  • Provide a written explanation for granting the relief under the facts presented and identify which of the Rule 2130 grounds for expungement exist; and,
  • Assess forum fees against the parties requesting relief.  

Click here for a full text of Rule 12805 and here for a full text of Rule 13805.

In addition, FINRA will require all arbitrators to complete training and certify that they are familiar with the new rules prior to considering any request for expungement under Rule 2130. The practical effect of the new rule is to make it more difficult and expensive to obtain expungement, even if one of the grounds under Rule 2130 can be established.