November 20, 2016 Practice Points

SEC Approves Rule Change Regarding Pre-Hearing Motions to Dismiss in FINRA Arbitrations

The approved rule change will amend Rules 12504 and 13504 by adding new language as Rule 12504(a)(6)(C) and 13504(a)(6)(C).

By Peter J. Tepley and Rebecca A. Beers

On November 10, 2016, the SEC announced its approval of a change proposed by FINRA to amend Rule 12504 of the FINRA Code of Arbitration Procedure for Customer Disputes and Rule 13540 of the Code of Arbitration Procedure for Industry Disputes. These amendments will become effective once FINRA issues a Regulatory Notice announcing the SEC's approval of the rule change and the amended rules' effective date. The change to these two rules will provide a new and additional basis for pre-hearing motions to dismiss in FINRA arbitrations. The SEC notes that, in general, this change to both the Customer and Industry Arbitration Codes will enable FINRA "arbitrators to act upon a motion to dismiss a party or a claim prior to the conclusion of a party's case in chief if the arbitrators determine that the non-moving party previously brought a claim regarding the same dispute against the same party, and the dispute was fully and finally adjudicated on the merits and memorialized in an order, judgment, award, or decision."

Specifically, the approved rule change will amend Rules 12504 and 13504 by adding the following language as Rule 12504(a)(6)(C) and 13504(a)(6)(C), respectively: "The non-moving party previously brought a claim regarding the same dispute against the same party that was fully and finally adjudicated on the merits and memorialized in an order, judgment, award, or decision." FINRA Rules 12100 and 13100 define "dispute" as "a dispute, claim or controversy .  .  . that . . . may consist of one of more claims."  

Previously, Rules 12504(a)(6) and 135404(a)(6) included only two grounds for motions to dismiss made prior to the completion of a party's case in chief, which were where "the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release" or where "the moving party was not associated with the account(s), security(ies), or conduct at issue." In advocating for the proposed rule change, FINRA observed that the proposed changes "would continue to permit the non-moving party to present evidence and testimony to the arbitrators concerning the merits of the motion prior to the decision on the motion" but that, under the new rule, arbitrators would be empowered to "grant a motion to dismiss relating to a particular controversy if they believe the matter was [previously] adjudicated fully even in instances where a claimant adds a new cause of action, or adds additional facts." Prior to the SEC's approval of the new addition to the grounds for motions to dismiss in FINRA arbitrations, FINRA noted that, after the implementation of the amendment, it planned to "train its arbitrators on the new rule emphasizing that the moving party must demonstrate that the non-moving party brought the same dispute against the same party and the non-moving party had a full opportunity to present its claims in the earlier proceeding." Some of FINRA's justifications for supporting this rule change were to prevent parties from being subject to legal fees for claims that had already been adjudicated and to protect against litigants using repeated filings as leverage in settlement negotiations. While FINRA did not provide statistics indicating that this rule change would affect a large number of proceedings, it did state that the change should reduce the costs of all parties to an arbitration in which such a motion is granted and would prevent litigants, especially pro se investors, from having to file or participate in separate proceedings in state and federal courts.

While this rule change obviously grants respondents (typically industry members and employees) an additional ground for moving to dismiss arbitration claims, FINRA asserts that the rule change was purposefully drafted narrowly and that FINRA had not changed its position that motions to dismiss filed prior to the conclusion of a party's case in chief are discouraged in FINRA arbitrations.

Peter J. Tepley is a partner and Rebecca A. Beers is an associate at Rumberger Kirk & Caldwell, P.C. in Birmingham, Alabama.


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Peter J. Tepley and Rebecca A. Beers – November 20, 2016