May 28, 2015


The FINRA Roach Motel: Dismissing a FINRA Arbitration
by Richard Roth in Inside the Litigation Lion

If being served with a Statement of Claim in a securities arbitration is not bad enough, you may be doubly blindsided by the fact that the result is like a roach motel – it is nearly impossible to get out. This is because unlike every other dispute resolution forum in the civilized world, one can be sanctioned for even making a motion to dismiss in a FINRA arbitration.

Motions to dismiss have long been a cornerstone for those falsely accused of wrongdoing. Simply put, a motion to dismiss is a procedural device used shortly after the commencement of a litigation wherein a defendant seeks for the immediate dismissal of the relief being sought. They are generally made at the onset of the litigation and/or arbitration in order to prevent the defendant from having to go through the expense of discovery and trial, just to disprove claims that, for legal reasons, never should have been brought. To succeed on such a motion, the defendant must primarily show that assuming all the asserted facts alleged in the pleading (i.e. the Statement of Claim) to be true, there is no basis in law that allows for a legal remedy.

Motions to dismiss are integral to the court system – they give defendants the opportunity to sidestep hundreds of thousands of dollars in legal fees and unnecessary time defending legally baseless claims. As for the courts, it clears up the docket by allowing judges to only adjudicate legitimate cases, freeing up court time and resources. How fundamental are motions to dismiss to the legal system? The motion has been a pillar of the legal process since the 13th century! Yet, FINRA thinks it knows better than centuries of Roman, British and United States law.

That is, despite the immediate and obvious benefits of this motion to both defendants and the courts, FINRA decided that protecting the innocent through standard judicial means is a fruitless effort. Its attempt to practically eliminate legitimate motions to dismiss is overreaching at worst, and arbitrary at best.

FINRA’s rules on motions to dismiss are entirely too restrictive; those served with Statements of Claims have three extremely limited grounds in which to file a motion to dismiss. While every federal and state courthouse in the U.S. provides a plethora of avenues in which to move to dismiss, FINRA Rule 12504 places a chokehold on traditional policies by only permitting motions based on: (i) lack of eligibility (i.e. Statute of Limitations); (ii) release; or (iii) the Respondent was “not associated with the account, securities or conduct.” Thus, there are three narrow ways in which a respondent may dismiss a case prior to an actual hearing, and that is it. Not only does the FINRA rule set a much higher bar than ordinary courts, but it also requires the arbitrators to “unanimous[ly]” agree to dismiss. If that were not enough, the FINRA rule also explicitly “discourage[s]” any motions to dismiss from being made and even threatens sanctions to any party filing such motion in bad faith.

What is the logical result? If you are sued, you are stuck! In other words, even if under the law a claimant cannot succeed on his claims, FINRA rules require a respondent to go through the very significant expense of taking discovery and holding a full blown evidentiary hearing before the arbitration panel is permitted to dismiss the claim. That result defies logic and serves one purpose only – to put the Claimant who filed the baseless claim in an unfair advantage to coerce a settlement.

What is the purpose of the rule one may ask? FINRA suggests that it is due to an abuse of motions to dismiss; that it is a “necessary” change to prevent delayed schedules and waste of resources. Even if this explanation were genuine, changes to the rules could be better implemented to actually address that supposed problem. For example, FINRA could institute a rule that would sanction a respondent for making a baseless motion to dismiss (i.e. a motion that is not supported by law). Such a rule at least arguably would address FINRA’s concerns. But simply removing a respondent’s legitimate ability to dismiss a legally baseless claim does not actually address the alleged problem. As a result, the only conceivable motive for FINRA’s actions are to give customers an unfair advantage in the arbitration. Either the broker agrees to settle the baseless claim at the commencement of the arbitration (a result that should be unnecessary if a broker were permitted to file a motion to dismiss), or the broker is forced to spend significant time and money defending the baseless claim.

FINRA has created a roach motel out of the arbitration process, and its virtual elimination of the motion to dismiss has made it clear that FINRA views the broker as the roach.

Read at wealthmanagement.com