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2016 Mitigating Risk: Key Litigation Developments

Financial Services >> Limitations on Motions to Dismiss in FINRA Arbitration

April 5, 2016

There are advantages to financial institutions in resolving disputes with investors through arbitration under the auspices of the Financial Industry Regulatory Authority (FINRA) rather than in court. These include streamlined procedures, reduced discovery costs, faster decisions, and finality. There are, however, important procedural issues to consider when approaching FINRA arbitrations, one of which is the near-total absence of a defendant’s ability to move for dismissal of claims before trial.

FINRA’s arbitration rules state that motions to dismiss prior to trial are discouraged. Although this mindset exists at many arbitration bodies, FINRA has codified this policy and, indeed, has taken it a step further. The pertinent rule expressly limits motions to dismiss prior to trial to two narrow and rare circumstances:

  • Where the non-moving party previously released the claims in dispute — i.e., the case already was settled; and
  • Where the moving party was not associated with the accounts, securities, or conduct at issue — essentially a “mistaken identity” situation.

In addition, FINRA’s rules separately provide for a motion to dismiss under FINRA’s six-year “eligibility” rule, which is similar to a statute of limitations. These rules preclude many traditional grounds for motions to dismiss, including state and federal statutes of limitations and arguments that the claimant has failed to state a claim by not alleging facts supporting one or more elements of the cause of action. Thus, some claims that would be dismissed at the pleading stage in court may proceed all the way to trial. In fact, FINRA’s rules are written broadly enough to prohibit all dispositive motions prior to trial — including summary judgment motions which typically play a central role in court proceedings.

Financial institutions should carefully consider this issue, along with the advantages of FINRA arbitration, when determining whether to include FINRA arbitration provisions in their contracts. Although a customer of a broker-dealer may demand FINRA arbitration even in the absence of such a provision, under certain circumstances the absence of an arbitration clause may reduce the likelihood that a dispute will be resolved in that forum. These considerations are particularly significant with regard to clients holding large or complex accounts, where the opportunity to bring a dispositive motion prior to trial may be particularly valuable.

Takeaways

  • Arbitrating under FINRA’s rules generally deprives defendants of the right to move to dismiss claims that are legally deficient on their face.
  • Financial institutions should carefully consider the merits of including FINRA arbitration clauses in contracts with certain customers, particularly those holding large accounts.

Author(s)

JAMES R. LEVINE
Partner
212.468.4985
jlevine@dglaw.com
Litigation