SEC likely to approve prohibition of pre-case motions to dismiss

InvestmentNews (November 2, 2008 11:01 pm) --  The Securities and Exchange Commission is expected to approve a controversial rule that would make dismissing arbitration cases more difficult.

The rule, proposed last March by the Financial Industry Regulatory Authority Inc. of New York and Washington, would prohibit motions to dismiss a claim before investors have had a chance to present their case.

Motions to dismiss are typically made by respondent brokerage firms.

Arbitration panels rarely grant such motions, but Finra and the SEC have been concerned that excessive use of motions can be abusive and can intimidate investors.

Finra expects approval of the rule "in the next month or so," Linda Fienberg, head of the regulator's dispute resolution unit, said at the annual conference of the Public Investors Arbitration Bar Association of Norman, Okla., late last month.

Approval is seen as a win for the plaintiff's bar.

"It's a win for the [arbitration] process," said PIABA president Brian Smiley, a partner at Smiley Bishop Porter LLP in Atlanta.

Motions to dismiss are "very legalistic, in a forum that's not legalistic," he said.

"By eliminating [motions to dismiss] until after the claimant puts on his or her case, we're getting back to arbitration as an expedited substitute to litigation," said David Robbins, a partner at Kaufmann Feiner Yamin Gildin & Robbins LLP of New York.

"It's a way to reduce the [motion-related] issues presented to arbitrators," he said.

Plaintiff's attorneys say the complexity and expense of defending against dismissal motions can intimidate investors.


The industry, however, is hotly opposed to any efforts that would impede its ability to throw out frivolous cases.

Travis Larson, spokesman for the Securities Industry and Financial Markets Association Inc. of New York and Washington, declined to comment.

Last April, SIFMA detailed its concerns in a comment letter.

The Wall Street trade group is worried that, among other problems, industry managers and clearing firms could still be improperly sued without a chance of the claim against them being dismissed before a hearing is held.

"Proper motions to dismiss should be encouraged, not stigmatized," SIFMA said in its comment letter.

In its filing, Finra said investors should have the right to a hearing.

"We think [the proposal is] a workable solution," Ms. Fienberg told PIABA members last month.

Should the rule be approved, customer claimants may still face motions to dismiss, Mr. Smiley said, "but it's preferable that the arbitrators have an opportunity to hear the [claimant's] story" before ruling on dismissal.

"There's no other way to do it," he said. "There are no depositions and discovery as you [have] in court."

Finra and its predecessor organization, NASD, have never had a rule dealing with dismissal motions.

The proposal now pending at the SEC would be a first. The rule would allow some cases to be dismissed prior to a hearing, but only if the parties settled, the respondent was not associated with the investor's account, or if the case did not meet Finra's six-year eligibility rule, which is an informal statute of limitations.

An arbitration panel would have to vote unanimously to grant a pre-hearing motion to dismiss.

In comment letters, industry observers pushed to have branch managers and executives included as exceptions for a pre-hearing dismissal. But in a letter to the SEC in September responding to comments, Finra said the exception for a respondent who was not associated with an account would be applied "narrowly, such as in cases involving issues of misidentification."

Supervisors or managers who could be liable for a failure to supervise could not be dismissed prior to a hearing, Finra said.

Likewise, regarding industry efforts to exempt clearing firms from the rule, Finra said courts have found that clearing firms may be liable for the misdeeds of their introducing firms.

The argument over dismissal motions has raged since at least 2003, when Finra proposed a motions rule as part of a code revision. But that proposal was pulled in the face of controversy. Another motions rule was filed in 2006. But it, too, was yanked due to negative feedback. In March of this year Finra took another shot at the issue by proposing the current version of the rule.

Finra granted the SEC four time extensions to consider the latest proposal.