
[Federal Register: March 20, 2008 (Volume 73, Number 55)]
[Notices]               
[Page 15019-15025]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20mr08-73]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57497; File No. SR-FINRA-2007-021]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Relating to Amendments to the Code of Arbitration Procedure for 
Customer Disputes and the Code of Arbitration Procedure for Industry 
Disputes To Address Motions To Dismiss and To Amend the Eligibility 
Rule Related to Dismissals


    March 14, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
Financial Industry Regulatory Authority, Inc. (``FINRA'') (f/k/a 
National Association of Securities Dealers, Inc. (``NASD'')) filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') on 
November 2, 2007, and amended on February 13, 2008 (Amendment No. 1), 
the proposed rule change as described in Items I, II, and III below, 
which Items have been substantially prepared by FINRA Dispute 
Resolution. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA Dispute Resolution is proposing to amend NASD Rules 12206 and 
12504 of the Code of Arbitration Procedure for Customer Disputes 
(``Customer Code'') and NASD Rules 13206 and 13504 of the Code of 
Arbitration Procedure for Industry Disputes (``Industry Code'') by 
providing specific procedures that will govern motions to dismiss, and 
amending the provision of the eligibility rule related to dismissals. 
Below is the text of the proposed rule change. Proposed new language is 
in italics; proposed deletions are in brackets.
* * * * *
12206. Time Limits

    (a) No change.
    (b) Dismissal under Rule
    Dismissal of a claim under this rule does not prohibit a party from 
pursuing the claim in court. By filing a motion to

[[Page 15020]]

dismiss a claim under this rule, the moving party agrees that if the 
panel dismisses a claim under this rule, the non-moving party may 
withdraw any remaining related claims without prejudice and may pursue 
all of the claims in court.
    (1) Motions under this rule must be made in writing, and must be 
filed separately from the answer, and only after the answer is filed.
    (2) Unless the parties agree or the panel determines otherwise, 
parties must serve motions under this rule at least 90 days before a 
scheduled hearing, and parties have 30 days to respond to the motion.
    (3) Motions under this rule will be decided by the full panel.
    (4) The panel may not grant a motion under this rule unless an in-
person or telephonic prehearing conference on the motion is held or 
waived by the parties. Prehearing conferences to consider motions under 
this rule will be recorded as set forth in Rule 12606.
    (5) If the panel grants a motion under this rule (in whole or 
part), the decision must be unanimous, and must be accompanied by a 
written explanation.
    (6) If the panel denies a motion under this rule, a party may not 
re-file the denied motion, unless specifically permitted by panel 
order.
    (7) If the party moves to dismiss on multiple grounds including 
eligibility, the panel must decide eligibility first.
     If the panel grants the motion to dismiss the case on 
eligibility grounds on all claims, it shall not rule on any other 
grounds for the motion to dismiss.
     If the panel grants the motion to dismiss on eligibility 
grounds on some, but not all claims, and the party against whom the 
motion was granted elects to move the case to court, the panel shall 
not rule on any other ground for dismissal for 15 days from the date of 
service of the panel's decision to grant the motion to dismiss on 
eligibility grounds.
     If a panel dismisses any claim on eligibility grounds, the 
panel must record the dismissal on eligibility grounds on the face of 
its order and any subsequent award the panel may issue.
     If the panel denies the motion to dismiss on eligibility 
grounds, it shall rule on the other bases for the motion to dismiss the 
remaining claims in accordance with the procedures set forth in Rule 
12504(a).
    (8) If the panel denies a motion under this rule, the panel must 
assess forum fees associated with hearings on the motion against the 
moving party.
    (9) If the panel deems frivolous a motion filed under this rule, 
the panel must also award reasonable costs and attorneys' fees to any 
party that opposed the motion.
    (10) The panel also may issue other sanctions under Rule 12212 if 
it determines that a party filed a motion under this rule in bad faith.
    (c)-(d) No change.
* * * * *

Rule 12504. [Reserved] Motions to Dismiss

    (a) Motions to Dismiss Prior to Conclusion of Case in Chief
    (1) Motions to dismiss a claim prior to the conclusion of a party's 
case in chief are discouraged in arbitration.
    (2) Motions under this rule must be made in writing, and must be 
filed separately from the answer, and only after the answer is filed.
    (3) Unless the parties agree or the panel determines otherwise, 
parties must serve motions under this rule at least 60 days before a 
scheduled hearing, and parties have 45 days to respond to the motion.
    (4) Motions under this rule will be decided by the full panel.
    (5) The panel may not grant a motion under this rule unless an in-
person or telephonic prehearing conference on the motion is held or 
waived by the parties. Prehearing conferences to consider motions under 
this rule will be recorded as set forth in Rule 12606.
    (6) The panel cannot act upon a motion to dismiss a party or claim 
under paragraph (a) of this rule, unless the panel determines that:
    (A)  the non-moving party previously released the claim(s) in 
dispute by a signed settlement agreement and/or written release; or
    (B) the moving party was not associated with the account(s), 
security(ies), or conduct at issue.
    (7) If the panel grants a motion under this rule (in whole or 
part), the decision must be unanimous, and must be accompanied by a 
written explanation.
    (8) If the panel denies a motion under this rule, the moving party 
may not re-file the denied motion, unless specifically permitted by 
panel order.
    (9) If the panel denies a motion under this rule, the panel must 
assess forum fees associated with hearings on the motion against the 
moving party.
    (10) If the panel deems frivolous a motion filed under this rule, 
the panel must also award reasonable costs and attorneys' fees to any 
party that opposed the motion.
    (11) The panel also may issue other sanctions under Rule 12212 if 
it determines that a party filed a motion under this rule in bad faith.
    (b) Motions to Dismiss After Conclusion of Case in Chief
    A motion to dismiss made after the conclusion of a party's case in 
chief is not subject to the procedures set forth in subparagraph (a).
    (c) Motions to Dismiss Based on Eligibility
    A motion to dismiss based on eligibility filed under Rule 12206 
will be governed by that rule.
    (d) Motions to Dismiss Based on Failure to Comply with Code or 
Panel Order
    A motion to dismiss based on failure to comply with any provision 
in the Code, or any order of the panel or single arbitrator filed under 
Rule 12212 will be governed by that rule.
    (e) Motions to Dismiss Based on Discovery Abuse
    A motion to dismiss based on discovery abuse filed under Rule 12511 
will be governed by that rule.
* * * * *
13206. Time Limits

    (a) No change.
    (b) Dismissal under Rule
    Dismissal of a claim under this rule does not prohibit a party from 
pursuing the claim in court. By filing a motion to dismiss a claim 
under this rule, the moving party agrees that if the panel dismisses a 
claim under this rule, the non-moving party may withdraw any remaining 
related claims without prejudice and may pursue all of the claims in 
court.
    (1) Motions under this rule must be made in writing, and must be 
filed separately from the answer, and only after the answer is filed.
    (2) Unless the parties agree or the panel determines otherwise, 
parties must serve motions under this rule at least 90 days before a 
scheduled hearing, and parties have 30 days to respond to the motion.
    (3) Motions under this rule will be decided by the full panel.
    (4) The panel may not grant a motion under this rule unless an in-
person or telephonic prehearing conference on the motion is held or 
waived by the parties. Prehearing conferences to consider motions under 
this rule will be recorded as set forth in Rule 13606.
    (5) If the panel grants a motion under this rule (in whole or 
part), the decision must be unanimous, and must be accompanied by a 
written explanation.
    (6) If the panel denies a motion under this rule, a party may not 
re-file the denied motion, unless specifically permitted by panel 
order.
    (7) If the party moves to dismiss on multiple grounds including 
eligibility, the panel must decide eligibility first.
     If the panel grants the motion to dismiss the case on 
eligibility grounds

[[Page 15021]]

on all claims, it shall not rule on any other grounds for the motion to 
dismiss.
     If the panel grants the motion to dismiss on eligibility 
grounds on some, but not all claims, and the party against whom the 
motion was granted elects to move the case to court, the panel shall 
not rule on any other ground for dismissal for 15 days from the date of 
service of the panel's decision to grant the motion to dismiss on 
eligibility grounds.
     If a panel dismisses any claim on eligibility grounds, the 
panel must record the dismissal on eligibility grounds on the face of 
its order and any subsequent award the panel may issue.
     If the panel denies the motion to dismiss on eligibility 
grounds, it shall rule on the other bases for the motion to dismiss the 
remaining claims in accordance with the procedures set forth in Rule 
13504(a).
    (8) If the panel denies a motion under this rule, the panel must 
assess forum fees associated with hearings on the motion against the 
moving party.
    (9) If the panel deems frivolous a motion filed under this rule, 
the panel must also award reasonable costs and attorneys' fees to any 
party that opposed the motion.
    (10) The panel also may issue other sanctions under Rule 13212 if 
it determines that a party filed a motion under this rule in bad faith.
    (c)-(d) No change.
* * * * *
13504. [Reserved] Motions to Dismiss

    (a) Motions to Dismiss Prior to Conclusion of Case in Chief
    (1) Motions to dismiss a claim prior to the conclusion of a party's 
case in chief are discouraged in arbitration.
    (2) Motions under this rule must be made in writing, and must be 
filed separately from the answer, and only after the answer is filed.
    (3) Unless the parties agree or the panel determines otherwise, 
parties must serve motions under this rule at least 60 days before a 
scheduled hearing, and parties have 45 days to respond to the motion.
    (4) Motions under this rule will be decided by the full panel.
    (5) The panel may not grant a motion under this rule unless an in-
person or telephonic prehearing conference on the motion is held or 
waived by the parties. Prehearing conferences to consider motions under 
this rule will be recorded as set forth in Rule 13606.
    (6) The panel cannot act upon a motion to dismiss a party or claim 
under paragraph (a) of this rule, unless the panel determines that:
    (A) the non-moving party previously released the claim(s) in 
dispute by a signed settlement agreement and/or written release; or
    (B) the moving party was not associated with the account(s), 
security(ies), or conduct at issue.
    (7) If the panel grants a motion under this rule (in whole or 
part), the decision must be unanimous, and must be accompanied by a 
written explanation.
    (8) If the panel denies a motion under this rule, the moving party 
may not re-file the denied motion, unless specifically permitted by 
panel order.
    (9) If the panel denies a motion under this rule, the panel must 
assess forum fees associated with hearings on the motion against the 
moving party.
    (10) If the panel deems frivolous a motion filed under this rule, 
the panel must also award reasonable costs and attorneys' fees to any 
party that opposed the motion.
    (11) The panel also may issue other sanctions under Rule 13212 if 
it determines that a party filed a motion under this rule in bad faith.
    (b) Motions to Dismiss After Conclusion of Case in Chief
    A motion to dismiss made after the conclusion of a party's case in 
chief is not subject to the procedures set forth in subparagraph (a).
    (c) Motions to Dismiss Based on Eligibility
    A motion to dismiss based on eligibility filed under Rule 13206 
will be governed by that rule.
    (d) Motions to Dismiss Based on Failure to Comply with Code or 
Panel Order
    A motion to dismiss based on failure to comply with any provision 
in the Code, or any order of the panel or single arbitrator filed under 
Rule 13212 will be governed by that rule.
    (e) Motions to Dismiss Based on Discovery Abuse
    A motion to dismiss based on discovery abuse filed under Rule 13511 
will be governed by that rule.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA \3\ proposes to provide specific procedures to govern motions 
to dismiss, and to amend the provision of the eligibility rule related 
to dismissals. The proposal is designed to ensure that parties would 
have their claims heard in arbitration, by significantly limiting the 
grounds for filing motions to dismiss 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 rule.
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    \3\ Although some of the events referenced in this rule filing 
occurred prior to the formation of FINRA through consolidation of 
NASD and the member regulatory functions of NYSE Regulation, the 
rule filing refers to FINRA throughout for simplicity.
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Background
    The Code of Arbitration Procedure that was in use prior to April 
16, 2007, did not address motion practice.\4\ Because motions were 
becoming increasingly common in arbitration, FINRA proposed to include 
in its revision of the entire Code of Arbitration Procedure (Code 
Revision) some guidance for parties and arbitrators with respect to 
motions practice.
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    \4\ The Customer and Industry Codes became effective on April 
16, 2007, for claims filed on or after that date; the old Code 
continues to apply to pending cases until their conclusion.
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    The Code Revision, as initially filed with the SEC in 2003, 
contained a rule that would have permitted a panel to grant a motion to 
decide claims before a hearing on the merits (a ``dispositive motion'') 
only under extraordinary circumstances. FINRA proposed this rule in an 
attempt to address concerns raised by investors' counsel, SEC staff and 
other constituent groups about abusive and duplicative filing of 
dispositive motions. Specifically, FINRA received complaints that 
parties (typically respondent \5\ firms) were filing dispositive 
motions routinely and repetitively in an apparent effort to delay 
scheduled hearing sessions on the merits, increase investors' costs 
(typically claimants \6\), and intimidate less sophisticated 
parties.\7\ In some

[[Page 15022]]

cases, if a party did not receive a favorable ruling on a dispositive 
motion filed at a particular stage in an arbitration proceeding, that 
party would re-file the same or a similar dispositive motion at a later 
time, which often served only to increase investors' costs and delay 
the hearing and the issuance of any award. Moreover, FINRA learned 
through various constituent and focus groups that some respondents' 
attorneys were being counseled by their law firms that an acceptable 
and useful tactic was to file multiple dispositive motions at various 
stages of an arbitration proceeding.
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    \5\ A respondent is a party against whom a statement of claim or 
third party claim has been filed.
    \6\ A claimant is a party that files the statement of claim and 
other documents that initiate an arbitration.
    \7\ For example, the Securities Arbitration Commentator 
published a study in Fall 2006 on motions to dismiss in customer 
cases, which concludes that, in the universe of cases that went to 
award, there were motions to dismiss in 28% of the cases in 2006 as 
compared to 10% in 2004. Securities Arbitration Commentator, Nov. 
2006 (Vol. 2006, No. 5), at 3.
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    When the Code Revision was published for comment in the Federal 
Register, commenters opposed the dispositive motion rule for a variety 
of reasons. Therefore, FINRA removed the rule from the Code Revision 
and re-filed it separately.\8\ The SEC then approved the Code Revision 
without the dispositive motion rule.\9\
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    \8\ See Securities Exchange Act Release No. 54360 (August 24, 
2006); 71 FR 51879 (August 31, 2006) (SR-NASD-2006-088) (notice).
    \9\ See Securities Exchange Act Release No. 55158 (January 24, 
2007); 72 FR 4574 (January 31, 2007) (SR-NASD-2003-158 and SR-NASD-
2004-011) (approval order).
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Prior Dispositive Motion Proposal
    As re-filed with the SEC, the dispositive motion proposal would 
have permitted a panel to grant a dispositive motion prior to an 
evidentiary hearing only under extraordinary circumstances. \10\ The 
SEC published the proposal for public comment on August 31, 2006, and 
received over 60 comment letters,\11\ the majority of which opposed the 
proposal. The comments and FINRA's response are discussed in Section 5 
below.
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    \10\ See note 8.
    \11\ See Comments on File No. SR-NASD-2006-088, Notice of Filing 
of Proposed Rule Change Relating to Motions to Decide Claims Before 
a Hearing on the Merits, available at http://www.sec.gov/comments/
sr-nasd-2006-088/nasd2006088.shtml (last visited October 5, 2007).
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    Based on the comments, FINRA recognized that the proposal did not 
provide effective guidance on how dispositive motions would be handled 
in the forum. Because the comments indicated that various issues 
involving dispositive motions required more guidance, FINRA withdrew 
the dispositive motion proposal, and filed a new proposed rule change 
to provide specific procedures that would govern motions to dismiss. 
FINRA also proposes to amend the separate rule governing dismissals 
made on eligibility grounds.
Motions To Dismiss on Other Than Eligibility Grounds
    FINRA filed the proposed rule change to provide specific procedures 
that would govern motions to dismiss. Generally, FINRA believes that 
parties have the right to a hearing in arbitration. In certain very 
limited circumstances, however, it would be unfair to require a party 
to proceed to a hearing. The proposal is designed to balance these 
competing interests. The proposal should ensure that parties \12\ have 
their claims heard in arbitration, by significantly limiting the 
grounds for filing motions to dismiss prior to conclusion of a party's 
case in chief and by imposing stringent sanctions against parties for 
engaging in abusive practices under the rule. The proposal would permit 
parties to file a motion to dismiss at the conclusion of a party's case 
in chief, based on any theory of law.
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    \12\ For purposes of the proposal, a party could be an initial 
claimant, respondent, counterclaimant, cross claimant, or third 
party claimant and his or her motion to dismiss would be subject to 
Rules 12206 and 12504 of the Customer Code or Rules 13206 and 13504 
of the Industry Code.
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    The proposed rule change would govern motions to dismiss filed 
prior to the conclusion of a party's case in chief (under the Customer 
Code or Industry Code, as applicable), as discussed in further detail 
below.
Discourage Motions To Dismiss a Claim Prior to a Party's Case in Chief
    The proposed rule change would clarify that motions to dismiss a 
claim prior to a party's case in chief are discouraged in arbitration. 
FINRA believes that parties have the right to a hearing in arbitration, 
and only in certain very limited circumstances should that right be 
challenged. This provision would not apply to motions filed on the 
basis of eligibility grounds, as discussed below.
Require That Motions To Dismiss Be Filed in Writing, Separately From 
the Answer, and After the Answer Is Filed
    FINRA believes that requiring a party to file a motion to dismiss 
in writing separately from the answer and only after the answer is 
filed would deter parties from filing these motions routinely in lieu 
of an answer, and would prevent parties from combining a motion to 
dismiss with an answer. This provision should ensure that parties 
receive an answer that responds directly to the statement of claim.
Filing Deadlines
    The proposed rule change would require parties to serve motions 
under this provision at least 60 days before a scheduled hearing and 
would provide 45 days to respond to a motion unless the parties agree 
or the panel determines otherwise. FINRA believes that requiring a 
motion to dismiss to be served at least 60 days before a scheduled 
hearing and providing 45 days for a party to respond to such a motion 
would prevent the moving party from filing a motion shortly before a 
hearing as a surprise tactic to force a delay in the arbitration 
process.
Require the Full Panel To Decide Motions To Dismiss
    The proposal would require the full panel to decide motions to 
dismiss. Given the ramifications of granting a motion to dismiss, FINRA 
believes that each member of the panel should be required to hear the 
parties' arguments, so that each panel member may make an informed 
decision when ruling on the motion.
Require an Evidentiary Hearing
    Under the proposal, the panel may not grant a motion to dismiss 
prior to the conclusion of a party's case in chief unless the panel 
holds an in-person or telephonic prehearing conference on the motion 
that is recorded in accordance with Rule 12606 or Rule 13206, unless 
such conference is waived by the parties. FINRA believes this 
requirement would ensure that the panel holds a hearing on the motion 
and that the panel has sufficient information to make a ruling.
Limited Grounds on Which a Motion May Be Granted
    FINRA proposes to limit the grounds on which a panel may act upon a 
motion to dismiss prior to the conclusion of the party's case in chief. 
The proposal states that a panel may act upon a motion to dismiss only 
after the party rests its case in chief unless the panel determines 
that:
     The non-moving party previously released the claim(s) in 
dispute by a signed settlement agreement and/or written release; or
     the moving party was not associated with the account(s), 
security(ies), or conduct at issue.\13\

    \13\ A motion to dismiss on eligibility grounds would be 
governed by Rules 12206 and 13206 of the Customer and Industry Code, 
respectively; the amendments to those rules are discussed below.

FINRA believes that limiting the grounds on which a motion to dismiss 
may be granted prior to the conclusion

[[Page 15023]]

of the party's case in chief would minimize the potential for abusive 
practices and ensure that most parties' claims would be heard in the 
forum.
Require a Unanimous, Explained, Written Decision To Grant a Motion To 
Dismiss
    The proposal would require a unanimous decision by the panel to 
grant a motion to dismiss as well as a written explanation of the 
decision in the award. Under the proposal, each member of the panel 
must agree to grant a motion to dismiss. FINRA believes that because 
these decisions are an integral part of the arbitration process, all 
panel members should agree to dismiss a claim; otherwise the case 
should continue. Moreover, the provision that requires the panel to 
provide a written explanation of its decision would help parties 
understand the panel's rationale for its decision.
Require Permission From the Arbitrators To Re-File a Denied Motion To 
Dismiss
    Under the proposal, a party would be prohibited from re-filing a 
denied motion to dismiss, unless specifically permitted by a panel 
order. FINRA believes this limitation would serve to expedite the 
arbitration process and minimize parties' costs.
Require Arbitrators To Award Fees Associated With Denied Motions To 
Dismiss and To Award Fees and Costs Associated With Frivolously Filed 
Motions To Dismiss
    The proposal would also require that the panel assess forum fees 
associated with hearings on the motion to dismiss against the party 
filing the motion to dismiss, if the panel denies the motion. Further, 
if the panel deems frivolous a motion filed under this rule, the panel 
must award reasonable costs and attorneys' fees to a party that opposed 
the motion. FINRA believes that imposing monetary penalties would 
minimize abusive practices involving motions to dismiss and would deter 
parties from filing such motions frivolously.
Permit Sanctions for Motion To Dismiss Filed in Bad Faith
    If the panel determines that a party filed a motion under this rule 
in bad faith, the panel also may issue sanctions under Rule 12212 or 
Rule 13212. FINRA believes that these stringent sanction requirements 
would provide panels with additional enforcement mechanisms to address 
abusive practices involving motions to dismiss if other deterrents 
prove ineffective.
    When a moving party (governed by the Customer Code or Industry 
Code, as applicable) files a motion to dismiss at the conclusion of a 
party's case in chief, the provisions governing motions to dismiss 
filed prior to the conclusion of a party's case in chief discussed 
above would not apply. Thus, a moving party could file a motion to 
dismiss at the conclusion of a party's case in chief, based on any 
theory of law. The rule, however, would not preclude the panel under 
this scenario from issuing an explanation of its decision if it grants 
the motion, or awarding costs or fees to the party that opposed the 
motion if it denies the motion.
    FINRA believes that permitting a moving party to file a motion to 
dismiss at the conclusion of a party's case in chief should balance the 
goal of ensuring that non-moving parties have their claims heard by a 
panel against the rights of moving parties to challenge a claim they 
believe lacks merit or has not been proved. Moreover, FINRA believes 
that arbitrators should be permitted to entertain and act upon a motion 
to dismiss at this stage of a hearing to minimize the moving parties' 
incurring unnecessary additional attorneys' fees and forum fees. If a 
claimant has presented its case in chief and clearly failed to present 
sufficient evidence to support a claim, then the moving party should 
not be forced to incur the additional expenses and costs associated 
with unnecessary hearings.
    The proposal provides that motions to dismiss based on failure to 
comply with code or panel order under Rule 12212 or 13212, as 
applicable, would be governed by that rule. Further, the proposal 
provides that motions to dismiss based on discovery abuse filed under 
Rule 12511 or 13511, as applicable, would be governed by that rule.
Amendments to the Dismissal Provision of the Eligibility Rule
    FINRA proposes to amend Rules 12206(b) and 13206(b) of the Customer 
and Industry Codes, respectively, to address motions to dismiss made on 
eligibility grounds. Under this proposal, a party may file a motion to 
dismiss on eligibility grounds at any stage of the proceeding (after 
the answer is filed), except that a party may not file this motion any 
later than 90 days before the scheduled hearing on the merits. FINRA is 
also proposing to amend the rule to address the res judicata defense 
claimants could encounter when they attempt to pursue in court a claim 
dismissed in arbitration, when the grounds for the dismissal are 
unclear.
    The first issue FINRA addresses with the proposal is amending Rules 
12206(b) and 13206(b) to establish procedures for motions to dismiss 
made on eligibility grounds. In light of the new motions to dismiss 
proposal, FINRA believes that similar changes should be incorporated 
into the existing eligibility rule to provide procedures and guidance 
for dealing with motions to dismiss made on eligibility grounds. The 
proposed changes to the eligibility rule contain most of the same 
provisions as those contained in the proposed motions to dismiss rule 
(discussed above), except for those criteria that are not applicable to 
eligibility motions, that is, the two other grounds on which a panel 
may grant a motion to dismiss before a party has presented its case in 
chief (i.e., signed settlement and written release and factual 
impossibility).
    In addition, the filing deadlines would be different from those in 
the motions to dismiss proposal. Under the proposed rule, a party may 
file a motion to dismiss on eligibility grounds at any stage of the 
proceeding (after the answer is filed), except that a party may not 
file this motion any later than 90 days before the scheduled hearing on 
the merits. FINRA believes that this requirement would encourage moving 
parties to determine in the early stages of the case whether to pursue 
their claims in court or to proceed with the arbitration. Further, 
FINRA believes that this requirement would prevent the moving party 
from filing this motion shortly before a hearing as a surprise tactic 
to force a delay in the arbitration process.
    The proposal also would provide parties with 30 days to respond to 
an eligibility motion. If a panel grants a motion to dismiss a party's 
claim based on eligibility grounds, that party must re-file the claim 
in court to pursue its remedies, which could further delay resolution 
of the dispute. Therefore, FINRA is proposing the 30-day timeframe to 
respond to eligibility motions to expedite the process, so that the 
time between filing a claim and resolution of the dispute is shortened.
    The second issue concerns potential problems in the implementation 
of the eligibility rule since it was last amended in 2005. Currently, 
the eligibility rule makes clear that dismissal of a claim on 
eligibility grounds in arbitration does not preclude a party from 
pursuing the claim in court; it provides that, by requesting dismissal 
of a claim under the rule, the requesting party is agreeing that the 
non-moving party may withdraw any remaining related claims

[[Page 15024]]

without prejudice and may pursue all of the claims in court.\14\
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    \14\ Rule 12206(b) of the Customer Code and Rule 13206(b) of the 
Industry Code.
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    In certain situations, when a claim is dismissed under the 
eligibility rule, FINRA understands that claimants have had difficulty 
proceeding with their claims in court, because respondents have 
asserted a res judicata defense when the panel's grounds for dismissing 
the arbitration claim were unclear. For example, if a respondent files 
a motion to dismiss based on several grounds, including eligibility, 
and the panel issues an order dismissing a claim, but without citing 
reasons, the claimants would not know whether or not they are afforded 
the right to pursue the claim in court, as provided by the rule. If the 
claimants proceed to file the dismissed claim in court, the respondents 
may argue that the panel's decision on the claim is the final decision, 
and that claimants are barred from having the court decide the same 
claim again. In such a case, claimants would be required to prove that 
the dismissal was based on eligibility, not the other grounds for 
dismissal that the respondents raised. This would be difficult or 
impossible if the arbitrator or panel did not explain the reasons for 
the dismissal.
    FINRA proposes to amend the eligibility rule to address this issue. 
The rule would be amended to provide that, when a party files a motion 
to dismiss on multiple grounds, including eligibility, the panel must 
consider the threshold issue of eligibility first. First, the rule 
would be amended to require that if the panel grants the motion to 
dismiss on eligibility grounds on all claims, it shall not rule on any 
other grounds for the motion to dismiss. Second, the rule would be 
amended to require that if the panel grants the motion to dismiss on 
eligibility grounds, on some, but not all claims, and the non-moving 
party elects to move the case to court, the panel shall not rule on any 
other ground for dismissal for 15 days from the date of service of the 
panel's decision to grant the motion to dismiss on eligibility grounds. 
Third, the rule would be amended to require that, when arbitrators 
dismiss any claim on eligibility grounds, that fact must be stated on 
the face of their order and any subsequent award the panel may issue. 
And fourth, if the panel denies the motion to dismiss on the basis of 
eligibility, it shall rule on the other bases for the motion to dismiss 
the remaining claims in accordance with the motions to dismiss rule. 
FINRA believes that the proposed amendments will close a loophole that 
has resulted from implementing the rule by eliminating the res judicata 
defense that claimants could face when they attempt to pursue claims in 
court that were dismissed in arbitration on eligibility grounds.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act, which requires, among other 
things, that FINRA rules must be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change would 
enhance investor confidence in the fairness and neutrality of FINRA's 
arbitration forum by ensuring that non-moving parties have their claims 
heard in arbitration, while preserving the moving parties' rights to 
challenge the necessity of a hearing in certain limited circumstances. 
Further, the proposed changes to the eligibility rule would help 
prevent manipulative practices by closing a loophole in the rule, so 
that parties may pursue their claims in court without facing an 
unintended legal impediment, in the event their claims are dismissed in 
arbitration on eligibility grounds.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change would result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received by FINRA. The 
SEC received 63 comments on the prior dispositive motion proposal that 
was published for comment on August 31, 2006.\15\ In general, most 
commenters

[[Page 15025]]

opposed the prior proposal and argued that it would, among other 
things, encourage, rather than discourage, the making of dispositive 
motions; have a chilling effect on the ability of investors to have all 
evidence judged and the credibility and veracity of witnesses weighed; 
and result in a loss of the major benefits of the arbitration process--
cost effectiveness and expediency.
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    \15\ Comment letters were submitted by Paul R. Meyer, Esq., 
dated July 26, 2006 (``Meyer Letter''); Seth E. Lipner, Professor of 
Law, Zicklin School of Business, dated August 29, 2006 (``Lipner 
Letter''); Kevin Thomas Hoffman, Esq., dated September 8, 2006 
(``Hoffman Letter''); Randall R. Heiner, Esq., dated September 12, 
2006 (``Heiner Letter''); Joseph C. Korsak, Esq., dated September 
13, 2006 (``Korsak Letter''); Philip M. Aidikoff, Esq., Aidikoff, 
Uhl Bakhtiari, dated September 13, 2006 (``Aidikoff Letter''); Barry 
D. Estell, Esq., dated September 13, 2006 (``Estell Letter''); 
Daniel A. Ball, Esq., Ball Associates, dated September 14, 2006 
(``Ball Letter''); Stuart E. Finer, Esq., dated September 21, 2006 
(``Finer Letter''); Barbara Black, Director, University of 
Cincinnati College of Law and Jill I. Gross, Director, Pace 
University School of Law, dated September 21, 2006 (``Black and 
Gross Letter''); Robert S. Banks, Jr., President, Public Investors 
Arbitration Bar Association, dated September 21, 2006 (``PIABA 
Letter''); Tim Canning, Esq., Law Offices of Timothy A. Canning, 
dated September 21, 2006 (``Canning Letter''); Gary Pieples, 
Director, Syracuse University Securities Arbitration and Consumer 
Clinic, dated September 22, 2006 (``Pieples Letter''); Scot D. 
Bernstein, Esq., dated September 24, 2006; Robert C. Port, Esq., 
Cohen Goldstein Port & Gottlieb, LLP, dated September 25, 2006 
(``Port Letter''); William P. Torngren, Esq., dated September 25, 
2006 (``Torngren Letter''); Laurence S. Schultz, Esq., Driggers 
Schultz and Herbst; dated September 25, 2006 (``Schultz Letter''); 
Al Van Kampen, Esq., Rohde & Van Kampen PLLC, dated September 25, 
2006 (``Van Kampen Letter''); Allan J. Fedor, Esq., dated September 
26, 2006 (``Fedor Letter''); A. Daniel Woska, Esq., Woska & Hayes, 
LLP, dated September 25, 2006 (``Woska Letter''); Cliff Palefsky, 
Co-Chair ADR Committee, National Employment Lawyers Association, 
dated September 26, 2006 (``Palefsky Letter''); Steven B. Caruso, 
Esq., Maddox Hargett Caruso, P.C., dated September 27, 2006 
(``Caruso Letter''); Dale Ledbetter, Esq., Adorno & Yoss, dated 
September 27, 2006 (``Ledbetter Letter''); Noah H. Simpson, Esq., 
dated September 28, 2006 (``Simpson Letter I''); Stephen P. Meyer, 
Esq., PIABA, dated September 29, 2006 (``Meyer Letter''); Edward G. 
Turan, Chair, Arbitration and Litigation Committee, Securities 
Industry Association, dated September 29, 2006 (``SIA Letter''); 
Joseph Fogel, Esq., Fogel & Associates, dated September 30, 2006 
(``Fogel Letter''); Henry Simpson, III, Simpson Woolley McConachie, 
L.L.P, dated October 2, 2006 (``Simpson Letter II''); Michael J. 
Willner, Esq., Miller Faucher and Cafferty LLP, dated October 3, 
2006 (``Willner Letter''); T. Michael Kennedy, P.C., dated October 
3, 2006 (``Kennedy Letter''); Richard A. Lewins, Burg Simpson 
Eldredge Hersh & Jardine P.C., dated October 3, 2006 (``Lewins 
Letter''); Val Hornstein, Esq., Hornstein Law Offices, dated October 
3, 2006 (``Hornstein Letter''); Steve Buchwalter, Esq., Law Offices 
of Steve A. Buchwalter, P.C., dated October 3, 2006 (``Buchwalter 
Letter''); W. Scott Greco, Esq., Greco & Greco, P.C., dated October 
3, 2006 (``Greco Letter''); Jeffrey B. Kaplan, Esq., dated October 
3, 2006 (``Kaplan Letter''); Jan Graham, Esq., Graham Law Offices, 
dated October 3, 2006 (``Graham Letter''); Thomas C. Wagner, Esq., 
Van Deusen & Wagner, LLC, dated October 3, 2006 (``Wagner Letter''); 
Scott R. Shewan, Esq., Born, Pape & Shewan LLP, dated October 3, 
2006 (``Shewan Letter''); Jeffrey S. Kruske, Esq., dated October 3, 
2006 (``Kruske Letter''); Gail E. Boliver, Esq., Boliver Law Firm, 
dated October 3, 2006 (``Boliver Letter''); Sarah G. Anderson, dated 
October 3, 2006 (``Anderson Letter''); Rob Bleecher, Esq., Pecht & 
Associates, PC, dated October 4, 2006 (``Bleecher Letter''); Robert 
Goehring, Esq., dated October 4, 2006 (``Goehring Letter''); Herbert 
E. Pounds, Jr., Esq., dated October 4, 2006 (``Pounds Letter''); 
Leonard Steiner, Esq., Steiner & Libo, Professional Corporation, 
dated October 4, 2006 (``Steiner Letter''); Harry S. Miller, Esq., 
Burns & Levenson LLP, dated October 4, 2006 (``Miller Letter''); 
Jonathan W. Evans, Esq., Jonathan W. Evans & Associates, dated 
October 4, 2006 (``Evans Letter''); Henry Simpson, Esq., Simpson 
Woolley McConachie, LLP, dated October 4, 2006 (``Simpson Letter 
III''); Eliot Goldstein, Esq., Law Offices of Eliot Goldstein LLP, 
dated October 4, 2006 (``Goldstein Letter''); Kyle M. Kulzer, Esq., 
Alan L. Frank Law Associates, P.C., dated October 4, 2006 (``Kulzer 
Letter''); Adam S. Doner, Esq., dated October 4, 2006 (``Doner 
Letter''); Brian N. Smiley, Esq., Gard Smiley Bishop & Porter LLP, 
dated October 4, 2006 (``Smiley Letter''); Frederick W. Rosenberg 
JD, dated October 4, 2006 (``Rosenberg Letter''); Theodore M. Davis, 
Esq., dated October 5, 2006 (``Davis Letter''); James D. Keeney, 
Esq., James D. Keeney, P.A., dated October 5, 2006 (``Keeney 
Letter''); Jorge A. Lopez, Esq., dated October 5, 2006 (``Lopez 
Letter''); Michael B. Lynch, Esq., Levin Papantonio Thomas Mitchell 
Echsner & Proctor P.A., dated October 5, 2006 (``Lynch Letter''); 
John Miller, Esq., dated October 10, 2006 (``Miller Letter''); 
Jenice L. Malecki, Esq., dated October 11, 2006 (``Malecki 
Letter''); Stuart Meissner, Esq., The Law Offices of Stuart D. 
Meissner LLC, dated October 13, 2006 (``Meissner Letter''); Howard 
Rosenfield, Esq., Law Offices of Howard M Rosenfield, dated December 
12, 2006 (``Rosenfield Letter''); Richard P. Ryder, Esq., Securities 
Arbitration Commentator, dated June 16, 2007 (``Ryder Letter''); and 
Bryan Lantagne, Chair, North American Securities Administrators 
Association, Inc. Broker-Dealer Arbitration Project Group, dated 
July 19, 2006 (``NASAA Letter'')(submitted as comment on SR-NASD-
2003-158).
---------------------------------------------------------------------------

    Some commenters who opposed the prior proposal argued that FINRA 
should adopt a rule that would prohibit all dispositive motions in 
arbitration. These commenters contended that the prior proposal would 
establish a procedure that would deprive investors of their fundamental 
right to a hearing in arbitration--a policy, they believe, is 
antithetical to the goals of arbitration.\16\ Another group of 
commenters indicated that they would support a modified version of the 
prior proposal if it included some safeguards. Some of the safeguards 
suggested by these commenters included prohibiting a panel from 
deciding a claim before a hearing until all documents have been 
produced by the parties; requiring a panel to deny a dispositive motion 
if there are disputed facts; requiring a panel to award costs and 
attorneys' fees to the party defending a dispositive motion if it is 
denied; and requiring a written explanation from the panel if the 
dispositive motion is granted.\17\
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    \16\ See, e.g., Estell, Finer, and Woska Letters.
    \17\ See, e.g., Ledbetter, Schultz and Torngren Letters.
---------------------------------------------------------------------------

    Based on the concerns raised by the commenters, FINRA realized that 
the prior proposal did not convey its position on dispositive motions 
effectively; and did not provide guidance on how the dispositive motion 
rule and noncompliance with the rule should be handled in its 
arbitration forum. Because the comments indicated that these positions 
were unclear, FINRA withdrew the prior proposal and filed this new 
proposal to replace it.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period: (i) As the Commission 
may designate up to 90 days of such date if it finds such longer period 
to be appropriate and publishes its reasons for so finding or (ii) as 
to which the self-regulatory organization consents, the Commission 
will:
(A) By order approve such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule change 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2007-021 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

    All submissions should refer to File Number SR-FINRA-2007-021. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to the File Number SR-INRA-2007-
021 and should be submitted on or before April 10, 2008. 

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon.
Deputy Secretary.
 [FR Doc. E8-5571 Filed 3-19-08; 8:45 am]

BILLING CODE 8011-01-P
