
[Federal Register: January 7, 2009 (Volume 74, Number 4)]
[Notices]               
[Page 731-743]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ja09-61]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59189; File No. SR-FINRA-2007-021]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, 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

December 31, 2008.

I. Introduction

    The 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), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 
relating to amendments to the Code of Arbitration Procedure for 
Customer Disputes (``Customer Code'') and the Code of Arbitration 
Procedure for Industry Disputes (``Industry Code,'' and together with 
the Customer Code, the ``Codes'') to address motions to dismiss and to 
amend the eligibility rule related to dismissals. The proposed rule 
change was published for comment in the Federal Register on March 20, 
2008.\3\ The Commission received 119 comments in response to the 
proposed rule change.\4\ This order approves the

[[Page 732]]

proposed rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57497 (March 14, 
2008), 73 FR 15019 (March 20, 2008) (SR-FINRA-2007-021) (notice).
    \4\ See Joseph C. Korsak, Esq., dated November 4, 2007 (``Korsak 
Letter''); Will Struyk, dated December 10, 2007 (``Struyk Letter''); 
Michael Thurman, Esq., Loeb & Loeb LLP, dated February 29, 2008 
(``Thurman Letter''); Prof. Seth E. Lipner, Esq., Baruch College 
dated March 18, 2008 (``Lipner Letter''); Leonard Steiner, Esq., 
dated March 18, 2008 (``Steiner Letter''); Laurence S. Schultz, 
Esq., Public Investors Arbitration Bar Association, dated March 18, 
2008 (``PIABA Letter''); Steven J. Gard, Esq., Gard Law Firm, dated 
March 20, 2008 (``Gard Letter''); Steven B. Caruso, Esq., Maddox 
Hargett Caruso, P.C., dated March 20, 2008 (``Caruso Letter''); 
Philip M. Aidikoff, Esq., dated March 21, 2008 (``Aidikoff 
Letter''); Charles W. Austin, Jr., Esq., dated March 21, 2008 
(``Austin Letter''); Gail E. Boliver, dated March 22, 2008 
(``Boliver Letter''); Steve A. Buchwalter, Esq., dated March 23, 
2008 (``Buchwalter Letter''); Ryan K. Bakhtiari, Esq., Uhl and 
Bakhtiari, dated March 24, 2008 (``Bakhtiari Letter''); Mark E. 
Maddox, Esq., Maddox Hargett Caruso, P.C., dated March 24, 2008 
(``Maddox Letter''); Robert W. Goehring, Esq., dated March 24, 2008 
(``Goehring Letter''); John J. Miller, Esq., Swanson Midgley, LLC, 
dated March 24, 2008 (``Miller Letter''); Richard A. Lewins, dated 
March 24, 2008 (``Lewins Letter''); Howard Rosenfield, Esq., dated 
March 24, 2008 (``Rosenfield Letter''); Sam Edwards, Esq., dated 
March 24, 2008 (``Edwards Letter''); Noah H. Simpson, Esq., Simpson 
Woolley, LLP, dated March 24, 2008 (``Simpson Letter''); Robert A. 
Uhl, Esq., March 25, 2008 (``Uhl Letter''); David Harrison, Esq., 
dated March 26, 2008 (``Harrison Letter''); Jeffrey Sonn, Esq., Sonn 
Erez, PLC, dated March 26, 2008 (``Sonn Letter''); Brian N. Smiley, 
Esq., Smiley Bishop Porter LLP, dated March 26, 2008 (``Smiley 
Letter''); Thomas A. Hargett, Esq., dated March 27, 2008, (``Hargett 
Letter''); Jay Salamon, Esq., Hermann, Cahn and Schneider LLP, dated 
March 27, 2008 (``Salamon Letter''); J. Pat Sadler, Esq., dated 
March 31, 2008 (``Sadler Letter''); Keith L. Griffin, Esq., Maddox 
Hargett Caruso, P.C., dated April 1, 2008 (``Griffin Letter''); 
Scott R. Shewan, Esq., Born, Pape & Shewan LLP, dated April 1, 2008 
(``Shewan Letter''); Alan S. Brodherson, Esq., dated April 3, 2008 
(``Brodherson Letter''); W. Scott Greco, Esq., Greco & Greco, P.C., 
dated April 3, 2008 (``Greco Letter''); David P. Neuman, Esq., 
Stoltmann Law Offices, P.C., dated April 4, 2008 (``Neuman 
Letter''); Edward G. Turan and Martha E. Solinger, Securities 
Industry and Financial Markets Association, dated April 7, 2008 
(``SIFMA Letter''); Curt H. Mueller, Esq., Schwab & Co., Inc., dated 
April 7, 2008 (``Schwab Letter''); Erin Linehan, Esq., Raymond James 
Financial, Inc., dated April 8, 2008 (``Raymond James Letter''); 
Barry D. Estell, Esq., dated April 8, 2008 (``Estell Letter''); 
Robert C. Port, Esq., dated April 8, 2008 (``Port Letter''); 
Jonathan W. Evans, Esq., dated April 8, 2008 (``Evans Letter''); 
Kevin A. Carreno, dated April 8, 2008 (``Carreno Letter''); Vincent 
J. Imbesi, Esq., The Avelino Law Firm, dated April 9, 2008 (``Imbesi 
Letter''); John E. Lawlor, Esq., dated April 9, 2008 (``Lawlor 
Letter''); Jonathan Schwartz, Esq., dated April 9, 2008 (``Schwartz 
Letter''); Andrew Dale Ledbetter, dated April 9, 2008 (``Ledbetter 
Letter''); Theodore A. Krebsbach, Esq., Krebsbach & Snyder, dated 
April 9, 2008 (``Krebsbach Letter''); Raymond W. Henney, Esq., 
Honigman Miller Schwartz and Cohn LLP, dated April 9, 2008 (``Henney 
Letter''); Randall R. Heiner, Esq., dated April 9, 2008 (``Heiner 
Letter''); Inge Selden III, Esq., Maynard Cooper & Gale PC, dated 
April 9, 2008 (``Selden Letter''); Eric G. Wallis, Esq., Reed Smith 
LLP, dated April 9, 2008 (``Wallis Letter''); Robert H. Rex, Esq., 
Dickenson Murphy Rex and Sloan, dated April 9, 2008 (``Rex 
Letter''); Bradley R. Stark, Esq., Florida International University, 
dated April 9, 2008 (``Stark Letter''); Robert N. Rapp, Esq., 
Calfee, Halter Griswold LLP, dated April 9, 2008 (``Rapp Letter''); 
Richard J. Babnick, Esq., Sichenzia Ross Friedman Ference LLP, dated 
April 9, 2008 (``Babnick Letter''); Joseph F. Myers, Esq., dated 
April 9, 2008 (``Myers Letter''); Anne T. Cooney, Esq., Morgan 
Stanley, dated April 9, 2008 (``Morgan Stanley Letter''); Jonathan 
Kord Lagemann, Esq., dated April 9, 2008 (``Lagemann Letter''); 
Frederick S. Schrils, Esq., GrayRobinson, dated April 9, 2008 
(``Schrils Letter''); Andrew Stoltmann, Esq., dated April 9, 2008 
(``Stoltmann Letter''); Richard M. Layne, Esq., dated April 9, 2008 
(``Layne Letter''); Herb Pounds, Jr., Esq., dated April 9, 2008 
(``Pounds Letter''); Alan F. Hartman, CLU, ChFC, dated April 9, 2008 
(``Hartman Letter''); Brian F. Amery, Esq., Bressler, Amery Ross, 
P.C., dated April 9, 2008 (``Amery Letter''); Michael G. Shannon, 
Esq., Thelen Reid Brown Raysman & Steiner LLP, dated April 9, 2008 
(``Shannon Letter''); Carl J. Carlson, Esq., Carlson & Dennett, 
P.S., dated April 9, 2008 (``Carlson Letter''); Matthew Farley, 
Esq., Drinker Biddle & Reath LLP, dated April 9, 2008 (``Farley 
Letter''); Joel E. Davidson, Esq., Davidson & Grannum, LLP, dated 
April 9, 2008 (``Davidson Letter''); Al Van Kampen, Esq., dated 
April 10, 2008 (``Van Kampen Letter''); Theodore M. Davis, Esq., 
dated April 10, 2008 (``Davis Letter''); Lawrence R. Gelber, Esq., 
dated April 10, 2008 (``Gelber Letter''); Pearl Zuchlewski, Esq., 
Kraus Zuchlewski LLP, dated April 10, 2008 (``Zuchlewski Letter''); 
Rob Bleecher, Esq., dated April 10, 2008 (``Bleecher Letter''); 
Thomas C. Wagner, Esq., dated April 10, 2008 (``Wagner Letter''); 
John V. McDermott, Esq., Holme Roberts Owen LLP, dated April 10, 
2008 (``McDermott Letter''); Peter J. Mougey, Esq., Beggs & Lane, 
dated April 10, 2008 (``Mougey Letter''); Christopher Gibbons/Lisa 
A. Catalano, Securities Arbitration Clinic, St. John's University 
Law School, dated April 10, 2008 (``St. John's Letter''); John W. 
Shaw, Esq., Berkowitz, Oliver, Williams, Shaw Eisenbrandt, dated 
April 10, 2008 (``Shaw Letter''); Audrey Venezia, Esq., dated April 
10, 2008 (``Venezia Letter''); H. Nicholas Berberian, Esq., Gerber & 
Eisenberg LLP, dated April 10, 2008 (``Berberian Letter''); Michael 
N. Ungar, Esq., and Kenneth A. Bravo, Esq., Ulmer & Berne LLP, dated 
April 10, 2008 (``Ungar/Bravo Letter''); Jody Forchheimer, Esq., 
Fidelity Investments, dated April 10, 2008 (``Forchheimer Letter''); 
Jill I. Gross, Barbara Black and Teresa Milano, dated April 10, 2008 
(``Gross/Black Letter''); Michael Weissmann, Esq., Bingham McCutchen 
LLP, dated April 10, 2008 (``Weissmann Letter''); Thomas P. 
Willcutts, Esq., Willcutts Law Group, LLC, dated April 10, 2008 
(``Willcutts Letter''); Mark A. Tepper, Esq., Mark A. Tepper, P.A., 
dated April 10, 2008 (``Tepper Letter''); Joe Soraghan, Principal, 
Danna McKitrick, P.C., dated April 10, 2008 (``Soraghan Letter''); 
Bryan T. Forman, Esq., dated April 10, 2008 (``Forman Letter''); 
Rodney Acker, Esq., Fulbright & Jaworski LLP, dated April 10, 2008 
(``Acker Letter''); Birgitta Siegel, Esq., Securities Arbitration & 
Consumer Law Clinic, Syracuse University, dated April 10, 2008 
(``Syracuse Letter''); Brett A. Rogers and Jill E. Steinberg, Esq., 
Rogers & Hardin, dated April 10, 2008 (``Rogers/Steinberg Letter''); 
Jeffrey Kruske, Esq., dated April 10, 2008 (``Kruske Letter''); John 
Taft, RBC Wealth Management, dated April 10, 2008 (``RBC Letter''); 
Thomas V. Dulcich, Esq., Schwabe, Williamson & Wyatt, dated April 
10, 2008 (``Dulcich Letter''); Harry T. Walters, Esq., Citigroup, 
dated April 10, 2008 (``Citigroup Letter''); Craig Gordon, RBC 
Correspondent Services, dated April 10, 2008 (``Gordon Letter''); 
William A. Jacobson, Esq., Cornell Securities Law Clinic, dated 
April 10, 2008 (``Cornell Letter''); Bradford D. Kaufman, Greenberg, 
Taurig, P.A., dated April 10, 2008 (``Kaufman Letter''); Tim 
Canning, Esq., Law Offices of Timothy A. Canning, dated April 10, 
2008 (``Canning Letter''); Peter R. Boutin, Esq., Keesal, Young & 
Logan, dated April 10, 2008 (``Boutin Letter''); Christian T. 
Kemnitz, Esq., Katten Muchin Rosenman, dated April 10, 2008 
(``Kemnitz Letter''); Scot Bernstein, Esq, dated April 10, 2008 
(``Bernstein Letter''); John S. Burke, Esq., Higgins Burke, P.C., 
dated April 10, 2008 (``Burke Letter''); Dayton P. Haigney, Esq., 
dated April 10, 2008 (``Haigney Letter''); Robert J. Anello, Esq., 
Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., dated 
April 10, 2008 (``Anello Letter''); Brad S. Karp, Esq., Paul, Weiss, 
Rifkind, Wharton & Garrison LLP, dated April 10, 2008 (``Karp 
Letter''); Andrew L. Weinberg, Esq., Deutsche Bank Securities Inc., 
dated April 10, 2008 (``DBSI Letter''); Harry A. Jacobowitz, Esq., 
Securities Arbitration Commentator, dated April 10, 2008 
(``Jacobowitz Letter''); Jenice L. Malecki, Esq., Malecki Law, dated 
April 10, 2008 (``Malecki Letter''); Stephen Krosschell, Esq., dated 
April 10, 2008 (``Krosschell Letter''); Abe Lampart, Esq., Offices 
of Abe Lampart, dated April 10, 2008 (``Lampart Letter''); Mark J. 
Astarita, Esq., dated April 10, 2008 (``Astarita Letter''); Robert 
S. Banks, Esq., Banks Law Offices, dated April 10, 2008 (``Banks 
Letter''); Debra G. Speyer, Esq., dated April 10, 2008 (``Speyer 
Letter''); Joseph Fogel, Sherman Oaks, CA (``Fogel Letter''); Harry 
J. Buckman, Jr., dated April 11, 2008 (``Buckman Letter''); Jan 
Graham, Esq., dated April 11, 2008 (``Graham Letter''); Patricia 
Cowart, Esq., Wachovia Securities, LLC, dated April 11, 2008 
(``Wachovia Letter''); Stuart D. Meissner, Esq., dated April 12, 
2008 (``Meissner Letter''); Debra B. Hayes, Esq., dated April 15, 
2008 (``Hayes Letter''); William P. Torngren, Esq., dated April 16, 
2008 (``Torngren Letter''); Laurence S. Schultz, Public Investors 
Arbitration Bar Association, dated April 25, 2008 (``PIABA 2 
Letter'').
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II. Description of the Proposed Rule Change

    FINRA \5\ proposed 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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    \5\ 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 motions practice.\6\ 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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    \6\ The 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 \7\ 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 \8\), and intimidate less sophisticated 
parties.\9\ In some 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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    \7\ A respondent is a party against whom a statement of claim or 
third party claim has been filed.
    \8\ A claimant is a party that files the statement of claim and 
other documents that initiate an arbitration.
    \9\ 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 motions rule for a variety 
of reasons. Therefore, FINRA removed the rule from the Code Revision 
and re-filed it separately.\10\ The SEC then approved the Code Revision 
without the dispositive motions rule.\11\
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    \10\ See Securities Exchange Act Release No. 54360 (August 24, 
2006), 71 FR 51879 (August 31, 2006) (SR-NASD-2006-088) (notice).
    \11\ 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 Motions Proposal

    As re-filed with the SEC, the dispositive motions proposal would

[[Page 733]]

have permitted a panel to grant a dispositive motion prior to an 
evidentiary hearing only under extraordinary circumstances.\12\ The SEC 
published the proposal for public comment on August 31, 2006, and 
received over 60 comment letters,\13\ the majority of which opposed the 
proposal.
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    \12\ See note 10, supra.
    \13\ 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 December 5, 2008).
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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 motions proposal, and filed a new proposed rule change 
to provide specific procedures that would govern motions to dismiss. In 
its new proposed rule change, FINRA also proposed 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 stated that it 
believes that parties have the right to a hearing in arbitration. In 
certain very limited circumstances, however, FINRA indicated that it 
would be unfair to require a party to proceed to a hearing. The 
proposal is designed to balance these competing interests. In FINRA's 
view, the proposal should ensure that parties \14\ 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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    \14\ 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 Conclusion of a Party's 
Case in Chief

    The proposal would clarify that motions to dismiss a claim prior to 
the conclusion of a party's case in chief are discouraged in 
arbitration. FINRA stated that it believes that parties have the right 
to a hearing in arbitration, and only in certain very limited 
circumstances should that right be challenged. This policy statement 
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 stated that it 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 stated that it 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 
stated that it 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 would not be permitted to 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 of the 
Customer Code or Rule 13206 of the Industry Code, unless such 
conference is waived by the parties. FINRA stated that it 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 proposed 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.\15\
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    \15\ 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 stated that it believes that limiting the grounds on which a 
motion to dismiss may be granted prior to the conclusion 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 stated that it 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 stated that it believes this limitation would serve to 
expedite the arbitration process and minimize parties' costs.

[[Page 734]]

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 stated that it 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 of 
the Customer Code or Rule 13212 of the Industry Code. FINRA stated that 
it 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 stated that it 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 stated that it 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 the code or an order of the panel under Rule 12212 of the 
Customer Code or 13212 of the Industry Code, as applicable, would be 
governed by that rule. Further, the proposal provides that motions to 
dismiss based on discovery abuse filed under Rule 12511 of the Customer 
Code or Rule 13511 of the Industry Code, as applicable, would be 
governed by that rule.

Amendments to the Dismissal Provision of the Eligibility Rule

    FINRA proposed 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 would be permitted to 
file a motion to dismiss on eligibility grounds at any stage of the 
proceeding (after the answer is filed), except that a party would not 
be permitted to file this motion any later than 90 days before the 
scheduled hearing on the merits. FINRA also proposed 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.
    First, FINRA proposed to amend Rules 12206(b) of the Customer Code 
and Rule 13206(b) of the Industry Code to establish procedures for 
motions to dismiss made on eligibility grounds. In light of the new 
motions to dismiss proposal, FINRA stated that it 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 would 
be permitted to file a motion to dismiss on eligibility grounds at any 
stage of the proceeding (after the answer is filed), except that a 
party would not be permitted to file this motion any later than 90 days 
before the scheduled hearing on the merits. FINRA stated that it 
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 
stated 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 proposed 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.
    Second, FINRA addressed 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 without prejudice and 
may pursue all of the claims in court.\16\
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    \16\ 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

[[Page 735]]

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 proposed to amend the eligibility rule to address this issue. 
As amended, the rule would 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, the rule would provide that 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 stated that it 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.

III. Comment Letters

    The Commission received 119 comments relating to FINRA-2007-021 
concerning amendments to arbitration procedures for pre-hearing motions 
to dismiss and dismissals on eligibility grounds. The Commission also 
received FINRA's response to comments, which is discussed below.\17\ Of 
the 119 letters: (i) Sixteen commenters \18\ (consisting of professors 
and attorneys representing investors) opposed the proposed rule change 
on the basis that it does not go far enough to end the abuse in motions 
to dismiss, (ii) forty-four commenters \19\ (consisting of SIFMA, 
broker-dealers and attorneys representing the financial industry) 
opposed the rule principally because of the narrow scope of the grounds 
for filing pre-hearing motions to dismiss; (iii) two commenters \20\ 
(an attorney representing investors and a professor of finance) opposed 
the proposed rule for other reasons; (iv) fifty-four commenters \21\ 
(including PIABA,\22\ attorneys representing investors, law school 
clinics and professors) supported the proposed rule; and (vi) three 
\23\ commenters did not express a definitive view.
---------------------------------------------------------------------------

    \17\ Letter from Mignon McLemore, FINRA, dated September 15, 
2008 (``FINRA Letter'').
    \18\ Burke, Canning, Estell, Fogel, Gard, Krosschell, Lipner, 
Meissner, Port, Pounds, Rex, Simpson, Speyer, Steiner, Tepper and 
Willcutts Letters.
    \19\ Acker, Amery, Anello, Astarita, Babnick, Berberian, 
Brodherson, Boutin, Buckman, Carreno, Citigroup, Davidson, DBSI, 
Dulcich, Farley, Forchheimer, Gelber, Gordon, Hartman, Henney, Karp, 
Kaufman, Kemnitz, Krebsbach, Lampart, McDermott, Morgan Stanley, 
Rapp, Raymond James, RBC, Rogers/Steinberg, Schrils, Schwab, Selden, 
Shannon, Shaw, SIFMA, Soraghan, Thurman, Ungar/Bravo, Venezia, 
Wachovia, Wallis, and Weissman Letters.
    \20\ Schwartz and Stark Letters.
    \21\ Aidikoff, Austin, Banks, Bakhtiari, Bernstein, Bleecher, 
Boliver, Buchwalter, Carlson, Caruso, Cornell, Davis, Edwards, 
Evans, Forman, Graham, Griffin, Goehring, Greco, Gross/Black, 
Haigney, Hargett, Harrison, Hayes, Heiner, Korsak, Kruske, Imbesi, 
Lagemann, Lawlor, Layne, Ledbetter, Lewins, Maddox, Malecki, Miller, 
Mougey, Myers, Neuman, PIABA, PIABA 2, Sadler, Salamon, Shewan, 
Smiley, Sonn, St. John's, Stoltmann, Syracuse, Torngren, Uhl, Van 
Kampen, Wagner and Zuchlewski Letters.
    \22\ PIABA wrote two letters in support of the proposed rule.
    \23\ Jacobowitz, Rosenfield and Struyk Letters.
---------------------------------------------------------------------------

    Of the 44 commenters that opposed the rule on the basis of the 
narrow scope of grounds for filing pre-hearing motions to dismiss, 15 
commenters \24\ expressed concern regarding many of the procedural 
rules in the proposal, 11 commenters \25\ noted that they would support 
the procedural rules in the proposal, while the remaining 18 commenters 
did not state their views regarding the procedural rules. Of the 54 
commenters who supported the proposal, two expressed unconditional 
support.\26\ Many of the remaining supporters indicated that the 
proposal should be approved, but also that all motions to dismiss 
should be prohibited in FINRA's arbitration forum.\27\
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    \24\ Astarita, Berberian, Berne, Carreno, DBSI, Forchheimer, 
Gordon, Lampart, RBC, Selden, Shaw, SIFMA, Ungar/Bravo, Venezia and 
Wachovia Letters.
    \25\ Babnick, Berberian, Citigroup, Kaufman, Kemnitz, McDermott, 
Morgan Stanley, Raymond James, Rogers, Schrils, and Thurman Letters.
    \26\ Heiner and Korsak Letters.
    \27\ See, e.g., Caruso, Kruske, Lewins, Shewan and St. John's 
Letters.
---------------------------------------------------------------------------

Detailed Discussion of Comments and FINRA Response

Policy Statement on Prehearing Motions
    Proposed Rules 12504(a)(1) of the Customer Code and 13504(a)(1) of 
the Industry Code would provide that motions to dismiss a claim prior 
to the conclusion of a party's case in chief are discouraged in 
arbitration. Many commenters addressed this statement of policy 
regarding motions to dismiss in FINRA's arbitration forum and, in 
particular, the use of the word ``discouraged.''
    Several commenters supported the statement of policy, indicating 
that it sets an appropriate tone for the rest of the proposal.\28\ One 
commenter contended that the rule language does not sufficiently 
discourage motions to dismiss and should indicate that motions to 
dismiss should be granted only in extraordinary circumstances.\29\ One 
commenter who opposed the proposal contended that, without this 
language, the proposal would appear to authorize and encourage motions 
to dismiss in the forum.\30\ A number of commenters opposed the policy 
statement, arguing that it unfairly discourages motions to dismiss 
prior to the conclusion of a party's case in chief in the forum, and 
creates an unnecessary bias against these motions.\31\
---------------------------------------------------------------------------

    \28\ See, e.g., Carlson Letters, Lawlor and PIABA 2.
    \29\ Black/Gross Letter.
    \30\ Lipner Letter.
    \31\ See, e.g., Forchheimer, SIFMA, Ungar/Bravo, and Wachovia 
Letters.
---------------------------------------------------------------------------

    FINRA responded to these comments by stating that, generally, FINRA 
believes that parties have the right to a hearing in arbitration and 
that proposed Rules 12504(a)(1) of the Customer Code and 13504(a)(1) of 
the Industry Code would reinforce this position by clarifying that 
prehearing motions to dismiss are discouraged in arbitration. FINRA 
stated its belief that the word ``discouraged'' is appropriately placed 
in the rule language, and accurately describes its view of prehearing 
motions to dismiss in the forum.
    FINRA also disagreed with those commenters who contended that this 
policy statement unfairly discourages all motions to dismiss in the 
forum. FINRA pointed out that, while the proposal limits the exceptions 
under which a prehearing motion to dismiss may be granted, proposed 
Rules 12504(b) of the Customer Code and 13504(b) of the Industry Code 
would permit parties to file a motion on any ground after the 
conclusion of a party's case in chief. FINRA indicated its belief that 
it would

[[Page 736]]

be unfair to require parties to incur additional hearing session fees 
if there is a valid reason to dismiss after the claimant's case. In 
those cases, FINRA suggested that a panel may grant a motion to 
dismiss, under proposed subparagraph (b), if the moving party proves 
such action is warranted.
    FINRA emphasized that the proposed rules do not constitute an 
invitation to parties to file prehearing motions to dismiss. Further, 
FINRA noted that the fact that a motion may be filed under one of the 
exceptions in the proposal does not mean that the panel should or will 
grant the motion.
    In a prior, withdrawn proposal, FINRA stated that motions to 
dismiss should be granted only in extraordinary circumstances.\32\ Some 
commenters suggested that the absence of that language in the current 
proposal effectively authorizes or encourages motions to dismiss. FINRA 
indicated that it disagrees, and believes that the current proposal 
removes the ambiguity that the ``extraordinary circumstances'' concept 
created, and expressly outlines FINRA's position concerning motions to 
dismiss. FINRA reiterated that the current proposal would provide for 
three limited exceptions under which a motion to dismiss may be granted 
before the conclusion of a claimant's case-in-chief, thereby limiting 
the timing and circumstances under which such a prehearing motion may 
be filed. Moreover, FINRA pointed out that the proposal would require a 
panel to impose strict sanctions against parties who file motions to 
dismiss frivolously or in bad faith. Taken together, FINRA stated that 
these provisions reinforce its position that prehearing motions to 
dismiss in arbitration are discouraged and should be granted only under 
the limited exceptions of the rule. Accordingly, FINRA declined to 
amend the proposal to reintroduce the reference to ``extraordinary 
circumstances.''
---------------------------------------------------------------------------

    \32\ See note 10, supra.
---------------------------------------------------------------------------

Scope of Proposed Rules 12504(a)(6)(B) of the Customer Code and 
13504(a)(6)(B) of the Industry Code (``Not Associated'' Exception)
    Proposed Rules 12504(a)(6)(B) of the Customer Code and 
13504(a)(6)(B) of the Industry Code would provide that a prehearing 
motion to dismiss may be granted prior to the conclusion of the 
claimant's case, if the respondent was not associated with the account, 
security, or conduct at issue.
    Most commenters suggested that FINRA should clarify how proposed 
Rule 12504(a)(6)(B) of the Customer Code would be applied. Many 
commenters indicated their belief that the exception should be 
interpreted broadly, so that senior executives, branch managers, and 
other office personnel could be excluded under this provision.\33\ 
Conversely, a number of commenters contended that a broad 
interpretation of the exception could wrongly exempt persons or 
entities not directly associated with transactions but who are liable 
under applicable statutes or case law (e.g., supervisors in ``selling 
away'' \34\ cases).\35\
---------------------------------------------------------------------------

    \33\ See, e.g., Raymond James, Selden, Shannon and SIFMA 
Letters.
    \34\ A ``selling away'' claim involves a dispute in which an 
associated person is alleged to have engaged in securities 
activities outside his or her firm.
    \35\ See, e.g., Banks, Greco, Krosschell, PIABA 2 and Shewan 
Letters.
---------------------------------------------------------------------------

    FINRA responded to these comments by indicating that it intends 
this exception to apply narrowly, such as in cases involving issues of 
misidentification. Thus, under this exception, a prehearing motion to 
dismiss could be granted if, for example, a party files a claim against 
the wrong person or entity, or a claim names an individual who was not 
employed by the firm during the time of the dispute, or a claim names 
an individual or entity that had no control over or was not connected 
to an account, security or conduct at the firm during the time of the 
dispute. Under this interpretation, therefore, a panel would not grant 
a motion to dismiss filed under this exception in cases in which a 
respondent may be liable as a supervisor or control person under 
applicable statutes \36\ or in ``selling away'' cases.\37\
---------------------------------------------------------------------------

    \36\ See, e.g., Uniform Securities Act Sec.  509(g) (2002).
    \37\ FINRA reiterated its position that ``selling away'' claims 
are arbitrable under the Codes. Under the Codes, FINRA accepts cases 
brought by customers against associated persons in selling away 
cases, and cases by customers against the associated person's member 
firm if there is any allegation that the member was or should have 
been involved in the events, such as an alleged failure to supervise 
the associated person. See, e.g., Multi-Financial Securities Corp. 
v. King, 386 F.3d 1364 (11th Cir. 2004); see also In the Matter of 
PFS Investments, Inc., 1998 SEC LEXIS 1547, (Exchange Act Rel. No. 
42069) (July 28, 1998).
---------------------------------------------------------------------------

    One commenter sought clarification concerning whether this 
exception would exclude parties in a supervisory position, or under 
control person liability when a broker-dealer is defunct.\38\
---------------------------------------------------------------------------

    \38\ Burke Letter.
---------------------------------------------------------------------------

    FINRA stated that if the claim involves a respondent who is liable 
as a supervisor or control person and the cause of action arose before 
the firm became defunct, a motion to dismiss filed under this exception 
would be inappropriate. FINRA noted that under its By-Laws, an 
associated person continues to be subject to FINRA's jurisdiction if 
the conduct occurred while the person was associated or registered with 
a firm.\39\ Moreover, FINRA pointed out that if a firm is defunct, a 
claimant may request default proceedings against the firm, provided 
certain criteria are met.\40\
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    \39\ See FINRA By-Laws, Article V, Sec.  4(a) (Retention of 
Jurisdiction).
    \40\ Rule 12801 of Customer Code and Rule 13801 of Industry 
Code.
---------------------------------------------------------------------------

Additional Exceptions for Permissible Prehearing Motions
    Numerous commenters, who opposed the proposal, argued that the 
three exceptions to the general prohibition on prehearing motions to 
dismiss \41\ are too narrow and fail to include certain situations in 
which such motions would be appropriate.\42\ These commenters suggested 
that FINRA expand the proposed rule to include the following 
exceptions: Clearing brokers, senior executives, statutes of 
limitation, and legal impossibility exceptions, such as defamation for 
statements made on required forms (which some courts have held are 
protected by an absolute privilege) and the doctrine of res 
judicata.\43\ Several of these commenters focused on the lack of an 
exception for clearing firms, arguing that, based on the nature of 
their operations, clearing firms do not owe a legal duty to claimants 
and, therefore, cannot be held liable for the wrongful acts of the 
introducing firm.\44\
---------------------------------------------------------------------------

    \41\ The three exceptions, as described above under II. 
Description of the Proposed Rule Change, are: (1) The non-moving 
party previously released the claim(s) in dispute by a signed 
settlement agreement and/or written release; (2) the moving party 
was not associated with the account(s), security(ies), or conduct at 
issue; or (3) the claim is not eligible for arbitration in FINRA's 
forum, under Rule 12206 of the Customer Code or 13206 of the 
Industry Code, as applicable.
    \42\ For example, these commenters contend that claims involving 
defamation on the Form U5 or those subject to the doctrine of res 
judicata should be exceptions to the rule. See, e.g., SIFMA, 
Thurman, Morgan Stanley, Rapp, Schrils, Kaufman, and Jacobowitz 
Letters.
    \43\ Id.
    \44\ Id.
---------------------------------------------------------------------------

    A large portion of the commenters who supported the proposal 
contended that expanding the scope of prehearing motions to dismiss 
would negate the intent of the proposal and encourage unnecessary and 
unwarranted motions to dismiss.\45\ Indeed, many of these commenters 
argued that the eligibility exception to the general prohibition on 
prehearing motions to dismiss should be removed because eligibility 
motions

[[Page 737]]

tend to be fact-based, and would, in most cases, require an evidentiary 
hearing.\46\
---------------------------------------------------------------------------

    \45\ See, e.g., Banks, Lagemann, PIABA 2 and St. John's Letters.
    \46\ See, e.g., Greco, Gross/Black, Ledbetter and PIABA 2 
Letters.
---------------------------------------------------------------------------

    FINRA responded by stating that it had considered these comments, 
and concluded that expanding the exceptions to the rule would negate 
its intent, which is to have clear, easily definable standards that do 
not involve fact-intensive issues. FINRA stated that the suggested 
additional exceptions would require fact-based determinations and, 
thus, would be inappropriate for dismissal before claimants have 
presented their cases. Although these exceptions would be inappropriate 
for prehearing dismissal, FINRA noted that a party would be permitted 
to file a motion addressing these issues at the conclusion of a 
claimant's case-in-chief. FINRA stated that the proposal strikes an 
appropriate balance by ensuring that claimants have their claims heard 
in arbitration, while minimizing the parties' exposure to additional 
fees in the event that the claimant does not prove the claims in its 
case-in-chief. For these reasons, FINRA declined to amend the proposal 
to expand the exceptions to the rule.
    FINRA also specifically stated that it had considered the concerns 
expressed by commenters regarding clearing firms and the impact the 
proposal could have on their operations. FINRA indicated that it 
understands the benefits that clearing firms provide to the operation 
of the securities markets, but these benefits do not warrant an 
exception to the rule. FINRA noted that courts have found that a 
broker-dealer's status as a clearing firm does not immunize it from 
liability.\47\ Further, FINRA stated that the courts have found that 
clearing firms may be liable for the misdeeds of the introducing firm, 
if the clearing firms become actively or directly involved in 
fraudulent activity.\48\ Based on these findings, FINRA stated its 
belief that claimants should have the opportunity to prove in an 
evidentiary hearing whether a clearing firm's involvement rises to the 
level of liability. As the issue of a clearing firm's liability in 
arbitration would be a fact-intensive determination, FINRA stated that 
issue would be inappropriate for prehearing dismissal. Based on these 
findings, FINRA declined to amend the proposal to include an exception 
for clearing firms.
---------------------------------------------------------------------------

    \47\ See, e.g., McDaniel v. Bear Stearns Co., and Bear Stearns 
Securities Corporation, 196 F.Supp. 2d 343 (S.D.N.Y. 2002); see 
also, Koruga v. Fiserv Correspondent Services, Inc., 183 F.Supp.2d 
1245 (D. Or. 2001), aff'd, 40 Fed.Appx. 364, 2002 WL 530548 (9th 
Cir. 2002).
    \48\ Id.
---------------------------------------------------------------------------

Expansion of the Exception for Prehearing Motions Under the Eligibility 
Rule To Include Applicable Statutes of Limitation
    The proposed changes to the eligibility rules, Rules 12206(b) of 
the Customer Code and 13206(b) of the Industry Code, would not include 
applicable statutes of limitation as an exception on which a prehearing 
motion would be granted.
    Many commenters argued that respondents should not be forced to 
proceed to an evidentiary hearing against parties whose claims could be 
deemed stale or time-barred under an applicable legal authority.\49\ 
Conversely, several other commenters contended that most statutes of 
limitation matters raise issues of fact which would require an 
evidentiary hearing.\50\ Some commenters urged FINRA to remove the 
eligibility exception from the proposal for the same reasons.\51\
---------------------------------------------------------------------------

    \49\ See, e.g., Babnick, Jacobowitz, Krebsbach, Rapp and SIFMA 
Letters.
    \50\ See, e.g., Greco, Gross/Black, Ledbetter and PIABA 2 
Letters.
    \51\ Id.
---------------------------------------------------------------------------

    FINRA responded by stating that it included the eligibility rule 
exception in the proposal because its eligibility standard is uniform 
for all cases (six years from the occurrence or event giving rise to 
the claim), and does not vary depending on a particular jurisdiction's 
laws or the cause of action raised by the claim. In addition, FINRA 
noted that claimants whose cases are dismissed on eligibility grounds 
have an alternative to resolve their disputes because the current rule 
gives them the right to take their cases to court.\52\ In light of the 
uniform applicability of the eligibility exception and the additional 
protections parties receive under the eligibility rule, FINRA declined 
to amend the proposal to remove the eligibility exception.
---------------------------------------------------------------------------

    \52\ Rule 12206(b) of the Customer Code and Rule 13206(b) of the 
Industry Code.
---------------------------------------------------------------------------

    Further, FINRA responded that it did not include applicable 
statutes of limitation in the eligibility exception because such issues 
involve fact-based determinations, depend on the law of the applicable 
jurisdiction, and depend on the type of claims alleged. FINRA noted 
that, in some jurisdictions, courts have found that statutes of 
limitations do not apply to arbitration proceedings. For these reasons, 
FINRA stated that it would be inappropriate to include an exception for 
prehearing motions to dismiss on statute of limitations grounds, and 
thus, declined to amend the proposal to include them in the eligibility 
exception.
Motions Permitted at the Conclusion of Claimant's Case-in-Chief
    Under Proposed Rules 12504(b) of the Customer Code and 13504(b) of 
the Industry Code, a motion to dismiss after the conclusion of a 
party's case-in-chief would not be limited to the three exceptions 
described above.\53\
---------------------------------------------------------------------------

    \53\ See note 41, supra.
---------------------------------------------------------------------------

    Many commenters who supported the proposal argued that this 
provision would shift abusive motions practice to the middle of the 
hearing, because respondents would wait until the end of the claimant's 
case to file their motions, and thus, this provision should be 
deleted.\54\ Several commenters who opposed the proposal argued that 
the ability to file a motion at the conclusion of a party's case-in-
chief does not address their interests effectively, because respondents 
would have to prepare for and incur the costs of a full evidentiary 
hearing.\55\
---------------------------------------------------------------------------

    \54\ See, e.g., Banks, Bernstein, Caruso, Davis and Wilcutts 
Letters.
    \55\ See, e.g., Farley, Karp, Krebsbach and Walters Letters.
---------------------------------------------------------------------------

    FINRA responded by stating that the proposal strikes a fair balance 
by sharply limiting prehearing motions to dismiss, but permitting 
motions to dismiss after the claimant's case-in-chief. FINRA stated 
that it would be unfair to require the parties to continue with a 
hearing if the claimant has not proved its case. FINRA indicated that 
it expects such motions to be relevant to the case and based on 
theories that are germane to the issues raised in the case-in-chief. 
FINRA further stated that by the close of the claimant's case, the 
panel would have heard enough to decide whether a motion filed at the 
conclusion of a claimant's case should be considered, and, if 
warranted, granted.
    FINRA stated that it will monitor the frequency of motions filed 
pursuant to this provision once the proposal is implemented. If this 
analysis indicates potentially abusive behavior, FINRA stated that it 
may amend the rule or take other appropriate action.
    FINRA also stated it will inform arbitrators that, if a party files 
a motion at the conclusion of a case-in-chief, the panel is not 
required to consider or grant the motion merely because it was filed 
pursuant to the rule; rather, arbitrators will continue to control the 
hearing process. Furthermore, FINRA noted that the proposed rule would 
not preclude a panel from assessing respondents with sanctions, costs 
and

[[Page 738]]

attorney's fees, if the panel determines that a motion filed at this 
time is frivolous or in bad faith.\56\
---------------------------------------------------------------------------

    \56\ Rule 12212 of the Customer Code and Rule 13212 of the 
Industry Code.
---------------------------------------------------------------------------

    FINRA reiterated that the purpose of the proposal is to ensure that 
claimants have their claims heard by a panel while permitting 
respondents, after completion of a claimant's case-in-chief, to 
challenge a claim they believe lacks merit or has not been proved. 
FINRA suggested that because arbitrators currently deny most prehearing 
motions to dismiss, the proposal to permit motions to dismiss at this 
juncture should not have a significant impact on parties' costs in 
preparing for a hearing. FINRA stated its belief that respondents' 
exposure to attorneys' fees and forum fees should be minimized under 
the proposal because additional hearing sessions will not be required 
if the panel grants a motion to dismiss at the close of a claimant's 
case. Further, FINRA stated that, similarly, claimants will not incur 
additional forum costs if arbitrators believe they have not proved 
their case and dismiss it before respondents present their case, rather 
than at the conclusion of the respondents' case.
    For these reasons, FINRA declined to amend the proposal.
Concerns Regarding the Procedural Safeguards in the Proposal
    Several of the commenters who supported the procedural safeguards 
in the proposal indicated that these provisions provide protection to 
investors by creating an effective deterrent to abusive practices.\57\ 
However, multiple commenters opposed some of the proposed procedural 
safeguards as too stringent. Each proposed procedural rule that 
generated significant comment is addressed below.
---------------------------------------------------------------------------

    \57\ See, e.g., Harrison, Mougey, PIABA 2 and St. John's 
Letters.
---------------------------------------------------------------------------

     Unanimous panel decision to grant a prehearing motion.
    Proposed Rules 12504(a)(7) of the Customer Code and 13504(a)(7) of 
the Industry Code would require a unanimous decision by the panel to 
grant a prehearing motion to dismiss.\58\
---------------------------------------------------------------------------

    \58\ See also Proposed Rules 12206(b)(5) and 13206(b)(5) of the 
eligibility rule.
---------------------------------------------------------------------------

    The commenters who opposed this provision stated that this 
requirement is not necessary to ensure a fair decision concerning a 
prehearing motion to dismiss.\59\ Further, these commenters argued that 
the provision is inconsistent with other provisions of the Codes, which 
only require a majority decision.\60\
---------------------------------------------------------------------------

    \59\ See, e.g., Carreno, Forchheimer, Krebsbach, SIFMA and 
Wallis Letters.
    \60\ Id.
---------------------------------------------------------------------------

    FINRA responded that the type of relief requested by a prehearing 
motion to dismiss--the complete dismissal of a claim before an 
evidentiary hearing--justifies the requirement that all arbitrators 
agree, based on the moving party's proof, that the motion should be 
granted. FINRA indicated that it recognizes that this standard is 
different from the criteria for rendering other rulings and 
determinations.\61\ In practice, however, FINRA noted that most awards 
rendered in its forum are unanimous; thus, FINRA stated that this 
requirement is not a significant change from current practice. For 
these reasons, FINRA declined to amend the proposal to change this 
provision.
---------------------------------------------------------------------------

    \61\ Rule 12414(a) of the Customer Code and Rule 13414(a) of the 
Industry Code provide that ``all rulings and determinations of the 
panel must be made by a majority of the arbitrators, unless the 
parties agree, or the Code or applicable law provides, otherwise.''
---------------------------------------------------------------------------

     Mandatory assessment of forum fees.
    Proposed Rules 12504(a)(8) of the Customer Code and 13504(a)(8) of 
the Industry Code would require that, if a panel denies a prehearing 
motion to dismiss, it must assess forum fees associated with hearings 
on the motion against the moving party.\62\
---------------------------------------------------------------------------

    \62\ See also Proposed Rules 12206(b)(8) and 13206(b)(8).
---------------------------------------------------------------------------

    Commenters who opposed this provision stated that it is unfair to 
penalize moving parties who file motions to dismiss based on the 
exceptions available under the proposed rule, and who rely on a 
claimant's pleadings being accurate and complete when filing these 
motions.\63\
---------------------------------------------------------------------------

    \63\ See, e.g., Amery, Jacobowitz, Karp, Shannon and SIFMA and 
Letters.
---------------------------------------------------------------------------

    FINRA responded by stating that this provision on mandatory 
assessment of forum fees will deter parties from filing motions that 
fall outside the scope of the three exceptions \64\ to the rule, and 
will provide an incentive for parties to ensure that their prehearing 
motions to dismiss comply with the intent of the rule.
---------------------------------------------------------------------------

    \64\ See note 41, supra.
---------------------------------------------------------------------------

    In response to those commenters who argued that the proposal would 
punish respondents when a claimant's pleading lacks specificity, FINRA 
reminded parties that there are no specific pleading requirements under 
the Codes. FINRA noted that Rules 12302 of the Customer Code and 13302 
of the Industry Code require a claimant to supply only ``[a] statement 
of claim specifying the relevant facts and remedies requested'' along 
with the required fees, copies, and signed submission agreement in 
order to initiate an arbitration. Similarly, FINRA pointed out that the 
answer must include only ``[an] answer specifying the relevant facts 
and available defenses to the statement of claim.'' \65\ Further, FINRA 
stated that parties may obtain further information and documents 
through the discovery process.\66\
---------------------------------------------------------------------------

    \65\ Rules 12303 and 13303.
    \66\ See Rules 12500-12514 of the Customer Code and 13500-13512 
of the Industry Code.
---------------------------------------------------------------------------

    For these reasons, FINRA declined to amend the proposal to change 
this provision.
Mandatory Assessment of Costs and Attorneys' Fees and Possible 
Sanctions
    Proposed Rules 12504(a)(10) of the Customer Code and 13504(a)(10) 
of the Industry Code would require that, if a panel deems a prehearing 
motion to dismiss to be frivolous, it must award reasonable costs and 
attorneys' fees to any party that opposed the motion.\67\ Also, 
proposed Rules 12504(a)(11) of the Customer Code and 13504(a)(11) of 
the Industry Code would require that, if a panel deems that a 
prehearing motion to dismiss was filed in bad faith, it may issue 
sanctions against the moving party.\68\
---------------------------------------------------------------------------

    \67\ See also Proposed Rules 12206(b)(9) and 13206(b)(9) of the 
eligibility rule.
    \68\ See also Proposed Rules 12206(b)(10) and 13206(b)(10) of 
the eligibility rule.
---------------------------------------------------------------------------

    Several commenters who opposed the proposal nevertheless supported 
these provisions as sufficient deterrents against abusive motions 
practices, and suggested that they would eliminate the need to restrict 
prehearing motions to dismiss in the forum.\69\ Other commenters who 
opposed the proposal argued that, as drafted, the provisions would 
result in an increase in the number of motions for costs, fees, and 
sanctions filed by claimants.\70\ These commenters suggested that FINRA 
should amend the proposal to prohibit claimants from filing such 
motions, and permit the panel, on its own initiative, to decide whether 
a motion is frivolous or in bad faith and order relief 
appropriately.\71\
---------------------------------------------------------------------------

    \69\ See, e.g., Babnick, Kaufman, Krebsbach and Morgan Stanley 
Letters.
    \70\ See, e.g., Deutsche Bank, Lampart, SIFMA and Wachovia 
Letters.
    \71\ Id.
---------------------------------------------------------------------------

    FINRA responded by stating that it ``anticipates that parties will 
file fewer prehearing motions to dismiss once the proposal is 
implemented, which should forestall any increase in the number of 
motions for costs, fees, and sanctions.'' \72\ FINRA further stated its 
belief that the risk of monetary penalties

[[Page 739]]

and sanctions, imposed either by the panel on its own initiative, or as 
a result of a party's motion, should deter parties from filing such 
motions frivolously or in bad faith. FINRA suggested that, taken 
together, these enforcement mechanisms should ensure strict compliance 
with the rules. For these reasons, FINRA declined to amend the proposal 
to change these provisions.
---------------------------------------------------------------------------

    \72\ FINRA Letter.
---------------------------------------------------------------------------

Clarification of the In-Person or Telephonic Prehearing Conference 
Criteria
    The proposed rule requires that a panel may not grant a motion 
under the rule unless an in-person or telephonic prehearing conference 
is held or waived by the parties.\73\ One commenter requested 
clarification concerning what would satisfy the in-person or telephonic 
prehearing conference requirement.\74\ The commenter was concerned that 
the rules imply that the panel may grant the motion solely on the basis 
of the submissions from the parties.\75\
---------------------------------------------------------------------------

    \73\ Proposed Rules 12504(a)(5) of the Customer Code and 
13504(a)(5) of the Industry Code. See also Proposed Rules 
12206(b)(4) and 13206(b)(4) of the eligibility rule.
    \74\ St. John's Letter.
    \75\ Id.
---------------------------------------------------------------------------

    FINRA responded by explaining that prehearing conferences conducted 
under this provision would be subject to Rules 12501 of the Customer 
Code and 13501 of the Industry Code. Further, FINRA explained that, 
under the proposal, if the parties agree to waive the prehearing 
conference, as is permitted currently under the Codes,\76\ the panel 
may grant the motion based solely on the submissions of the parties. 
FINRA also stated that, if, however, the parties do not agree to waive 
the prehearing conference, then the panel must hold an evidentiary 
hearing on the motion at which time the parties will have an 
opportunity to present their arguments concerning the motion. In this 
situation, FINRA explained that the panel will have received the 
information necessary to make an informed decision.
---------------------------------------------------------------------------

    \76\ Rule 12105(a) of the Customer Code and Rule 13105(a) of the 
Industry Code.
---------------------------------------------------------------------------

Effect of the Proposal on the Parties' Costs
    Many commenters argued that current practice permits respondents to 
file numerous motions that are rarely granted, and that serve only to 
delay the hearings, harass claimants, and increase claimants' costs 
through higher forum fees and lower award amounts once expenses are 
paid.\77\ In general, these commenters indicated that defending these 
motions to dismiss is a waste of time and resources and, ultimately, 
will result in the denial of access to the forum for investors with 
small claims.\78\
---------------------------------------------------------------------------

    \77\ See, e.g., Buchwalter, Haigney, Neuman and Stoltmann 
Letters.
    \78\ Id. See also, e.g., Estell, Forman and St. John's Letters.
---------------------------------------------------------------------------

    A number of commenters argued that the proposal prohibiting most 
prehearing motions to dismiss would increase all parties' costs, 
particularly firms', because their attorneys charge on an hourly basis, 
whereas claimants' attorneys charge on a contingency basis, so 
claimants are not incurring any costs.\79\ Others contended that 
prohibiting prehearing motions to dismiss nullifies their most 
important objective--to avoid the expense of preparing for and 
attending an evidentiary hearing.\80\
---------------------------------------------------------------------------

    \79\ See, e.g., Hartman, Kemnitz, Morgan Stanley and Schrils 
Letters.
    \80\ See, e.g., Berberian, Davidson, Dulcich and McDermott 
Letters.
---------------------------------------------------------------------------

    FINRA responded by stating that it is not privy to the fee 
structure used by investors' attorneys or counsel for brokerage firms. 
However, based on internal data \81\ and other statistical studies 
tracking motions to dismiss in FINRA's forum,\82\ FINRA noted that it 
is aware that when motions to dismiss are filed, they serve to delay 
the hearings and increase all parties' costs through higher forum fees. 
As a result, FINRA stated its concern that the current practice by some 
respondents of filing motions to dismiss, and sometimes multiple 
motions in one case, could cause investors' attorneys not to take 
smaller claims, because the costs incurred in defending these motions 
could exceed the amount in dispute. FINRA stated that it anticipates 
that the proposal will continue to make the forum accessible to 
investors, particularly those with small claims, by minimizing the 
number of motions to dismiss filed in the forum, and by shifting the 
costs and fees associated with denied motions to dismiss to the moving 
party. FINRA stated that the proposal's benefits protecting investors' 
access to the forum and their ability to have claims heard in 
arbitration outweigh the possibility of increased costs and expenses 
firms might incur under the rule. For these reasons, FINRA declined to 
amend the proposal to address this concern.
---------------------------------------------------------------------------

    \81\ See Additional statistical support section below for 
updated statistics on motions to dismiss filed in FINRA's forum.
    \82\ See Securities Arbitration Commentator, Nov. 2006 (Vol. 
2006, No. 5) (``Study'').
---------------------------------------------------------------------------

Additional Statistical Support
    Several commenters who opposed the proposal argued that FINRA did 
not provide enough objective evidence to support the changes 
proposed.\83\ These commenters suggested that anecdotal evidence of 
abuse is not sufficient proof that prehearing motions to dismiss should 
be prohibited.
---------------------------------------------------------------------------

    \83\ See, e.g., Astarita, Berberian, Davidson and Farley 
Letters.
---------------------------------------------------------------------------

    FINRA responded that it disagrees with these commenters. FINRA 
stated that a significant number of changes to FINRA's arbitration 
rules have begun with users of the forum expressing a concern or 
complaint to FINRA. FINRA further stated that it relies on its 
constituents to inform it of concerns with its rules, arbitrator 
conduct, or abusive practices. Moreover, FINRA noted that once FINRA 
staff members become aware of a problem, they investigate further, and 
propose changes to the rules to address the concern, if necessary.
    FINRA stated that, in the case of motions to dismiss, it received 
many complaints from users of the forum documented with copies of 
motions to dismiss, responses, and the panels' denials of those 
motions. FINRA stated that it also learned through a Securities 
Arbitration Commentator study that the number of motions to dismiss 
filed in customer cases had begun to increase over a two year period, 
starting in 2004.\84\ The Study was conducted on motions to dismiss in 
customer cases and concluded that, of the cases that went to award in 
2006, 28% had motions to dismiss as compared to 10% of cases that went 
to award in 2004.\85\ FINRA found the results of the Study ``alarming'' 
not only because of the significant increase in the motions filed in 
these cases, but also because the Study did not include cases that 
settled during that time. As a result of this analysis, FINRA indicated 
that it became concerned that, if left unregulated, this type of 
motions practice would limit investors' access to the forum, which is 
antithetical to FINRA's goals of investor protection and market 
integrity.
---------------------------------------------------------------------------

    \84\ See, note 82, supra, at 3.
    \85\ Id.
---------------------------------------------------------------------------

    In light of the Study and concerns raised by constituents, FINRA 
began tracking motions to dismiss in 2007. FINRA noted that from 
January 1, 2007 to July 1, 2008, there have been 6,079 arbitration 
cases filed in the forum,\86\ and a total of 754 motions to dismiss 
filed in these cases. Further, FINRA

[[Page 740]]

noted that in 10% of the 6,079 cases, parties filed one or more motions 
to dismiss, and in 2% of the 6,079 cases, parties filed two or more 
motions to dismiss. FINRA stated that these current statistics suggest 
that the number of motions to dismiss filed in the forum may be 
declining since the Study was conducted. FINRA opined that the 
reduction in these motions reflects its focus on this issue, through 
enhanced arbitrator training as well as a 2006 Notice to Parties to 
remind parties of the forum's policy and parties' responsibilities when 
filing motions to dismiss.\87\ FINRA indicated that even though the 
number of motions filed appears to be declining in the forum, the 
proposal will serve to reduce further the number of prehearing motions 
to dismiss filed, and, in particular, should prevent parties from 
filing multiple motions in a case. For these reasons, FINRA stated that 
its statistical and anecdotal evidence is sufficient support for the 
proposal, and that the proposal should be approved as drafted.
---------------------------------------------------------------------------

    \86\ The data do not include cases filed in the NYSE Regulation 
arbitration forum.
    \87\ See Notice to Parties on Motions to Dismiss under the Code 
of Arbitration Procedure for Customer and Industry Disputes 
available at http://www.finra.org/ArbitrationMediation/
ResourcesforParties/NoticestoParties/p037078. The Notice continues 
to be effective.
---------------------------------------------------------------------------

Alternate Criteria To Provide Specific Guidance to Arbitrators When 
Deciding Motions To Dismiss
    Several commenters suggested that the proposal should establish a 
specific standard for arbitrators to use when deciding motions to 
dismiss.\88\ Most of these commenters suggested that panels should deny 
prehearing motions to dismiss whenever: (1) Credibility is an issue; 
(2) there are disputed issues of material fact; or (3) the panel 
believes a hearing is necessary in the interests of justice.\89\
---------------------------------------------------------------------------

    \88\ See, e.g., Gross/Black, Honigman, Van Kampen and Wachovia 
Letters.
    \89\ Id.
---------------------------------------------------------------------------

    FINRA responded by stating that it considered incorporating these 
criteria into the rule but determined that this would be inconsistent 
with the Codes, which do not contain such specific standards for 
arbitrator decision making. FINRA further stated that because 
arbitration is an equitable forum, the panel may consider any evidence 
or use any method to achieve a fair result. FINRA indicated that it did 
not intend for the proposal to change this practice.
    Moreover, FINRA stated that establishing a specific approach for 
arbitrators to follow would infringe on arbitrators' discretion to 
decide arbitration cases. FINRA stated that the intent of the proposal 
was to select a very limited number of exceptions for granting 
prehearing motions to dismiss that would be relatively clear-cut for 
the panel to apply at this stage of the proceedings. FINRA stated that 
parties should argue their positions and arbitrators should be 
permitted to use their discretion in determining how motions to dismiss 
should be decided. For these reasons, FINRA declined to amend the 
proposal to incorporate a specific standard for arbitrators to use when 
deciding motions to dismiss.
Motion To Dismiss Policies of Other Securities Arbitration Forums
    One commenter contended that the former New York Stock Exchange 
(``NYSE'') arbitration forum did not permit prehearing motions to 
dismiss.\90\ Another commenter stated that the NYSE Regulation 
arbitration forum would not permit arbitrators to grant motions to 
dismiss before an investor had the opportunity to present his or her 
claims at an evidentiary hearing on the merits.\91\
---------------------------------------------------------------------------

    \90\ Tepper Letter.
    \91\ Canning Letter.
---------------------------------------------------------------------------

    FINRA stated that it responded to this comment previously in regard 
to the consolidation of the member firm regulatory functions of NASD 
and NYSE Regulation, Inc.\92\ FINRA noted that the NYSE Regulation 
arbitration forum had neither a rule nor a written policy on motions to 
dismiss, and FINRA was not aware that motions to dismiss were 
prohibited in the NYSE Regulation arbitration forum. Rather, FINRA 
stated its understanding that, in the NYSE forum, the panel determined 
whether and if so, when, a motion to dismiss would be heard.
---------------------------------------------------------------------------

    \92\ See Supplemental Response to Comments from Linda D. 
Fienberg, President, Dispute Resolution, dated May 29, 2007. The SEC 
approved the consolidation of member firm regulatory operations of 
NASD and NYSE on July 26, 2007. Securities Exchange Act Rel. No. 
56145, 72 FR 42169 (Aug. 1, 2007) (SR-NASD-2007-023) (approval 
order).
---------------------------------------------------------------------------

Proposal's Impact on the Parties' Negotiations
    A number of commenters argued that the proposal would create 
settlement value for claimants because respondents would have to 
conduct a cost-benefit analysis to determine whether the cost of 
settling the dispute is more beneficial than losing a prehearing motion 
to dismiss and proceeding to evidentiary hearing.\93\ Generally, the 
commenters who supported the proposal stated that it would reduce all 
parties' costs because the parties would no longer waste resources 
arguing frivolous prehearing motions to dismiss that are rarely 
granted.\94\
---------------------------------------------------------------------------

    \93\ See, e.g., Amery, Buckman, Gelber and Shannon Letters.
    \94\ See, e.g., Buchwalter, Haigney, Neuman and Stoltmann 
Letters.
---------------------------------------------------------------------------

    FINRA responded that it agrees with those commenters who believe 
the proposal would reduce all parties' costs because the number of 
prehearing motions to dismiss in the forum should decrease once the 
proposal is implemented. Moreover, FINRA stated that it believes that 
respondents are more likely to conduct a cost-benefit analysis 
concerning whether to proceed with an arbitration based on the strength 
or weakness of their claims or defenses, not the existence of a motion 
to dismiss rule. For this reason, FINRA declined to amend the proposal 
at this time.
Proposal's Effect on Parties Who Settle Claim Before Hearing
    Proposed Rules 12504(a)(3) of the Customer Code and 13504(a)(3) of 
the Industry Code provide that, unless the parties agree or the panel 
determines otherwise, parties must serve motions to dismiss at least 60 
days before a scheduled hearing, and parties have 45 days to respond to 
the motion.
    The author of a February 2008 Securities Arbitration Commentator 
(``SAC'') article suggested that, under the proposal, parties would not 
be permitted to settle a claim and have it dismissed before the 
evidentiary hearing, if the 60-day deadline has passed and the parties 
have not yet filed a prehearing motion.\95\
---------------------------------------------------------------------------

    \95\ Harry A. Jacobowitz, ``Roadblocks at the Exits: FINRA's 
Proposed Dispositive Motions Rule,'' Securities Arbitration 
Commentator, February 2008 (Vol. 2007, No. 4), at 1.
---------------------------------------------------------------------------

    FINRA responded to the suggestion in the article by noting that the 
proposal does not preclude parties from agreeing to settle at any time. 
FINRA pointed out that Rules 12105 and 12207 of the Customer Code \96\ 
permit the parties to agree to extend the deadlines for filing or 
responding to motions. FINRA stated that the proposal would not 
prohibit the parties from taking these actions.
---------------------------------------------------------------------------

    \96\ See also Rules 13105 and 13207 of the Industry Code.
---------------------------------------------------------------------------

    Moreover, FINRA stated that the proposed rule is not intended to 
apply to motions made jointly by all parties to dismiss a case because 
of a settlement. FINRA pointed out that, under the Codes, if all 
parties agree to settle a case, FINRA will close the case based on the 
settlement agreement.\97\ FINRA stated that this process is different 
from that contemplated by the proposal, in which a panel grants one 
party's motion to

[[Page 741]]

dismiss a case before an evidentiary hearing is held.
---------------------------------------------------------------------------

    \97\ Rule 12902(d) of the Customer Code and Rule 13902(d) of the 
Industry Code.
---------------------------------------------------------------------------

Motions To Dismiss as Awards
    The author of a different February 2008 SAC article argued that 
arbitrator decisions on motions to dismiss are awards and should be 
published as required under the Code.\98\
---------------------------------------------------------------------------

    \98\ Richard P. Ryder, ``Disposing of Dispositive Motions: The 
Process to Date,'' Securities Arbitration Commentator, February 2008 
(Vol. 2007, No. 4), at 10; see also Jacobowitz Letter.
---------------------------------------------------------------------------

    FINRA responded to the comments in this article by stating that, 
under the Code, an award is a document stating the disposition of a 
case.\99\ FINRA explained that, if a motion to dismiss all claims is 
granted and disposes of all open issues, it would be reported as an 
award. FINRA further explained that a decision to grant a motion to 
dismiss that does not dismiss all of the parties or end the dispute 
would not be an award; rather, it would be considered an order of the 
panel and would not be made publicly available.
---------------------------------------------------------------------------

    \99\ Rule 12100(b) of the Customer Code and Rule 13100(b) of the 
Industry Code.
---------------------------------------------------------------------------

IV. Discussion and Findings

    After careful review of the proposed rule change, the comments and 
FINRA's response to the comments, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and the rules and regulations thereunder that are applicable to a 
national securities association.\100\ In particular, the Commission 
believes the proposed rule change is consistent with the provisions of 
Section 15A(b)(6) of the Act,\ 101\ 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. The Commission 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 Commission believes the proposed changes to 
the eligibility rule would help prevent manipulative practices by 
closing a loophole in the existing 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.\102\
---------------------------------------------------------------------------

    \100\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
    \101\ 15 U.S.C. 78o-3(b)(6).
    \102\ As described above, under the existing rule, 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. 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.
---------------------------------------------------------------------------

Policy Statement on Prehearing Motions

    The Commission believes that FINRA has adequately responded to the 
comments regarding FINRA's proposed policy statement on prehearing 
motions. The Commission agrees that parties have the right to a hearing 
in arbitration, and that prehearing motions to dismiss should be 
limited. The Commission also agrees with FINRA that proposed Rules 
12504(a)(1) of the Customer Code and 13504(a)(1) of the Industry Code 
reinforce this position by clarifying that prehearing motions to 
dismiss are discouraged in arbitration.
    Further, the Commission believes that FINRA adequately responded to 
the commenters who contend that this policy statement unfairly 
discourages all motions to dismiss in the forum, by pointing out that 
the proposal permits parties to file a motion to dismiss on any ground 
after the conclusion of a party's case in chief.
    Finally, given the comments that were received in response to the 
original proposal, which stated that motions to dismiss should be 
granted only in extraordinary circumstances, the Commission believes 
that FINRA has appropriately refined the statement to reflect FINRA's 
policy while eliminating any ambiguity created by the words 
``extraordinary circumstances.''
    The Commission's oversight of the securities arbitration process is 
directed at ensuring that it is fair and efficient. As noted above, 
FINRA had received complaints that parties were filing dispositive 
motions routinely and repetitively in an apparent effort to delay 
scheduled hearing sessions on the merits, increase investors' costs, 
and intimidate less sophisticated parties. This type of abusive motions 
practice undermines the fairness and efficiency of the securities 
arbitration process. The proposed rules, which strictly limit the 
grounds for filing pre-hearing motions to dismiss, and impose sanctions 
on parties that engage in abusive practices, are designed to enhance 
the fairness and efficiency of the process. The Commission believes 
that FINRA's policy statement sets a clear tone that commands a narrow 
reading of the provisions setting forth the grounds on which parties 
may bring a motion to dismiss prior to the conclusion of a party's case 
in chief. A narrow reading of those provisions is essential to help 
achieve FINRA's overarching goal of the proposal: To 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. 
Furthermore, this policy statement is consistent with other parts of 
the Codes, where FINRA sets forth procedures that are only permitted to 
be used in limited circumstances.\103\
---------------------------------------------------------------------------

    \103\ See, e.g., NASD Rules 12507(a)(1), which states that 
``interrogatories are generally not permitted in arbitration,'' 
while setting forth limited types of written discovery requests and 
12510 (Depositions), which states that ``depositions are strongly 
discouraged in arbitration,'' while setting forth a list of the 
limited circumstances in which depositions are permitted.
---------------------------------------------------------------------------

Scope of Proposed Rules 12504(a)(6) of the Customer Code and 
13504(a)(6) of the Industry Code With Respect to Clearing Firms

    The Commission carefully considered a commenter's arguments that 
when a statement of claim does not make factual allegations of direct 
misconduct by a clearing firm, the clearing firm should be dismissed 
from the case.\104\ Under applicable rules of self-regulatory 
organizations, all clearing agreements must identify the division of 
duties between the introducing and clearing brokers.\105\ Typically, an 
introducing or correspondent broker deals directly with the public and 
originates customer accounts \106\ while the clearing broker handles 
functions related to the clearance and settlement of trades in the 
accounts of its introducing broker.\107\ The clearing broker usually 
has no direct contact with the customers of its introducing broker, 
except for the periodic mailing of reports and other records relating 
to their accounts.\108\ However, a clearing broker may expose itself to 
liability with respect to the introducing broker's misdeeds ``where a 
clearing firm moves beyond performing mere ministerial or routine 
clearing functions [with actual knowledge] and becomes actively and 
directly involved

[[Page 742]]

in the introducing broker's [fraudulent] actions. * * *'' \109\ 
Although findings of liability against clearing brokers are unusual, 
courts have upheld arbitration awards against clearing brokers, finding 
that the arbitrators did not act with ``manifest disregard of the 
law.'' \110\
---------------------------------------------------------------------------

    \104\ See SIFMA Letter.
    \105\ See, e.g., NYSE Rule 382, NASD Rule 3230, Amex Rule 400.
    \106\ See Katz v. Fin. Clearing & Serv. Corp., 794 F. Supp. 88, 
90 (S.D.N.Y. 1992).
    \107\ Dillon v. Militano, 731 F. Supp. 634, 636 (S.D.N.Y. 1990).
    \108\ Stander v. Fin. Clearing & Serv. Corp., 730 F. Supp. 1282, 
1285 (S.D.N.Y. 1990).
    \109\ McDaniel v. Bear Stearns & Co., 196 F. Supp. at 353.
    \110\ See, e.g., id; see also, Koruga, 183 F.Supp.2d at 1247.
---------------------------------------------------------------------------

    Because claimants generally need to be able to develop the facts to 
argue the liability of a clearing firm in a particular dispute, the 
Commission agrees with FINRA's analysis that it would be inappropriate 
for clearing firms to be eligible for prehearing dismissal based solely 
on their status as clearing brokers. Under the proposed rule, however, 
clearing firms will continue to be permitted to file motions to dismiss 
for any reason after the conclusion of the claimant's case in chief. 
The Commission believes that this strikes an appropriate balance 
between providing claimants an opportunity to resolve factual disputes 
and limiting clearing firms' needless involvement in disputes. The 
Commission staff has asked FINRA to request that SIFMA provide it with 
available statistics regarding all motions to dismiss filed by clearing 
firms in the past and until the effective date of the proposed rule 
change.\111\ Further, the Commission has asked FINRA to maintain 
statistics on motions to dismiss filed by clearing firms for a period 
of six months from the effective date of this proposed rule change, to 
shed greater light on any burdens imposed on clearing firms. The 
Commission has also asked FINRA to consider additional steps it could 
take to inform parties of the distinction between introducing brokers 
and clearing brokers.
---------------------------------------------------------------------------

    \111\ To the extent that firms and other interested parties have 
access to information or statistics that would be relevant, such 
firms and parties are invited to send such information to the 
attention of the staff of FINRA Dispute Resolution.
---------------------------------------------------------------------------

Scope of Proposed Rules 12504(a)(6)(B) of the Customer Code and 
13504(a)(6)(B) of the Industry Code (``Not Associated'' Exception)

    With respect to the comments regarding the ``not associated'' 
exception, the Commission believes that FINRA responded appropriately. 
Specifically, FINRA indicated that it intends this exception to apply 
narrowly, such as in cases involving issues of misidentification. FINRA 
further clarified the meaning of ``not associated'' by providing 
examples of ways in which the exception could be invoked. The 
Commission agrees with FINRA that the ``not associated'' exception 
would be inappropriate in cases in which a respondent may be liable as 
a supervisor or control person under applicable statutes or in 
``selling away'' cases.
    The Commission recognizes that certain situations, such as cases 
involving mistaken identity, would merit a prehearing dismissal, which 
is why the Commission supports the existence of a ``not associated'' 
exception within the rules. However, as stated above, the Commission 
believes that a narrow interpretation of the exceptions is appropriate.
Additional Exceptions for Permissible Prehearing Motions
    With respect to the comments requesting that FINRA incorporate 
additional exceptions for prehearing motions to dismiss, the Commission 
believes that FINRA responded appropriately. Specifically, the 
Commission agrees with FINRA's conclusion that expanding the exceptions 
to the rule would negate its intent, which is to have clear, easily 
definable standards for permissible prehearing motions to dismiss that 
do not involve fact-intensive issues. Moreover, the Commission agrees 
that the suggested additional exceptions would require fact-based 
determinations and, thus, would be inappropriate for dismissal before a 
claimant has presented its case. As FINRA pointed out, a party is 
permitted to file a motion to dismiss on any basis after the conclusion 
of a party's case in chief.
    The Commission believes that, particularly with respect to the 
limited exceptions to prehearing motions, the proposal strikes an 
appropriate balance by ensuring that claimants have their claims heard 
in arbitration, while minimizing the parties' exposure to additional 
fees in the event that the claimant does not prove the claims in its 
case-in-chief.
Expansion of the Exception for Prehearing Motions Under the Eligibility 
Rule To Include Applicable Statutes of Limitation
    With respect to the comments regarding statutes of limitations, the 
Commission believes that eligibility is an appropriate ground for a 
prehearing motion to dismiss because of its uniform application in all 
cases, and because of the additional protections parties receive under 
the eligibility rule. As FINRA explained, statutes of limitations 
involve fact-based determinations, depend on the law of the applicable 
jurisdiction, and depend on the type of claims alleged. Moreover, FINRA 
noted that, in some jurisdictions, courts have found that statutes of 
limitations do not apply to arbitration proceedings. For these reasons, 
the Commission agrees with FINRA's conclusion that it would be 
inappropriate to include an exception for prehearing motions to dismiss 
on statute of limitations grounds.
Motions Permitted at the Conclusion of Claimant's Case-In-Chief
    With respect to the argument that this provision will shift abusive 
motions practice to the middle of the hearing, because respondents will 
wait until the end of claimant's case to file their motions, the 
Commission believes FINRA responded appropriately. In particular, the 
Commission agrees with FINRA's assertion that it would be unfair to 
require the parties to continue with a hearing if the claimant has not 
proved its case.
    The Commission staff has requested that FINRA gather statistics on 
a going-forward basis, to determine whether abusive motions practice 
becomes apparent in the post-hearing phase of arbitration. In response, 
FINRA stated that it will monitor the frequency of motions filed 
pursuant to this provision once the proposal is implemented. FINRA has 
agreed to analyze the information to determine whether potentially 
abusive behavior develops, and FINRA stated that it may propose further 
amendments to the rules that are subject to this proposal or take other 
appropriate action.
    In addition, further to discussions with the Commission staff, 
FINRA noted in its response that the proposed rule would not preclude a 
panel from assessing respondents with sanctions, costs and attorney's 
fees, if the panel determines that a motion filed at this time is 
frivolous or in bad faith.
Concerns Regarding the Procedural Safeguards and Mandatory Assessment 
of Costs and Attorneys' Fees and Possible Sanctions
    With respect to the comments regarding the procedural safeguards 
and mandatory assessment of costs and fees and possible sanctions, the 
Commission believes FINRA responded appropriately. The Commission 
believes that the proposal's procedural safeguards are carefully 
designed to enhance the fairness and neutrality of FINRA's arbitration 
forum. The Commission further believes that the mandatory assessment of 
costs and attorneys' fees and possible sanctions serves the necessary 
function of deterring parties from filing such motions frivolously or 
in bad faith, and

[[Page 743]]

should ensure strict compliance with the rules.
Effect of the Proposal on the Parties' Costs
    With respect to the comments suggesting that the proposal 
prohibiting prehearing motions to dismiss except on limited grounds 
would increase all parties' costs, particularly firms', because their 
attorneys charge on an hourly basis (whereas claimants' attorneys 
charge on a contingency basis, so claimants are not incurring any 
costs),\112\ the Commission is unconvinced. The Commission believes 
FINRA responded appropriately by highlighting the effect of motions to 
dismiss on all parties' costs and the potential for claimants' 
attorneys to be reluctant to take on small cases due to costs 
associated with motions to dismiss. Furthermore, the Commission agrees 
with FINRA's ultimate determination that the proposal's benefits of 
protecting investors' access to the forum and their ability to have 
claims heard in arbitration outweigh the possibility of increased costs 
and expenses firms might incur under the rule.
---------------------------------------------------------------------------

    \112\ See, e.g., Hartman, Kemnitz, Morgan Stanley and Schrils 
Letters.
---------------------------------------------------------------------------

General

    In general, the Commission believes that FINRA has responded to the 
comments adequately and appropriately, and has explained how the 
proposed rule change is consistent with the requirements of the Act, 
and the rules and regulations thereunder that are applicable to a 
national securities association. As noted above, the Commission 
believes that the proposal would help achieve the overarching goal of 
ensuring 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. At the same time, the Commission believes that the proposal would 
not unduly limit the rights of parties to seek dismissal, because it 
would allow prehearing motions to dismiss in certain limited 
circumstances, and it would not affect the ability of parties to seek 
dismissal after the conclusion of the claimant's case in chief. As 
such, the Commission finds that the proposal would contribute to the 
fairness and efficiency of the securities arbitration process.

V. Conclusions

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\113\ that the proposed rule change (SR-FINRA-2007-021), as 
modified by Amendment No. 1, be, and hereby is, approved.
---------------------------------------------------------------------------

    \113\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\114\
---------------------------------------------------------------------------

    \114\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon
Acting Secretary.
 [FR Doc. E9-12 Filed 1-6-09; 8:45 am]

BILLING CODE 8011-01-P
