Subject: File No. SR-FINRA-2007-021
From: Harry A. Jacobowitz, Esq.
Affiliation: Data Base Manager, Securities Arbitration Commentator, Incorporated Managing Editor, Securities Awards Monthly

April 10, 2008

Thank you for the opportunity to comment on FINRA's proposed rules on dispositive motions. Most of the following comments are taken from my article, "Roadblocks at the Exits: FINRAs Proposed Dispositive Motions Rule," published in the Securities Arbitration Commentator.

These comments are based on my more than 20 years of experience preparing dispositive motions in court litigation, three years of experience reading and analyzing securities arbitration Awards on behalf of Securities Arbitration Commentator, Inc. (in the positions described above), and research I did especially for the article. However, I wish to state that my opinions are solely my own and do not reflect any policy of Securities Arbitration Commentator, Inc. or any of its publications.

FINRA justifies the proposed rules on the ground that "it received complaints that parties (typically respondent firms) 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." At the same time, it recognizes that in limited circumstances, it would be unfair to require a party to proceed to a hearing. To comport with those concerns, I have tried to tailor my suggestions to keep down the legal costs of defending against such motions.

The proposed rule change so narrows the grounds for dispositive motions that a respondent may no longer raise any statute of limitations claims in good faith. Such a restriction makes sense: it avoids the need to research and argue the applicability of various statutes of limitations that vary depending on the cause of action and jurisdiction in which it arose, as well as the fine points of accrual and tolling principles worked out by the courts. It substitutes in their place a single, nationally-applicable, bright line test of timeliness, the eligibility rule, thereby saving a lot of potential effort and expense. On the other hand, permitting arbitrators to exclude claims that are ineligible for arbitration anyway should save everyone expense, effort and time.

Aside from settlements, the only other ground for dismissal under the rule would be when "the movant was not associated with the account(s), security(ies), or conduct at issue." Unfortunately, the meaning of conduct leaves a troublesome gray area: the case in which a respondent (whether a broker, broker-dealer or customer) took part in transactions or events giving rise to the claim, but can prove that its conduct was not wrongful. For instance, a broker defending a claim of unsuitability, although he admittedly recommended securities to his customer, might be able to prove that he did not recommend any securities or whether it is sufficient for him to prove that did not make any unsuitable recommendations. Likewise, a clearing broker-dealer might be associated with administrative tasks in a questionable transaction without violating any duty to the customer and a broker-dealer might terminate a broker in a manner the employee regards as wrongful but which the employer can prove was proper.

Without more specific guidance, arbitrators could adopt widely divergent standards. In the foregoing examples, arbitrators who define conduct as the recommendation, administrative task or termination will find that the respondent was associated with that action and deny a motion based on the propriety of the action they might even go so far as to find the motion to be frivolous and impose sanctions. Other arbitrators who define conduct to require the making of an unsuitable recommendation, or the breach of a duty to the customer, or a wrongful discharge may grant dismissal on an identical motion. As the rule is currently worded, either interpretation is reasonable.

I believe that FINRA can and should adopt wrongfulness as an element of conduct because I do not believe that doing so will do violence to the SRO's objectives, even though it will likely present a mixed issue of fact and law. FINRA might arguably be concerned about respondents bringing motions based on dubious or ambiguous precedents. If so, it can address the issue by setting reasonable guidelines, such as requiring legal principles not directly based on statutes and rules used in support of a dispositive motion to be well-settled in the relevant jurisdiction - an argument that opposing counsel may rebut simply by citing counter-authority - rather than avoiding legal issues entirely. FINRA has already aided the consideration of legal issues by requiring Panel Chairs to be lawyers. Rule 1400(c).

Nothing in FINRA's explanation of the purpose of its proposed dispositive motion rules requires that it avoid any pre-hearing adjudications based on the legal propriety of the conduct alleged in the Statement of Claim. A properly supported motion on that ground might actually avoid unnecessary time and expense for both sides in prosecuting and defending conduct that was obviously appropriate. Even an only partially successful motion may narrow the issues or avoid the expense of expert testimony on fruitless theories of liability. A respondent's attorney who hopes to present a motion not based on a sound legal argument will still risk the imposition of attorney fees, costs or other sanctions for filing a frivolous or bad faith motion and faces the limitation on filing a second motion.

Another deficiency of the narrow standard for substantive dispositive motions arises when a claimant loses an arbitration and then refiles a claim based on the same transactions or identical issues of fact. Under the current rule proposal, the respondents have no recourse to dismissal based on principles of res judicata or collateral estoppel, no matter how clear, until the claimant rests his or her case. Although a respondent who settles with a claimant might be able to enforce the settlement agreement (since the rule wisely preserves settlements as a ground for dispositive motions), a respondent who has fought the case to a successful conclusion would have no recourse to an early disposition and would have to prepare a full defense to a second bite at the same apple.

Finally, these proposed rules, if adopted, will put respondents and their counsel in uncharted waters, fraught with previously unseen dangers. FINRA can help them navigate their way by posting, and educating arbitrators about, clearer guidelines on the issues raised in this article. However, if the history of jurisdiction is any guide, no set of guidelines will ever address all of the questions that arise in the course of practice. It is for this reason that a body of precedent has grown up around a host of laws and regulations. Indeed, even where a guideline is clear, examples of the principles in practice will add greater confidence to that understanding.

FINRA's requirement that panels provide written explanations for granting dispositive motions will partially meet this need. Unfortunately, there is no requirement that the arbitrators include this explanation in the final Award on the case (except in dismissals for ineligibility). Although FINRA must make Awards public, it does not intend making these dismissal decisions public. If the decision happens to terminate the case, then the panel will presumably include its explanation in the Award. However, if a dismissal affects only part of the case and leaves the rest to be decided, or denies the motion entirely, the panel might never explain the basis for its decison, even when it does issue a final Award.

Occasions when a panel judges a dispositive motion to be frivolous or in bad faith are more serious problems. Because they do not terminate a case and the panel has no duty to explain its decision in any case, they provide a far smaller and less reliable body of precedent. Moreover, since the proposed rules offer no definition of what is frivolous or in bad faith, there is a greater likelihood of inconsistent and unjust results. FINRA should consider requiring panels to explain such findings, at least at the end of the case if not at the time they grant the sanctions.