March 26, 2008
As a lawyer who has been deeply involved in securities arbitration for over 20 years as an arbitrator and advocate, I am pleased offer my comments on FINRA's proposed revisions to Rules 12206 and 12504, which represent a welcome reform.
This reform has been proposed because FINRA has recognized the increasingly oppressive use of motions to dismiss by brokerage firms against customer claims. Motions to dismiss are a routine part of court practice that should never become routine in arbitration. While a rarity in years past, such motions have become a standard part of the defensive arsenal of brokerage firms faced with customer complaints in arbitration. Even when they are denied, these motions are costly to defend against and require claimant's counsel to file legal briefs and present court-like arguments on technical points of law at hearings before the panel.
Motions to dismiss pose a special danger in the context of arbitration. Plaintiffs in federal or state court are afforded substantial protection to prevent their claims from being dismissed in error. This protection starts with the fact that motions are decided by judges who are required to rule on the basis of explicit procedural rules and legal precedent. Of course errors by trial courts can be corrected by courts of appeal. On the other hand, arbitrators need not be lawyers and have no explicit standards to guide them in deciding how to rule on motions to dismiss. Finally, and most disturbingly, there is no effective review on appeal of erroneously decided motions to dismiss arbitration claims. Thus, a retiree whose claim for recovery of nest-egg assets is dismissed by virtue of a "mere error of law" by the arbitrators will never be allowed meaningful review of the arbitrator's error. This is profoundly unfair.
Motions to dismiss are fundamentally antithetical to the securities arbitration process in which customer disputes are supposed to be decided expeditiously and on the basis of precepts of fairness and equity. When Marc Lackritz, President of the Securities Industry Association (SIA), testified before the Committee on Financial Services of the U.S. House of Representatives (March 17, 2005) he described arbitration as "a system that works," and "a fair and efficient means of resolving disputes between customers and brokerage firms." He asserted that a major reason the process is fair to claimants is because "parties who utilize arbitration are far more likely to have their claims aired in a full hearing and decided on the merits rather than won or lost on technicalities." Mr. Lackritz pointed out arbitration gives clients a chance to be heard on the merits which "is in sharp contrast to court proceedings, where a significant percentage of claims are dismissed on prehearing motions to dismiss or for summary judgment." If the securities industry genuinely believes that the absence of motions based on technical points of law is an advantage of arbitration, it should support the proposal, though I suspect it will not, particularly since so many of its member firms have exhibited such a proclivity for filing prehearing motions to dismiss .
For the reasons described above, I support FINRA's proposed procedural and substantive limitations on motions to dismiss prior to the conclusion of the claimant's case in chief. I would, however, urge the SEC and FINRA to make it clear that the explicit recognition in the proposed rules of motions to dismiss filed at the conclusion of the claimant's case is not a back door invitation for respondents to bombard panels with technical legal arguments that are appropriate for court, but not arbitration—particularly arbitration mandated by the securities industry.
Brian N. Smiley
Smiley Bishop Porter LLP
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bnsmiley@sbpllplaw.com