April 9, 2008
The FINRA proposed rule is designed to substantially limit the ability of FINRA Dispute Resolution arbitrators to consider and determine pre-hearing dispositive motions, and indeed, to discourage arbitrators from considering them at all --to "stigmatize" proper motions, as cogently stated by SIFMA representatives. This clearly represents a 180 degree shift over a relatively short period of time since, for example, the 1996 NASD Regulation Office of Dispute Resolution Chairperson Course Preparation Guide 58 (Version 1.1, November 1996), by which NASD arbitrators were specifically instructed that:
"Although arbitration is an informal process, any party may file a dispositive motion-- that is, a motion to dismiss all or part of a claim-- prior to hearing. The most common arguments for dismissing a claim are:
" Eligibility
" Statutes of Limitation
" Appropriateness of the forum."
Arbitrators have in fact been instructed to rule on dispositive motions. Id
The limitation that the Proposed Rule would place on pre-hearing dispositive motions, i.e. limiting motions to eligibility, prior release, or "non-association" grounds, disregards important elements of the historical context in which securities industry self-regulatory organization arbitration forums have evolved, and in which they have repeatedly been recognized by the United States Supreme Court as providing fair and efficient means of resolving disputes. At a time when enforceability of pre-dispute arbitration provisions in broker-customer agreements was a main focus in the courts, the fundamental point that parties to arbitration do not forgo substantive rights afforded by law --that they instead submit them to an arbitral rather than a judicial forum --was a key consideration. Nothing has changed that today would justify the effective elimination of the most efficient, and ultimately fair, means of securing arbitral determination of substantive legal rights when the result is plainly compelled and there is no reason to require the defense against defective or non-existent claims as a matter of controlling law.
The SIFMA comment letter well points out the dilemma for clearing firms in this scenario that find themselves named as respondents on conclusory claims in an arbitration statement of claim based solely on the relationship with an introducing firm that run directly contrary to established legal principles concerning the absence of a legal duty on which to make such claims. Even more to the point, the same is true where an applicable statute of limitations makes clear that there is no claim to begin with. These are substantive matters --rights-- of parties that should to be heard and determined before mandating further participation through a final hearing. FINRA expresses the belief that all parties have the right to a hearing in arbitration, and only in very limited circumstances should that right be challenged. Clearly, parties should have the right to a hearing when one is necessary. It may be entirely unnecessary, however, to force the defense through final hearing on clearly insubstantial, ineligible or improper claims that can most efficiently and fairly be considered on a pre-hearing motion.
FINRA arbitrators have shown no unwillingness to hold hearings, whether by telephone or in person, for the limited purposes of addressing proper dispositive motions, and there is clearly nothing that prevents them from doing so. Indeed, the Proposed Rule recognizes what in fact happens in practice by adding a specific hearing requirement. The FINRA concern for disposition of a case prior to presentation of the party's "case in chief" is that there is a reason for having the hearing at which evidence will be taken. Yet there are situations in which evidence is not needed, and in which a motion to dismiss is the fair and efficient means of dealing with claims.
Certain aspects of the FINRA Proposed Rule would make the dispositive motion procedure better. Separate filings, filing deadlines, full panel involvement, an explained written decision, and protection against frivolous or otherwise bad faith motions, are all positive steps. The fault in the Proposed Rule is simply the elimination of the right to present non-frivolous, good faith and substantiated motions to dismiss when there is no need to force the matter or any particular part of it to a further hearing "on the merits."
In sum, I urge the Commission to consider the Proposed Rule in historical context and with recognition that substantive, dispositive legal issues not only should, but need to be, heard and determined by pre-hearing motion. The arbitration forum should be open to full and fair presentation of these issues, and indeed consideration of the fundamental basis for a "claim," by means of a specific pre-hearing motion. Some commentators addressing the Proposed Rule express the belief that permitting pre-hearing motions to dismiss presents an unfair roadblock to securing just results for claimants. But that is itself an unfair criticism when the concern should be for the overall quality of justice in arbitration, which demands that all parties have the full and fair opportunity to have pre-hearing arbitrator consideration of the propriety of claims in the first place, whatever that dispositive issue may be.