April 10, 2008
Re: Comment on Proposed FINRA Rule 12905 File No. SR-FINRA-2008-005
I am an attorney representing parties in securities arbitrations. My practice primarily consists of representing investors in claims against the industry, but also includes representation of associated persons and members. Formerly, I was involved in the industry as a Chief Executive Officer, Compliance Officer and General Counsel of member broker/dealers during which time I served as Chairman and Vice Chairman of the FINRA District Committee for District 6 in Dallas, and also served on the Small Firm Advisory Board, and the Advisory Council for FINRA. I also serve as an arbitrator and mediator in securities arbitrations. My perspective stems from all sides of the issue. I write to oppose the codification of any practice or approval of any rule that invites dispositive motions into mandatory arbitration.
At the very core, mandatory arbitration was foisted on public customers as cheaper, more streamlined, grounded in equity, and ultimately more fair, and the trade-off was waiver of individual rights to a trial before a judge and by a jury of peers. Fundamental to this notion is a right to have your case heard by fair and neutral arbitrators. The alleged benefits of arbitration and the right to a final hearing are undermined if respondents in customer arbitrations can seek to dispose of a case prior to the panels receipt and consideration of relevant evidence. If arbitration is cheaper, more streamlined, equitable, and ultimately fair, then respondents are not prejudiced by a requirement to prove their case at a final hearing (and not before), even if their case would support grounds for dismissal due to any of the circumstances enumerated in proposed rule 12905. There should be no rule condoning a dispositive motion practice.
I encounter a motion to dismiss in essentially EVERY customer case, regardless of the facts, regardless of the date of the underlying events, and regardless of the claims alleged. It happens every time, without exception. It also happens pre-hearing, and then again during final hearing, and often post hearing. Respondents include these motions in their Answers (despite prohibitions in the New Code of Arbitration Procedure), and later assert them at the start of the final hearing, at the close of Claimants case in chief, and at the close of the evidence. Fundamentally, this is a litigation procedure, without the guidance, precedence or jurisprudence developed over centuries in the court system. It has no place in arbitration, but because of FINRAs tolerance for such strategy, it has enabled and condoned the practice. Now FINRA seeks to codify the practice based primarily on its prior tolerance of the practice in the absence of a rule addressing the practice. Some would say that "if you can't stop it, you may as well sit back and enjoy it." I do not. However, the Commission can stop it, and should stop it. Because of this creeping litigiousness dispositive motions have become the rule, and not the exception. The result is higher forum fees (bad for all parties, but good for the arbitrators and FINRA, but irreconcilable to the core ideals of arbitration), increased legal fees (good for the defense bar, bad for the public customer), and an effective closing of the door to dispute resolution for many claimants. I routinely deny representing customers that have clearly been victimized by their broker/firm for the simple reason that I will be required to invest more time in the case than is economical because of this creeping litigiousness. The result is I decline the case, and an aggrieved investor is unable to participate in the mandatory dispute resolution process. Now, both the courthouse doors and the doors to mandatory arbitration have been effectively closed to those that often were most vulnerable and easily victimized by unscrupulous brokers and non-supervising firms. If this is the intended result, then pass the rule in its current form. If arbitration should remain mandatory, then provide the claimants an unfettered right to prove their claim, or lose in light of the evidence, but dont betray the core vision of arbitration by condoning motion practice, and closing the door for many claimants. The proposed rule smacks of a political decision, special interest lobbying and partisanship. Either stand-up for investors' rights, or don't.
If any of the 3 bases for dismissal as set forth in the proposed rule were present in a case, the case will likely be voluntarily dismissed, settled, or quickly and efficiently resolved in arbitration, as is intended by the Code. Why encumber the process by permitting greater litigiousness. CEO Shapiro preaches investor protection in every aspect of FINRA public relations, but actions speak louder than words, and the rule proposal is a political handout that has nothing to do with investor protection. Prohibit dispositive motions and give the investor a hearing on the merits, or if you permit litigation and motion practice, give the investor a choice of what forum within which to litigate their claims---industry arbitration or the judicial system. Currently, you have condoned litigation before panelists, who have no training to be jurists, and may be conflicted or biased at any number of levels, while at the same time preventing public investors from litigating their claims before a trained jurist (judge/magistrate) and a neutral fact finder (juries). The result is that FINRA has sold out to the membership at the expense of the investor. They are required contractually to arbitration, in which they must engage in litigation before panels that are not qualified to render decisions on complex issues such as dismissing claims without a consideration of evidence. Give the investor a choice---- binding, non-appeallable arbitration with liberal pleading standards that is truly simplified and without the risk of dispositive motions at any juncture of the proceedings, or let the investor choose a trial before a judge and jury in which the claims will be subjected to the full gambit of litigation, discovery, motion practice, dispositive motions, and appeal.
The proposed rule is fundamentally contrary to arbitrations goals. If you must pass such a rule due to political pressures, give concrete parameters about when such a motion can be filed, and when it can be heard, and on what basis it can be granted, and the ramifications if denied. As currently drafted, it is manna from heaven to respondents, and history teaches us that arbitrators are unwilling to subjectively determine issues that may permanently impact the likelihood of their serving on future arbitrations. Take the proposal a step further by delineating when and only when a dispositive motion can be filed, and on what bases. Most importantly, provide real guidance to the pool of arbitrators. If our arbitrators remain untrained and hesitant to apply the sanctions set forth in the rule (as they are now with other issues), the rule will ultimately be another example of form over substance. Any sanctions imposed under the rule must be paid within 30 days. Amend the proposed rule to provide for such certainty.
As noted, I do not believe that dispositive motion practice belongs in arbitration—it is fundamentally inconsistent with the stated mission of this arbitration forum. However, it would appear inevitable that the SEC will codify motion practice in these arbitrations. Indeed, the proposed rule appears to improve the status quo, but as my Mother used to say, "It is hard to fall out of bed when you are sleeping on the floor." In other words, it can't get any worse than it is now, so the proposed rule appears an improvement.
Primarily, I support the elimination of dispositive motions in FINRA arbitrations. Because arbitration is a matter of contract between the parties, the only way to eliminate the dispositive motion practice is to approve a rule which emphatically states that dispositive motions are not permitted at any time during the arbitration. Anything short of that is an approval of the practice. As it is now, the Code does not address dispositive motions, which was the result of intention, not oversight, thus implying that such motions are not provided for in the rules. However, despite this clear history and legislative intent, the dispositive motion practice is rampant, and a real cancer on the forum, but a practice that is essentially ignored by rule makers and condoned by the SROs. Dispositive motions should be banned. It is a yes or no issue. The proposed rule codifies the cancerous practice of filing motions to dismiss in every arbitration-- before, during and after.
Since when does the Commission negotiate on what is appropriate in its responsibility to protect investors? The status quo is patently unfair and yet the proposed rule improves on the status quo. As a result, I am left with little alternative except to encourage the Commission to approve the rule as proposed as a first step toward eliminating entirely an abhorrent practice. This endorsement is only made on the assumption the Commission is unwilling to insist on a rule that will eliminate the dispositive motion practice.