On January 23, 2009, the Financial Industry Regulatory Authority (FINRA), formerly known as the National Association of Securities Dealers (NASD), announced a significant change to its Code of Arbitration Procedure (the "Arbitration Code") addressing motions to dismiss arbitration claims, ratified by the Securities and Exchange Commission (SEC). Effective February 23, 2009, motions to dismiss now are governed by Rule 12504 for customer disputes, and Rule 13504 for intra-industry disputes.¹

FINRA defines a motion to dismiss as "a request made by a party to the arbitrator(s) to remove some or all claims raised by a party filing a claim."² Motions to dismiss currently may be filed at any time. Prior to the changes to Code Rules, motions to dismiss were administered under Rules 12503 and 13503, the rules for motions in general.

Under the new Rules 12504(a) and 13504(a), an arbitration panel may not rule on a motion to dismiss prior to the conclusion of a claimant’s case (the "case in chief") at the arbitration hearing, with a few limited exceptions. Parties otherwise are free to file motions to dismiss pursuant to Rules 12504(b) and 13504(b) based on any applicable theory of law, following the conclusion of the case in chief at hearing. A summary of the new Rules’ provisions, together with these limited exceptions, is set forth in the following section, below.

In addition to introducing new rules governing motions to dismiss, FINRA has revised its arbitration rules concerning motions to dismiss specifically based on "eligibility." Such motions are governed separately by Rules 12206 and 13206. Those revisions also are summarized below.

¹ For the full text of FINRA Code of Arbitration Procedure Rule 12504 and Rule 13504, see http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=7377 and http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=7378, respectively.

² See FINRA FAQ’s at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117757.pdf.

Rules 12504(a) and 13504(a) now impose the following requirements on parties filing motions to dismiss prior to the case in chief at arbitration hearings (other than those motions to dismiss based solely on eligibility)³.

1. The motion to dismiss (for purposes of this section, the "motion") must be in writing.
2. The respondent must file his/her/its answer prior to filing any motion to dismiss, and such motion must be filed separately from the answer.
3. The moving party must file the motion at least 60 days prior to the arbitration hearing. The non-moving party has 45 days to respond to the motion.
4. The full panel must decide the motion.⁴
5. The panel must hold a hearing prior to granting the motion, unless the parties waive the hearing.
6. The panel may not rule on the motion, unless and until it (the panel) determines that
   1. the non-moving party signed a settlement and release barring the claims; or
   2. the moving party was not associated with the account, security or conduct at issue.
7. If a party files a motion to dismiss pursuant to Rule 12206 or 13206 (i.e., requesting dismissal on grounds of the non-moving party’s ineligibility), the panel may not act on the motion unless it determines that the claim is not eligible for arbitration because it does not meet the six-year eligibility requirement.
8. For "hybrid" (also called "mixed") motions where the motion to dismiss is based on multiple grounds including eligibility, the panel first must decide eligibility. If the panel grants the motion to dismiss on eligibility, it may not rule on the other grounds for the motion.
9. Any denial of a motion under these rules must be unanimous and must be explained in writing.
10. A party may not re-file a motion under these rules if the panel denies it, unless specifically permitted by panel order.
11. A party who files a motion under these rules and loses must be assessed forum fees. If the panel determines that the motion was frivolous, it also must award reasonable costs and attorney fees to the opposing party.

Motions to dismiss filed pursuant to Rules 12504(b) and 13504(b) are those motions filed after the conclusion of the case in chief at hearing. Such motions are not subject to the above provisions and may be filed under any applicable theory of law.

³ FINRA’s full summary of the changes to Rules 12504 and 13504 are included on the FINRA FAQ’s at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117757.pdf.

⁴ If the motion to dismiss under these rules includes a request for dismissal based on eligibility, the "hybrid" motion must be filed 90 days prior to arbitration hearing, and the non-moving party then has 30 days to respond. See section below concerning motions to dismiss based on eligibility.

FINRA has revised its rules governing motions to dismiss based on eligibility of claims, Rules 12206(b) and 13206(b), generally consistent with the foregoing provisions of Rules 12504(a) and 13504(a), with a few differences. The first difference is that the arbitration panel may decide a motion to dismiss alleging lack of eligibility prior to the conclusion of the case in chief. (Contrast with provision 6 in the previous section, precluding the panel from deciding motions to dismiss except under limited exceptions.)⁵

The first difference is that the arbitration panel may decide a motion to dismiss alleging lack of eligibility prior to the conclusion of the case in chief. (Contrast with provision 6 in the previous section, precluding the panel from deciding motions to dismiss except under limited exceptions.)

Secondly, while a panel may decide an eligibility-based motion to dismiss at any stage of the proceeding (including prior to the hearing), the moving party must file its eligibility motion least 90 days prior to the arbitration hearing. (Contrast with provision 3 in the previous section, requiring parties to file motions to dismiss under 12504(a) and 13504(a) at least 60 days prior to arbitration hearing.) This means that any hybrid motions to dismiss, alleging lack of eligibility and other grounds for dismissal, must be filed at least 90 days prior to the arbitration hearing.

A party responding to an eligibility-based motion to dismiss has 30 days to respond. (Contrast with provision 3 in the previous section, giving non-moving party 45 days to respond.) If the motion to dismiss is a hybrid motion alleging eligibility and other grounds for dismissal, however, the non-moving party still has 45 days to respond.

In ruling on hybrid motions to dismiss, the panel must decide eligibility first. If it finds on a hybrid motion that the claimant is ineligible under Rules 12206 or 13206 to file the claim, the panel may not rule on any other grounds for the motion.

Where a panel determines that a party filed an eligibility motion to dismiss pursuant to Rule 12206(b) or 13206(b) in bad faith, it may issue sanctions against that party pursuant to Code Rules 12212 and/or 13212.

⁵ See full text of Rules 12206 and 13206 and the following links, respectively: http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4112 and http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4209.

As FINRA states on its website, it implemented the foregoing rule changes as a result of forum feedback that "parties were filing prehearing motions routinely and repetitively which had the effect of delaying schedule hearing sessions on the merits, increasing customers’ costs and intimidating less-sophisticated customers."⁶

"FINRA also learned through an independent study that the number of motions to dismiss in customer cases had begun to increase over a two year period, starting in 2004. Even though most motions to dismiss filed prior to the approval of the new rules were denied, FINRA became concerned that, if left unregulated, this type of motion practice would limit investors’ access to the forum, either by making arbitration too costly or by denying customers their right to have their claims in arbitration."⁷

⁶ See FINRA’s FAQ’s at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117757.pdf.

⁷ See Id. at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117757.pdf.

FINRA imposed concurrently with the above rule changes a moratorium on the filing of all motions to dismiss, on any grounds, from January 23, 2009, up to and including Feburary 23, 2009. In some cases, arbitrators are declining to rule on pre-moratorium motions to dismiss. Our firm, however, recently opposed a pre-moratorium motion which the arbitration panel did decide to hear, notwithstanding the imposition of the new rule changes. The panel ultimately ruled in our client’s favor and denied the respondent’s motion to dismiss in its entirety, finding that California statutes of limitation do not apply to FINRA arbitrations. The panel found a FINRA arbitration does not constitute an "action" as defined by California’s Code of Civil Procedure, and formal requirements such as statutes of limitations therefore do not apply in such arbitrations.

We believe this ruling, and FINRA’s summaries of the new motion to dismiss rules, are consistent with policies previously expressed by FINRA and the SEC, such as disfavoring motions to dismiss, promoting efficiency and recognizing the parties’ right to a hearing on the merits of their case. Our firm has yet to determine whether panels’ rulings on post-moratorium motions to dismiss coincide with these historical policies as well.