What Disputes are Eligible for Arbitration?
Any disputes relating to or arising out of the broker/dealer relationship is going to be subject to arbitration. It used to be that there were several choices of where to file the arbitration claim against the brokerage firm – the NASD, the NYSE, or the CBOE. Everything was then consolidated and now all claims against brokerage firms are administered by the Financial Industry Regulatory Authority, Inc. (FINRA). In July 2007, FINRA was created which combined NASD and NYSE member regulation. In May 2015, the CBOE, which handled options cases, stopped its arbitration program and now refers folks to FINRA.
The forum is important, because its rules govern what claims are eligible for arbitration. FINRA Rule 12206 is referred to the eligibility rule and provides, in part:
12206. Time Limits
(a) Time Limitation on Submission of Claims
No claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule.
Brokerage firms invariably argue that the date of “the occurrence or event giving rise to the claim” is the purchase date of the securities at issue. The strongest argument Claimants’ lawyers use to combat this argument is that if that is what FINRA intended, it would have said so. But it didn’t. The interpretation of the phrase “the occurrence or event giving rise to the claim” has been the subject of much debate and many a court case. In fact, I have several reported cases in Texas on the six-year eligibility rule and was successful in convincing Texas courts that “the occurrence or event giving rise to the claim” could have meanings well beyond the purchase date of the securities. The investor might not have discovered the wrongdoing for years after the purchase date of the securities. The stockbroker may have contributed to the investor’s delay by concealing losses. The investor may not have experience losses until long after the purchase dates, and everyone knows that you can’t have a claim without losses. Each of these scenarios can serve to extend or elongate the six-year period. Depending on what state law governs the arbitration, it is likely that there is very favorable case law supporting one or more of these theories.
FINRA Rule 12206 makes clear that the decision on eligibility is to be made by the arbitrators assigned to the case, not the courts. This is a benefit for investors, because arbitration panels are less stringent than courts. There is a great quote in the Arbitrator’s Guide in the section on “About the Arbitration Process” that states as follows:
“Equity is justice in that it goes beyond the written law. And it is equitable to prefer arbitration to the law court, for the arbitrator keeps equity in view, whereas the judge looks only to the law, and the reason why arbitrators were appointed was that equity might prevail.” –
Domke on Aristotle
The Arbitrator’s Guide further states that “FINRA believes that parties have the right to a hearing in arbitration. Therefore, motions to dismiss filed prior to the conclusion of a party’s case-in-chief are discouraged and granted only under limited circumstances.”
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