Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, January 8, 2009

SEC Approves FINRA Rule Limiting Pre-Hearing Motions To Dismiss

FINRA announced that the SEC approved an important change FINRA requested to its dispute resolution rules that will significantly reduce the frequency of motions to dismiss arbitration cases before investors have a chance to present their case.  The new rule responds to investor concerns regarding abusive and duplicative filing of motions to dismiss, also called dispositive motions. FINRA received complaints that parties - most often respondent firms - were filing dispositive motions routinely and repetitively, causing increased costs for claimants, who are typically retail investors.  Under the new rule, a motion to dismiss before a claimant's case is presented can only be granted on three specific grounds, and there are stringent new sanctions against parties for engaging in abusive case-dismissal practices.

Specifically, if a party in an arbitration case files a dispositive motion before a claimant finishes presenting its case, the arbitration panel can only grant the motion for three reasons: the parties have settled their dispute in writing; there is a "factual impossibility," meaning the party could not have been associated with the conduct at issue; or the motion could be granted under the eligibility rule that requires parties to bring arbitration claims within six years of the events at issue.  The new rule also requires that the arbitrators conduct a hearing on motions to dismiss; that a decision to grant the dispositive motion be unanimous; and that the panel issues a written explanation of a decision to grant dismissal.

As for costs and penalties, the party seeking a dismissal will be assessed all the related fees if the motion is denied. The arbitrators must also award costs and attorneys' fees in favor of the party opposing a motion that is deemed to be frivolous by the panel.

FINRA will announce the effective date of the rule change in a Regulatory Notice to be published shortly.

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