SEC Approves FINRA Rule to Drastically Limit Motions to Dismiss in Arbitration

Abusive Motions to Dismiss Cases Will Face Stringent Sanctions

The Financial Industry Regulatory Authority (FINRA) today announced that the Securities and Exchange Commission (SEC) has 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.

"In recent years, there has been an increase in motions to dismiss by respondents, even before individual claimants presented their cases," said Linda Fienberg, President of FINRA Dispute Resolution. "Although arbitrators rarely grant such motions, it is costly and time consuming for parties to defend motions to dismiss. This new rule sharply limits the bases for making motions to dismiss and penalizes those who abuse the dismissal process."

By narrowing significantly the grounds for granting dispositive motions before investors present their case, the new rule will ensure that claimants in arbitration have a full opportunity to argue their case. 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.

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, and that a decision to grant the dispositive motion be unanimous. The panel also is required to issue a written explanation of a decision to grant dismissal.

Additionally, a party is prohibited from re-filing a denied motion to dismiss unless specifically permitted by an order of the panel. If the panel determines that a party filed a motion in bad faith, the panel may, under existing rules, issue sanctions that can include fines, initiation of a disciplinary referral, or dismissal of a defense.

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. When a respondent files a motion to dismiss after the conclusion of the claimant's case, the provisions above would not apply. However, the rule would not prevent the arbitrators from issuing an explanation or awarding costs or fees.