FINRA arbitration provides an efficient and cost-effective way for investors to resolve their investment loss claims. Discovery is streamlined, and dispositive motions such as motions to dismiss based on statutes of limitations are discouraged and rarely granted. This article will discuss situations other than the six-year eligibility rule when practitioners must make decisions about whether to arbitrate claims.
FINRA Rules 12200–12205
The following Q&A addresses other common situations:
What if there is no pre-dispute arbitration clause in the customer’s account opening document? Can the customer still pursue the claim in FINRA arbitration?
A. Yes. Rule 12200 states that parties must arbitrate a dispute under the Code if:
A. Arbitration under the Code is either (1) required by a written agreement, or (2) requested by the customer;
B. The dispute is between a customer and a member or associated person of a member; and
C. The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.
What if an investor was sold unsuitable investments or was defrauded by a financial advisor but the investor did not have an account with the brokerage firm? Can the customer still pursue the claim in FINRA arbitration against the brokerage firm?
A. Probably. Sometimes investors are financially harmed by the broker-dealer or its representatives even though the customer does not have an account with the firm. This situation often arises when the broker is selling investments to consumers away from the brokerage firm (i.e., selling away). Under this situation, there is no customer agreement or pre-dispute arbitration clause.
As stated above, Rule 12200, states that a FINRA member is required to arbitrate a claim upon the request of a “customer.” Rule 12100(i) broadly defines a customer, stating “A customer shall not include a broker or dealer.” Furthermore, courts have broadly construed the definition of what constitutes a customer for the purpose of determining arbitrability.
Are post-dispute arbitration clauses enforceable in FINRA arbitration?
A. Yes. Rule 12201 of the FINRA Code of Arbitration entitled Elective Arbitration states:
Parties may choose to arbitrate a dispute under the Code if:
A. The parties agree in writing to submit the dispute to arbitration after the dispute arises; and
B. The dispute is between a customer and a member, associated person of a member, or other related party; and
C. The dispute arises in connection with the business activities or a member or an associated person, except in disputes involving the insurance business activities of a member that is also an insurance company.
Is an investor required to arbitrate claims against firms or financial advisors who are no longer in business?
A. Probably not. Rule 12202 states:
A claim by or against a member is not eligible for arbitration under the Code in the following circumstances:
A. If a member’s membership is terminated, suspended, cancelled, or revoked;
B. If a member has been expelled from FINRA; or
C. If a member is otherwise defunct.
In some instances, brokerage firms go out of business or a broker leaves the industry and as a result, they cease to be members this rule allows customers to file actions in court.
Can the Director of Arbitration refuse to permit parties to arbitrate claims?
A. Yes. Rule 12203(a) states: The Director may decline to permit the use of the FINRA arbitration forum if the Director determines that, given the purposes of FINRA and the intent of the Code, the subject matter of the dispute is inappropriate, or that accepting the matter would pose a risk to the health or safety of arbitrators, staff, or parties or their representatives. Only the Director or the President of FINRA Dispute Resolution may exercise the Director’s authority under this rule.
Are class actions allowed in arbitration?
A. No. Rule 12204(a) states: “Class action claims may not be arbitrated under the Code.”
Can arbitration provisions be enforced against class members?
A. No. Rule 12204(d) states: A member or associated person may not enforce any arbitration agreement against a member of a certified or putative class action with respect to any claim that is the subject of the certified or putative class action until:
• The class certification is denied;
• The class is decertified;
• The member of the certified or putative class is excluded from the class by the court; or
• The member of the certified or putative class elects not to participate in the class or withdraws from the class according to conditions set by the court, if any.
The economic collapse in 2008 devastated the retirement savings of many Americans. Importantly, many still have a chance to recover some or all of those investment losses. Practitioners should be aware that there are still many victims that have not come forward and as a result, there are still many opportunities for representation. As discussed, however, claims must be filed within six years from the date of the transaction or occurrence. As a result, practitioners should be aware of this deadline as well as the arguments to extend the deadline beyond 2014, six years after the 2008 financial crisis.