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One of the supposed advantages of FINRA arbitration over litigation—for investors—is that the grounds on which investors’ claims may be dismissed are much more narrowly circumscribed in FINRA arbitration than in litigation.

There are only three narrow grounds on which a brokerage firm can seek the dismissal of an investor’s claims in FINRA arbitration. The ground that is invoked most often is the one set forth in FINRA Rule 12206, which states that claims are not “eligible” for arbitration if they are filed more than six years after “the event or occurrence giving rise to the claim[s].” Most of the time, these eligibility motions are based on a misconception, or deliberate misstatement, that the eligibility period always commences on the date that the investment at issue was purchased. In legal parlance, this would make the eligibility rule a “rule of repose.” But any lingering misconception that the eligibility rule is a “rule of repose” should have been put to bed for good by the December 16, 2015 Final Report and Recommendations of the FINRA Dispute Resolution Task Force.[1] In its Report, the blue-ribbon task force, made up of investor advocates, neutrals, and industry participants, acknowledged that the eligibility rule is not a “rule of repose” and declined to make any recommendation that the rule be revised in a manner that would establish a rule of repose.

The task force’s pronouncement should not have come as a surprise to anybody because the plain language of Rule 12206 is entirely inconsistent with a rule of repose. Rule 12206 focuses on the event or occurrence that gives rise to “the claim” and it is axiomatic that a “claim” does not exist until all of the elements of the claim are present, including damages. In many cases, typically suitability cases, the investor does not suffer damages, and hence does not have “a claim,” until long after the date of purchase of his or her investment. In those cases, the eligibility period commences when the damages are suffered because the damages are the “occurrence” that proximately gives rise to “the claim.” A contrary rule would lead to the situation where claims would be time-barred before they even come in to existence. At least two federal appellate courts have expressly declined to adopt such an interpretation. Kidder Peabody & Co., Inc. v. Brandt, 131 F.3d 1001, 1004 (11th Cir. 1997); Osler v. Ware, 114 F.3d 91, 93 (6th Cir. 1997).[2]

In investment fraud cases, the date that “the claim” comes into existence is generally considered to be the date on which the investor discovers or should have discovered the fraud. See, e.g., Smith v. Dean Witter Reynolds, Inc., 2004 WL 1859623, *3 (6th Cir. Aug. 18, 2004); Mid-Ohio Securities Corp. v. Est. of Burns, 790 F. Supp. 2d 1263, 1270-72 (D. Nev. 2011) (“the arbitrators were free to interpret the rule as they saw fit, including adding in tolling provisions or a discovery rule . . . . If the arbitrators adopted tolling or discovery principles and used the [date of discovery of the fraud] as the triggering event, that would be within the six-year period in Rule 12206.”); Gregory J. Schwartz and Co. Inc. v. Fagan, 660 N.W. 2d 103, 105-106 (Mich. App. 2003) (noting that prior decisions rejecting tolling of the eligibility rule “relied on cases whose rationales have effectively been superseded by [Supreme Court precedent’]”); Goldberg v. Parker, No. 94-02670, 1995 WL 396568, at *2-4 (N.Y. Sup. Apr. 12, 1995) (rejecting argument that eligibility period commenced on date of purchase because “[t]he effect of this interpretation in fraud cases is to reward the unscrupulous broker-dealer and to penalize the unsophisticated investor who does not discover the fraud for more than six years after the investment was purchased.”). Significantly, FINRA has endorsed and applied the discovery rule in fraud cases in numerous letter rulings. See Ernest E. Badway and Anthony Del Guericio, Timing Cuts to the Heart of the Matter; In NASD Arbitration proceedings, Eligibility Motions Are Not Ordinary Statute Of Limitations Filings, 182 N.J.L.J., 182, (Dec. 26, 2005) (discussing letter rulings).

The doctrine of fraudulent concealment is closely related to the discovery rule. Under this doctrine, when a broker acts to conceal his actionable conduct (e.g., negligence) from an investor, the eligibility period is deemed to commence when the investor discovers or should discover he has a claim. Vestax Securities Corp. v. Desmond, 919. F. Supp. 1061 (E.D. Mich. 1995). Under federal law, the doctrine of fraudulent concealment can only be invoked if the broker affirmatively misleads the investor. Id. This requirement can be satisfied by showing that the broker provided the investor with false or misleading information or offered false reassurances to the investor. Under the state law of some states, including Michigan, fraudulent concealment can also be invoked against a fiduciary based on fraudulent omissions (e.g., remaining silent when there is a duty to disclose negligence or wrongdoing). Id. Whether a particular person is a fiduciary is a highly fact-intensive inquiry. Id. In determining whether a broker is a fiduciary, the fact finder should give consideration to factors such as the age, investment experience, and financial sophistication of the investor. Id. A fiduciary relationship is also more likely to exist where the broker has a close personal relationship with the investor, or where the relationship is the product of affinity marketing.

Notwithstanding the foregoing, it is best practice for investors to file their claims within six years of the date of purchase of the investments at issue for the simple reason that it will stave off frivolous motions to dismiss that might otherwise be filed.


[2] In 2002, the U.S. Supreme held that eligibility decisions are for arbitrators to decide, not the courts. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002).

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