Friday, June 3, 2011

FINRAs 6-Year Arbitration Eligibility Rule

In 2007, the Financial Regulatory Authority, FINRA, adopted the National Association of Securities Dealers (NASD) rule setting forth the time period in which claims can be submitted to arbitration. FINRA Arbitration Code Rule 12206(a) provides:

(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.

FINRA also provides in the introduction to the Rule:

“The Customer Code applies to claims filed on or after April 16, 2007. In addition, the list selection provisions of the Customer Code apply to previously filed claims in which a list of arbitrators must be generated after April 16, 2007; in these cases, however, the claim will continue to be governed by the remaining provisions of the old Code unless all parties agree to proceed under the new Code.”

This six-year time limitation became pivotal in In the Matter of the Arbitration Between Beja Finance International v. RBC Dain Rauscher f/k/a Tucker Anthony, Inc. In this case, the claimant, Beja Finance International (“Beja”), filed a Statement of Claim in November 2009 alleging various causes of actions when Beja provided notice of termination to RBC in the beginning of October 2000 but the termination was not complete until late-2001. Specifically, the Statement of Claim sets forth claims for negligence, breach of fiduciary duty, breach of contract, and unsuitability involving damage to Beja’s discretionary accounts with Respondent RBC after informing Respondent of its intention to terminate the use of RBC’s investment management and advisory services. Between the time of notification and completion of the termination, Beja alleged over $3 million in losses as a result of RBC’s failure to properly implement Beja’s investment objectives and a failure to reasonably execute the requested asset transfers to Julius Baer and VP Bank in 2000 and 2001.

RBC denied the allegations and sought dismissal of Beja’s claims under FINRA rule 12206(a) on the basis that the claims arose more than 6 years prior to Beja’s filing its Statement of Claim. Further, RBC argued that Rule 12206 is an eligibility provision, not a statute of limitations, so the claim cannot be revived by asserting tolling, lack of notice, or other equitable defense to “extend” the statute of limitations period. The FINRA arbitration panel agreed with RBC and dismissed Beja’s claim as being ineligible for FINRA Arbitration.

Although Rule 12206, as cited in this case, will only be effective until June 5, 2011, its successor rule retains the same “eligibility” provision insulating claims made after 6 years of occurrence regardless of claimants’ lack of notice or equitable defenses as to why their claims could not be sought earlier.

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