FINRA Arbitrator Invokes Ineligibility Sua Sponte To Bar Expungement

February 3, 2020

Customer advocates attack FINRA's expungement process for providing the industry with an all too facile eraser of troubling complaints; whereas industry advocates attack the process as being too expensive and time-consuming. Frankly, there is merit on both sides of the divide and the mess is ripe for reform. In a recent FINRA arbitration, we see how this faulty system is taking on even more troubling dimensions.

Sharifi v. Morgan Stanley

In a FINRA Arbitration Statement of Claim filed in May 2019, associated person Claimant Sharifi sought the expungement of a customer complaint from her Central Registration Depository record ("CRD"). Respondent Morgan Stanley did not oppose the requested relief. In the Matter of the Arbitration Between Haider Sharifi, Claimant, v. Morgan Stanley, Respondent (FINRA Arbitration 19-01252)

December 3 Brief

Following the conduct of a telephonic hearing, the sole FINRA Arbitrator ordered Claimant Sharifi to file a Memorandum "addressing whether the expungement claim is still eligible for arbitration under Rule 13206 of the Code of Arbitration Procedure ("Code")." Claimant submitted her brief on December 3, 2019. (the "December 3 Brief").

January 3 Brief

Following Claimant's submission of her "December 3 Brief," the Arbitrator then "issued an Order for Claimant to be prepared to address Mitchell Dean Horst v. Financial Industry Regulatory Authority, Inc., (2018) ("Horst Case") at the hearing on December 20, 2019." Following a hearing on the "Horst Case" issue, the Arbitrator "issued an Order for Claimant to submit a memorandum on the issue of an arbitrator's authority to raise jurisdictional issues sua sponte under Rule 13206, " which Claimant did on January 3, 2020 (the "January 3 Brief).


FINRA Rule 13206: Time Limits

(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.

(b) Dismissal under Rule
Dismissal of a claim under this rule does not prohibit a party from pursuing the claim in court. By filing a motion to dismiss a claim under this rule, the moving party agrees that if the panel dismisses a claim under this rule, the non-moving party may withdraw any remaining related claims without prejudice and may pursue all of the claims in court.
(1) Motions under this rule must be made in writing, and must be filed separately from the answer, and only after the answer is filed.
(2) Unless the parties agree or the panel determines otherwise, parties must serve motions under this rule at least 90 days before a scheduled hearing, and parties have 30 days to respond to the motion. Moving parties may reply to responses to motions. Any such reply must be made within 5 days of receipt of a response.
(3) Motions under this rule will be decided by the full panel.
(4) The panel may not grant a motion under this rule unless an in-person or telephonic prehearing conference on the motion is held or waived by the parties. Prehearing conferences to consider motions under this rule will be recorded as set forth in Rule 13606.
(5) If the panel grants a motion under this rule (in whole or part), the decision must be unanimous, and must be accompanied by a written explanation.
(6) If the panel denies a motion under this rule, a party may not re-file the denied motion, unless specifically permitted by panel order.
(7) If the party moves to dismiss on multiple grounds including eligibility, the panel must decide eligibility first.
  • If the panel grants the motion to dismiss the case on eligibility grounds on all claims, it shall not rule on any other grounds for the motion to dismiss.
  • If the panel grants the motion to dismiss on eligibility grounds on some, but not all claims, and the party against whom the motion was granted elects to move the case to court, the panel shall not rule on any other ground for dismissal for 15 days from the date of service of the panel's decision to grant the motion to dismiss on eligibility grounds.
  • If a panel dismisses any claim on eligibility grounds, the panel must record the dismissal on eligibility grounds on the face of its order and any subsequent award the panel may issue.
  • If the panel denies the motion to dismiss on eligibility grounds, it shall rule on the other bases for the motion to dismiss the remaining claims in accordance with the procedures set forth in Rule 13504(a).
(8) If the panel denies a motion under this rule, the panel must assess forum fees associated with hearings on the motion against the moving party.
(9) If the panel deems frivolous a motion filed under this rule, the panel must also award reasonable costs and attorneys' fees to any party that opposed the motion.
(10) The panel also may issue other sanctions under Rule 13212 if it determines that a party filed a motion under this rule in bad faith.

(c) Effect of Rule on Time Limits for Filing Claim in Court
The rule does not extend applicable statutes of limitations; nor shall the six-year time limit on the submission of claims apply to any claim that is directed to arbitration by a court of competent jurisdiction upon request of a member or associated person. However, when a claimant files a statement of claim in arbitration, any time limits for the filing of the claim in court will be tolled while FINRA retains jurisdiction of the claim.

(d) Effect of Filing a Claim in Court on Time Limits for Filing in Arbitration
If a party submits a claim to a court of competent jurisdiction, the six-year time limitation will not run while the court retains jurisdiction of the claim matter.

FINRA Rule 13413: Jurisdiction of Panel and Authority to Interpret the Code

The panel has the authority to interpret and determine the applicability of all provisions under the Code. Such interpretations are final and binding upon the parties.

In the Matter of the Arbitration Between Mitchell Dean Horst, Claimant, v. Wells Fargo Advisors Financial Network, LLC, Respondent (FINRA Arbitration Decision 17-02535)

In a FINRA Arbitration Statement of Claim filed in September 2017, associated person Claimant Horst sought the expugnement of a customer complaint from his Central Registration Depository Record ("CRD"). Respondent Wells Fargo did not object or oppose the requested relief. The Horst Decision states in part that:

On January 8, 2018, the Arbitrator ordered Claimant to submit a memorandum of points and authorities by March 23, 2018 regarding the Arbitrator's authority to render a decision on the merits if the case filing does not meet FINRA Code of Arbitration Procedure ("Code") Rule 12206/13206 claim eligibility guidelines. On March 23, 2018, Claimant filed a Memorandum in Support of Chairperson's Authority to Recommend Expungement in this Matter. 

After an evidentiary hearing at which Respondent Wells Fargo participated but did not contest the requested expungement, the sole FINRA Arbitrator denied Claimant Horst's expungement for "failing to file action within the claim eligiblity period listed in FINRA Rule 13206."

Horst v. FINRA (Colorado District Court / October 29, 2018)

Pursuant to Horst's Motion to Vacate the FINRA Arbitration Award, FINRA appeared at the oral argument, at which Wells Fargo appeared without opposition. Horst named FINRA as a Defendant in its capacity as an arbitration forum but not as a self-regulatory-organization. The Court stated that as "the neutral arbitration forum, FINRA does not take a position at this time on the substantive issue of Mr. Horst's underlying claim for expungement." Absent from the Arbitration Decision, the Court explains the underlying nature of the customer complaint at issue; namely, that it was a September 2008 customer complaint involving Auction Rate Securities. In denying Horst's Motion to Vacate, the Court found, in part that, FINRA Rule 13206:

speaks for itself, as does the Rule on the Arbitrator's ability to apply all the Rules in FINRA's Code of Arbitration Procedure. In order to be eligible for resolution by a FINRA arbitration panel, a claim must be less than six years old. Here, the customer complaint was made in 2008-well past the six-year eligibility threshold. Contrary to Mr. Horst's arguments, FINRA Rule 13206's eligibility requirements is jurisdictional-it may be raised sua sponte by an arbitrator and not only when a party to the arbitration raises it in a motion. Complaint, ¶¶ 37-43. To the contrary, both FINRA Rule 13206 and FINRA Rule 13413 are jurisdictional in nature, and make clear that the Arbitrator had authority and was well within that authority to determine the eligibility of the claim before him.

This Court also rejects Mr. Horst's arguments that the arbitrator did not give him an opportunity to be heard regarding eligibility. The Complaint specifies that the Arbitrator raised the eligibility issue at the IPHC in January 2018, and asked Mr. Horst to provide a memorandum of law on the eligibility issue in his January 8, 2018 IPHC Scheduling Order. Complaint, ¶¶ 25- 26. Pursuant to this IPHC Scheduling Order, Mr. Horst submitted the required memorandum. Complaint, ¶ 27. The Arbitrator then gave counsel for Mr. Horst an opportunity to present oral argument on the issue at the April 13, 2018 hearing. Complaint, ¶ 30. As such, Mr. Horst had several opportunities to address this issue. That the Arbitrator determined the claim did not meet the eligibility issue does not form a basis, under Nevada or Federal law, to vacate the Award.  

Sharifi's Expungement Denied

The FINRA Arbitrator denied Claimant Sharifi's requested expungement as constituting an action that was not filed "within the claim eligibility period listed in FINRA Rule 13206." Pointedly, the Arbitrator found that:

This case was filed on May 6, 2019. The event or occurrence giving rise to the claim occurred in June 2011, when the Customer sold an annuity with the advice and assistance of Claimant, thereby incurring a tax liability of approximately $50,000.00. More than seven and a half years have elapsed since the filing of the claim. Due to the lapse of over six years between the event or occurrence giving rise to the claim and the date of filing the claim, the case is not eligible for decision under FINRA Rule 13206. Under FINRA Rules 13206 and 13413, the Arbitrator has the authority to raise the eligibility issue sua sponte. . .  

The FINRA Arbitrator provided the following explanation under the heading of "Findings":

December 3 Brief 

Claimant's December 3 Brief contained two major arguments. The first is that FINRA Rule 13206 does not establish a "bright line" rule regarding the "occurrence or event giving rise to the claim." The second is that because Rule 13206 is a contractual provision, the eligibility of Claimant's claim is not a jurisdictional issue, but one of procedure.

The brief cites the 2002 U. S. Supreme Court case of Howsam v. Dean Witter Reynolds, 537 U.S. 79 for the proposition that "the applicability of the NASD time limit [R]ule is a matter presumptively for the arbitrator not for the judge . . . moreover, the NASD arbitrators, comparatively more expert about the meaning of their [R]ule, are comparatively better able to interpret and apply it." (Brief). The Arbitrator agrees with this statement of law. Thus, the Arbitrator has the power and latitude to determine the eligibility of any claim submitted to it for decision. 

The brief goes on to describe the history of BrokerCheck and the CRD system in support of the argument that the earliest possible "event or occurrence" giving rise to his expungement request could be January 30, 2013, when Claimant's broker-dealer reported the Underlying Complaint on his CRD. "That date is the very earliest Claimant could have filed his expungement request." The Arbitrator disagrees with this interpretation of the Rule because it uses the harm to Claimant rather than the harm to the customer in the Underlying Complaint ("Customer") to trigger the running of the sixyear period. Claimant claims additional harm when FINRA amended Rule 2210 in 2016 requiring members' websites to include a hyperlink to BrokerCheck making it much easier for potential customers to check broker records. The Arbitrator rejects this argument as, once again, it focuses on alleged harm to Claimant rather than the time of the event giving rise to the Underlying Complaint - the sale of an annuity in June 2011 which resulted in an unanticipated $50,000.00 tax liability to the Customer. 

The December 3 Brief concludes with the argument that "the Rule does not contemplate the issue being raised by the Chairperson sua sponte, because the Rule is contractual and procedural, not jurisdictional." 

The foregoing argument flies in the face of well-established authority that Rule 13206 is jurisdictional in nature and an absolute bar to claims filed more than six years from the event or occurrence of the claim. 

The brief recognizes that both FINRA Rules 12206 and 13206 contain the same language and were derived from the same source - Section 15 of the NASD Code of Arbitration Procedure ("Section 15"). Thus, it is appropriate to consider cases interpreting one rule when interpreting the other. 

Rule 13206(a) serves as an absolute base to claims submitted for arbitration more than six years after the event giving rise to the dispute. Paine Webber v. Farnam, 870 F.2d, 1286, 1292 (7th Cir. 1989). Further, "Section 15 is an eligibility requirement that must be met in order for a claim to be arbitrable before the NASD it goes to the very power (i.e. subject matter jurisdiction) of the NASD. It is not a statute of limitations." Edward D. Jones & Co. v. Sorrells, 957 F.2d, 509, 512 (7th Cir. 1992).

January 3 Brief 

The focus of Claimant's January 3 Brief is that Rule 13206 is not jurisdictional. As set forth above in Sorrells, Rule 13206 is clearly jurisdictional and not merely procedural as argued by Claimant.  

The Horst Case 

The facts and issues presented in the Horst case are strikingly similar to those in this case. The Arbitrator is persuaded that Horst was correctly decided and its holdings should be followed here. 

The claimant in Horst was trying to get the court to overturn a FINRA Panel's decision that it lacked authority to determine his expungement request because the claim did not meet the eligibility period described in FINRA Rule 13206. The eligibility issue was raised by the sole arbitrator acting for the Panel sua sponte at the initial pre-hearing conference. As in this case, briefs and oral argument on the eligibility issue were requested. The Horst court recognized the broad authority given to arbitrators under Rules 13206 ad 13413. 

In finding that the arbitrator properly applied FINRA Rule 13206, the court stated: 

The rule of claim eligibility speaks for itself, as does the Rule on the Arbitrator's ability to apply all Rules in FINRA's Code of Arbitration Procedure. In order to be eligible for resolution by a FINRA arbitration panel, a claim must be less than six years old . . . Contrary to Mr. Horst's arguments, FINRA Rule 13206's eligibility requirements is jurisdictional - it may be raised sua sponte by an arbitrator and not only when it is a motion . . . Both FINRA Rules 13206 and 13413 are jurisdictional in nature, and make it clear that the Arbitrator had authority to determine the eligibility of the claim before him. (Horst) (emphasis added). 

The Horst case refutes all of Claimant's arguments. Yet, Claimant failed to address Horst in the final briefing. . . .

Bill Singer's Comment

Whether or not you agree with the FINRA Arbitrator's sua sponte action or his ultimate ruling, he deserves compliments for drafting a thorough and thoughtful Decision. 

The salient issue in Sharifi is that Respondent Morgan Stanley did not contest or oppose the requested expungement, and did not raise any issue about the age of the claim. Accordingly, this is purely a case where a FINRA arbitrator sua sponte raised the Eligibility Rule. Which is not to say that the arbitrator could not do so, but it is to point out that the issue was not raised by any party to the arbitration. Ultimately, I suspect that the courts will continue to affirm the discretion of both judges and arbitrators to conserve judicial/arbitral resources by clearing their dockets of purportedly ineligible cases, but I hope that such appellate rulings will at least require some hearing as to whether equitable tolling should be considered. 

The sua sponte injection of the Arbitrator raises issues in cases where a given Claimant and Respondent have reached a settlement whereby the Claimant agrees not to seek monetary damages and/or to raise certain claims in exchange for the Respondent's agreement to not raise a given defense, statute of limitation, and/or an eligibility rule. For example, imagine that Reggie Repp wants to sue his former Broker-Dealer for $250,000 in defamation and $250,000 in discrimination but agrees to drop both his claims in exchange for his former employer's agreement to not contest his request for an expungement of a customer complaint. Now what happens when that agreement falls apart because a FINRA Arbitrator sua sponte deems Reggie Repp's claims as ineligible? Is there a point where the desires of the parties in an arbitration supersede the prerogatives of an arbitrator, who, in fact, they selected and appointed to hear their case? 

Arbitration is often described as a creature of private contract; however,  FINRA's intra-industry arbitration docket is largely the byproduct of force by which the industry's associated persons must resolve their intra-industry disputes before FINRA's arbitration forum. 
  • Should that act of compulsion come with enhanced respect for the rights of the parties to decide whether to raise or not raise a given claim or defense? 

  • Should the parties have the right to impose upon any arbitrator a condition precedent to that arbitrator's acceptance of appointment that he or she will not render a sua sponte decision to invoke the Eligibility Rule? 
Again -- I am not offering answers here but merely raising the questions.

The issue of FINRA's invocation of its Eligibility Rule to bar access of its arbitration forum for allegedly "stale" expungement claims is now an issue before the SEC. 
See: the "Kaplow Order" cases:
The Horst FINRA Arbitration Decision discloses in part that:

For Claimant Mitchell Dean Horst ("Claimant"): Michael Bessette, Esq., AdvisorLaw, LLC, Broomfield, Colorado. 

The Sharifi FINRA Arbitration Decision discloses in part that:

For Claimant Haider Sharifi ("Claimant"): Dochtor Kennedy, J.D., MBA, and Erica Harris, Esq., AdvisorLaw LLC, Westminster, Colorado.