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After beating investor claim in court, adviser mired in FINRA arbitration

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Q: Last year a client filed a lawsuit against me. My lawyer didn’t push the client to go to arbitration since he thought we’d do better with a judge. The judge ruled in my favor, but the client later filed an arbitration case. My attorney filed a motion to dismiss, but the arbitrator said the claimant could argue his case before he’d rule on the motion. The case is dragging out and getting very expensive. Is there anything I can do?

A: Originally, motions to dismiss in arbitration were virtually unheard of. Arbitration was intended to be a simple, alternative dispute resolution mechanism that would allow a client to present their complaint in front of a neutral party and hash it out with the rep and, typically, the branch manager. As claims got larger and more complicated, more attorneys got involved and the process began to incorporate many of the same trappings as court. Motions to dismiss a complaint became more common, but arbitrators would generally give clients the opportunity to present their case.

As arbitrations got more complicated, they also took longer and got significantly more expensive. Consequently, FINRA added a rule to specify when arbitrators could decide on a motion to dismiss before a claimant finished presenting their case. In each instance, the exception addressed specific problems that had arisen. Prior to January, the rule provided that arbitrators could act on a motion to dismiss before the conclusion of the case if they determined that: the claimant had settled; the rep was not associated with the account, security or conduct at issue; or the claim was not eligible for arbitration because it didn’t meet the six-year time limit for submitting a claim.

Stocks and Puerto Rican bonds are the focus of many cases among clients, advisers and firms.
March 10

In January, FINRA added new ground for arbitrators to consider dismissal, allowing arbitrators to dismiss if they determine that the claimant previously brought the same case and that it was decided on the merits. Unfortunately, this new provision is only effective for motions to dismiss filed on or after Jan. 23, so it seems you’ll have to wait until the claimant finishes his case before the arbitrator will rule.

Q: I’ve been arguing with my compliance department for months now over when I can mark a trade as unsolicited. What are your thoughts?

A: In most cases, it’s relatively easy to decide if a trade was solicited or unsolicited. If you brought the investment to the client’s attention, then it’s solicited. In some cases, it’s a more difficult decision.

For example, if you provide a client with in-house research that he’d requested, the conservative approach would be to mark the trade as solicited. It’s easier to argue that you took the conservative approach in marking a ticket solicited when you didn’t have to versus having to justify that you marked it unsolicited when you shouldn’t have. Some compliance officers I’ve talked to say that you if you engage in any selling effort whatsoever, you should mark the ticket as solicited. Even providing a client with a list of various securities for the client to choose from could be considered solicitation if you’re presenting the securities in the list as essentially equivalent. In effect, you’re recommending all of the options to the client and you’ve engaged in some sort of selling effort in assembling the list.

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