FINRA Rule 12206: Statute of Repose or Statute of Limitation?

Brian J. Sommer
bjs@muslaw.com

Under the FINRA rules of procedure, the grounds for a pre-hearing dismissal are limited.  FINRA Rule 12206 is one of those limited options.  Rule 12206 states that “no claim shall be eligible for submission to arbitration under the [FINRA] Code when six years have elapsed from the occurrence or event giving rise to the claim.”  Confusion exists as to whether to treat Rule 12206 as a statute of repose, i.e., a substantive limit on the agreement to arbitrate, or as a statute of limitation which can be subject to tolling and the discovery rule.  This is because historically, courts were inconsistent in their treatment of Rule 12206’s NASD predecessors.  Current court decisions suggest the trend towards treating Rule 12206 as a statute of limitations which can be subject to tolling and the discovery rule and thus requiring the hearing of evidence.  As a result, Rule 12206 cannot be utilized, at least in one jurisdiction and potentially others, to dismiss claims on a pre-hearing basis.

Prior to 2002, the issue before most courts was whether or not rules, such as Rule 12206’s predecessor, NASD Rule 10304, were subject solely to their review or solely to the arbitrator’s review.  There were decisions on both sides.  While some courts held that the Rule was solely the purview of the arbitrator and, by extension, could be treated as a statute of limitation and thus subject to tolling and the discovery rule, other courts concluded that Rule 12206’s predecessors were statutes of repose, i.e. substantive limits on the agreement to arbitrate that were not subject to tolling or the discovery rule and thus were within the court’s power to determine whether the claims were time barred or not.  Still the decisions by other courts sought a middle ground approach that started the six-year clock running from events other than the initial purchase, such as a later recommendation to hold onto an investment, continuing breaches of fiduciary duty, and/or the active concealment of wrongdoing can also be an events or occurrences from which a claim can arise thereby not triggering Rule 12206’s six-year limitation.

In any event, the rationale underlying those decisions that placed the power to decide with the courts, were eviscerated by the U.S. Supreme Court in Howsam v. Dean Witter, 357 U.S. 7985 (U.S. 2002).  In Howsam, the High Court held that NASD Rule 10304 was a matter presumptively for the arbitrator and not for a judge to decide since the time limit rule was more of a gateway question and not a question of arbitrability.  Howsam accordingly overruled the justification used by earlier decisions that held that Rule 12206 and its predecessors were questions of what the parties contractually had agreed was eligible for arbitration and were not therefore statute of limitations subject to tolling.  Consequently, a number of courts have held that post-Howsam, Rule 12206 is not a substantive limit on agreement to arbitrate but rather it is akin more to a statute of limitations subject to interpretations that include tolling provisions or discovery rule.  See Mid-Ohio Securities v. Estate of Burns, 790 F.Supp. 2d 1263, 1271-1272 (D. Nev. 2011).  See also, Oshidary v. Purpura-Androiola, 2012 U.S. Dist. LEXIS 81367 (N.D. Cal. June 12, 2012).

Post-Howsam, at least one appellate court has held that Rule 12206 is in essence a statute of limitations without explicitly saying so.  More critically, that court has held that Rule 12206 cannot be used in Pennsylvania to dismiss claims prior to a hearing on the merits, thereby effectively eliminating Rule 12206 as grounds for a pre-hearing dismissal.

In Andrew v. CUNA Brokerage Services, the Pennsylvania Superior Court considered whether it was appropriate for the arbitrators to dismiss the claimant’s causes of action pursuant to NASD Rule 10304(a) and FINRA Rule 12206 when the arbitrators only conducted a prehearing telephone conference as required by FINRA Rule 12206.  The Superior Court determined that it is inappropriate for arbitrators to dismiss a claim prior to the close of a claimant’s case-in-chief.  976 A.2d 496, 502 (Pa. Super. 2009).  The court noted that where a matter is submitted to arbitration, arbitrators are obliged to abide by the minimal procedural requirements necessary for a common law arbitration which entails granting the parties a full and fair hearing.  Id., infra.  Consequently, in Pennsylvania, there can be no pre-hearing dismissal of claims pursuant to Rule 12206 as there must be a hearing first.

Because Pennsylvania is one of many states that adopted the Uniform Arbitration Act, although not controlling, the rationale of Pennsylvania Superior Court’s decision may have application beyond the keystone state’s borders.  In any event, post-Howsam, the rationale that Rule 12206 is a statute of repose is, at best, on shaky ground.
 

Consequently, it appears that the trend will be to treat Rule 12206 as a statute of limitation and not as a statute of repose.