There was a decision this week from the D.C. Circuit Court of Appeals on an appeal of a decision by a respondent who – stop the presses! – lost an SEC administrative proceeding, and then lost his appeal to the SEC. Montford and Company, Inc. v. SEC, No. 14-1126 (July 10, 2015). One of the arguments that the respondent made to the Court on appeal was that the SEC had violated its own internal rule that requires the initial complaint to be issued within 180 days of the date of the Wells notice. The Court gave that argument short shrift, concluding that the rule merely created an “internal deadline,” one that carried no consequences in the event the SEC failed to meet it.
That got me thinking of the concept of time, more specifically, the weird way it seems to work in the world of securities defense, and how disturbingly common it is for seemingly straightforward rules establishing deadlines to be ignored, generally to my clients’ detriment. Cue the Ramones: https://https://www.youtube.com/watch?v=Q3T3faCmE0I
The most glaring and common situation of this ilk is the decision by FINRA arbitration panels routinely to ignore the impact of the “Eligibility Rule,” found in Rule 12206(a) of the Code of Arbitration Procedure. It requires, plainly enough, that arbitrations must be filed within six years of the occurrence or event giving rise to the claim. That doesn’t seem particularly difficult to get your head around. Customer buys the security in question on June 1, 2008, so he has to file the arbitration within six years, i.e., by June 1, 2014, and, if he is late, the case is dismissed, right? Sadly, it rarely is. Sometimes, sure, but most of the time, at least statistically and anecdotally speaking, panels deny motions to dismiss based on Eligibility even when the facts would seem to mandate dismissal. And, because panels are not required to explain their decisions, their reasoning seems mysterious, at best. It is frustrating, especially when reporting the result of a denied motion to a disappointed client.
The same is true of motions to dismiss based on statutes of limitation. Every claim contained in a Statement of Claim filed to initiate an arbitration, whether based on a statute or a violation of common law, has an applicable statute of limitations. Courts do not hesitate to enforce statutes of limitations, but arbitration panels often act quite to the contrary, despite their obligation to apply the law as written.
What about Enforcement cases? This may be the more interesting discussion, as Enforcement cases brought by SROs, like FINRA, have no statute of limitations. Moreover, there is no procedural rule that requires FINRA to file cases within any specified timeframe of the particular event or action that is the subject of its attention. As a result, I often find myself defending claims that are many years old. Just today, for instance, I got approached to assist a registered rep who has been “requested” by FINRA to appear for an OTR to answer questions about an investment made in the late 1990s. And there is a problem with that. Documents disappear. Witnesses’ recollections fade. Witnesses disappear. The reason statutes of limitations exist is to provide a modicum of fairness to defendants by requiring claims to be filed sufficiently close to the event at issue so documents and witnesses still exist and can be used as part of the defense. In FINRA world, however, that is not the case, so be prepared to answer questions about emails sent six years ago, or trades made eight years ago.
But, there is a slim ray of hope, as there exists an equitable defense based on timeliness that is theoretically available in FINRA actions; indeed, it has actually worked a couple of times. The defense stems from the SEC’s decision in Hayden, 15 years ago. In that case, the SEC overturned a NYSE Enforcement case because so much time transpired between the activity in question and the filing of the complaint that it was “unfair” to the respondent. The SEC stated that “a fundamental principle governing all SRO disciplinary proceedings is fairness,” and that an SRO has “a statutory obligation to ensure the fairness and integrity of its disciplinary proceedings.” Yikes! Did the SEC really say that?
Applying that principle to the facts before it, the SEC focused on four time periods to determine that the NYSE had waited too long to bring the case:
- The time between the first alleged occurrence of misconduct and the date the NYSE filed the complaint;
- The time between the last alleged occurrence of misconduct and the date the NYSE filed the complaint;
- The time between the date that the NYSE received notice of the alleged misconduct and the date the NYSE filed the complaint; and
- The time between the date that the NYSE commenced its investigation and the date that the NYSE filed the complaint.
That all makes sense, and arguments based on these timeframes would seem to remain valid. But, since then, alarmingly, FINRA has engrafted on to this rather mechanical construct the further requirement that a respondent also demonstrate that the delay has caused him “actual prejudice.” Why is that alarming? Because shortly after Hayden was issued, the National Adjudicatory Council held that “even without a showing of prejudice, it can be inherently unfair to require respondents to face the prospect of claims for prolonged and indeterminate periods of time.” By now requiring what neither the SEC nor the NAC initially held was necessary to establish a Hayden defense, i.e., the need to demonstrate actual prejudice, successful Hayden defenses are few and far between.
This is just a taste of the temporal weirdness that I grapple with every day, Arbitration panels and regulators playing dangerous games with the space-time continuum. I don’t necessarily share Doc Brown’s fear that this could result in the destruction of the universe, but, if you are in the role of facing old, dusty, faded claims, it could certainly be disastrous for you.
 A common argument against motions to dismiss claims based on the statute of limitations, right out of the PIABA playbook, is that they only apply in court, but not in arbitrations. Happily, a couple of years ago a court in Florida largely put that one to bed, finding that statutes of limitations do, in fact, govern arbitration claims. Thanks to my friends George Guerra and Dominque Heller for that helpful decision!
 See redacted decision, in which the Hearing Panel not only required a showing of actual prejudice, but detailed how such a showing has to be made: respondent “must identify key witnesses or evidence whose ‘absence has resulted in [respondent’s] inability to present a full and fair defense on the merits,’” and “must produce evidence that a witness’s memory ‘would have been fresh one, two, or three years ago, but is not fresh today.’”