Categories: Financial Services

By:  Dena L. Narbaitz

Here is the scenario:  your company, a FINRA Member Firm, terminates a broker for “violation of company policies” and reports this as the reason for termination on the broker’s Form U-5 (Uniform Termination Notice for Securities Industry Registration).  The broker then sues your company in state court asserting several claims, including defamation for the language contained on his Form U-5.  Your company thinks there is a good legal basis to have the broker’s claims dismissed as a matter of law before the case is tried.  Should your company litigate the case in the former employee’s chosen forum (state court) or file a motion to compel FINRA arbitration?

Let’s first look at the option of compelling arbitration.  The broker is an Associated Person under FINRA rules, and, therefore, your company could file a motion to compel arbitration to move the case into FINRA arbitration.  FINRA Code of Arbitration Rule 13200(a).  FINRA Rules, however, only provide for dismissing claims on an extremely limited basis prior to an arbitration hearing.  Under FINRA Rule 13504, motions to dismiss claims prior to an arbitration hearing are “discouraged.”  FINRA Rule 13504 states, a claim can be dismissed if  “(A) the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release; or (B) the moving party was not associated with the account(s), security(ies), or conduct at issue.”  Under these rules, even if there is no legal basis for the broker’s defamation claim, the claim would not be dismissed.  The company would have to go through the entire FINRA arbitration before it prevails.

Now, let’s look at remaining in state court.  In California, and most state and federal courts, a claim can be dismissed if there is not a material issue of triable fact.  Cal. Code Civ. Proc. § 437c  Also, there are other pre-trial methods for dismissal of claims.  Cal. Code Civ. Proc. § 430.10.  In California, courts would dismiss the former employee’s defamation claim; there would be no issue for a trial on that unfounded cause of action.  See Fontani v. Wells Fargo Investments, 129 Cal.App.4th 719 (2005) (a claim for defamation is dismissed because the Member Firm’s statements on the Form U-5 are absolutely privileged). 

Under the above example, the case – at least some claims – could be knocked out prior to a hearing on the merits.  Often, the choice of compelling FINRA arbitration or staying in state court (the former employee’s chosen forum), will affect the company’s ability to dismiss claims prior to arbitration or trial.  Consequently, the choice is an important one; it should carefully be considered.  By no means, am I suggesting that the Member Firm initiate a case in court versus filing in FINRA.  There are limitations to doing so.  And to do so, could be a bad idea leading to FINRA fines.  (See Blog Post -  FINRA’s $1 Million Dollar Fine of Merrill For Dodging Arbitration of Claims).  However, staying in state court – after the former employee has filed there – may be better for the company.

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