Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 731 

6 15 U.S.C. 78s(b)(3)(A). 

7 17 CFR 240.19b–4(f)(2). 

8 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 57497 

(March 14, 2008), 73 FR 15019 (March 20, 2008) 

(SR–FINRA–2007–021) (notice). 

4See Joseph C. Korsak, Esq., dated November 4, 

2007 (‘‘Korsak Letter’’); Will Struyk, dated 

December 10, 2007 (‘‘Struyk Letter’’); Michael 

Thurman, Esq., Loeb & Loeb LLP, dated February 

29, 2008 (‘‘Thurman Letter’’); Prof. Seth E. Lipner, 

Esq., Baruch College dated March 18, 2008 (‘‘Lipner 

Letter’’); Leonard Steiner, Esq., dated March 18, 

2008 (‘‘Steiner Letter’’); Laurence S. Schultz, Esq., 

Public Investors Arbitration Bar Association, dated 

March 18, 2008 (‘‘PIABA Letter’’); Steven J. Gard, 

Esq., Gard Law Firm, dated March 20, 2008 (‘‘Gard 

Letter’’); Steven B. Caruso, Esq., Maddox Hargett 

Caruso, P.C., dated March 20, 2008 (‘‘Caruso 

Letter’’); Philip M. Aidikoff, Esq., dated March 21, 

2008 (‘‘Aidikoff Letter’’); Charles W. Austin, Jr., 

Esq., dated March 21, 2008 (‘‘Austin Letter’’); Gail 

E. Boliver, dated March 22, 2008 (‘‘Boliver Letter’’); 

Steve A. Buchwalter, Esq., dated March 23, 2008 

(‘‘Buchwalter Letter’’); Ryan K. Bakhtiari, Esq., Uhl 

and Bakhtiari, dated March 24, 2008 (‘‘Bakhtiari 

Letter’’); Mark E. Maddox, Esq., Maddox Hargett 

Caruso, P.C., dated March 24, 2008 (‘‘Maddox 

Letter’’); Robert W. Goehring, Esq., dated March 24, 

2008 (‘‘Goehring Letter’’); John J. Miller, Esq., 

Swanson Midgley, LLC, dated March 24, 2008 

(‘‘Miller Letter’’); Richard A. Lewins, dated March 

24, 2008 (‘‘Lewins Letter’’); Howard Rosenfield, 

Esq., dated March 24, 2008 (‘‘Rosenfield Letter’’); 

Sam Edwards, Esq., dated March 24, 2008 

(‘‘Edwards Letter’’); Noah H. Simpson, Esq., 

Simpson Woolley, LLP, dated March 24, 2008 

(‘‘Simpson Letter’’); Robert A. Uhl, Esq., March 25, 

2008 (‘‘Uhl Letter’’); David Harrison, Esq., dated 

March 26, 2008 (‘‘Harrison Letter’’); Jeffrey Sonn, 

Esq., Sonn Erez, PLC, dated March 26, 2008 (‘‘Sonn 

Letter’’); Brian N. Smiley, Esq., Smiley Bishop 

Porter LLP, dated March 26, 2008 (‘‘Smiley Letter’’); 

Thomas A. Hargett, Esq., dated March 27, 2008, 

(‘‘Hargett Letter’’); Jay Salamon, Esq., Hermann, 

Cahn and Schneider LLP, dated March 27, 2008 

(‘‘Salamon Letter’’); J. Pat Sadler, Esq., dated March 

31, 2008 (‘‘Sadler Letter’’); Keith L. Griffin, Esq., 

Maddox Hargett Caruso, P.C., dated April 1, 2008 

(‘‘Griffin Letter’’); Scott R. Shewan, Esq., Born, Pape 

& Shewan LLP, dated April 1, 2008 (‘‘Shewan 

Letter’’); Alan S. Brodherson, Esq., dated April 3, 

2008 (‘‘Brodherson Letter’’); W. Scott Greco, Esq., 

Greco & Greco, P.C., dated April 3, 2008 (‘‘Greco 

Letter’’); David P. Neuman, Esq., Stoltmann Law 

Offices, P.C., dated April 4, 2008 (‘‘Neuman 

Letter’’); Edward G. Turan and Martha E. Solinger, 

Securities Industry and Financial Markets 

Association, dated April 7, 2008 (‘‘SIFMA Letter’’); 

Curt H. Mueller, Esq., Schwab & Co., Inc., dated 

April 7, 2008 (‘‘Schwab Letter’’); Erin Linehan, Esq., 

Raymond James Financial, Inc., dated April 8, 2008 

(‘‘Raymond James Letter’’); Barry D. Estell, Esq., 

dated April 8, 2008 (‘‘Estell Letter’’); Robert C. Port, 

Esq., dated April 8, 2008 (‘‘Port Letter’’); Jonathan 

W. Evans, Esq., dated April 8, 2008 (‘‘Evans 

Letter’’); Kevin A. Carreno, dated April 8, 2008 

(‘‘Carreno Letter’’); Vincent J. Imbesi, Esq., The 

Avelino Law Firm, dated April 9, 2008 (‘‘Imbesi 

Letter’’); John E. Lawlor, Esq., dated April 9, 2008 

(‘‘Lawlor Letter’’); Jonathan Schwartz, Esq., dated 

April 9, 2008 (‘‘Schwartz Letter’’); Andrew Dale 

Ledbetter, dated April 9, 2008 (‘‘Ledbetter Letter’’); 

Theodore A. Krebsbach, Esq., Krebsbach & Snyder, 

dated April 9, 2008 (‘‘Krebsbach Letter’’); Raymond 

W. Henney, Esq., Honigman Miller Schwartz and 

Cohn LLP, dated April 9, 2008 (‘‘Henney Letter’’); 

Randall R. Heiner, Esq., dated April 9, 2008 

(‘‘Heiner Letter’’); Inge Selden III, Esq., Maynard 

Cooper & Gale PC, dated April 9, 2008 (‘‘Selden 

Letter’’); Eric G. Wallis, Esq., Reed Smith LLP, dated 

April 9, 2008 (‘‘Wallis Letter’’); Robert H. Rex, Esq., 

Continued 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The foregoing rule change has become 

effective pursuant to Section 19(b)(3)(A) 

of the Act 6 and subparagraph (f)(2) of 

Rule 19b–4 7 thereunder. At any time 

within 60 days of the filing of the 

proposed rule change, the Commission 

may summarily abrogate such rule 

change if it appears to the Commission 

that such action is necessary or 

appropriate in the public interest, for 

the protection of investors, or otherwise 

in furtherance of the purposes of the 

Act. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–CBOE–2008–130 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–CBOE–2008–130. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room, 100 F Street, NE., Washington, 

DC 20549, on official business days 

between the hours of 10 a.m. and 3 p.m. 

Copies of the filing will also be available 

for inspection and copying at the 

principal office of the self-regulatory 

organization. All comments received 

will be posted without change; the 

Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–CBOE– 

2008–130 and should be submitted on 

or before January 28, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.8

Florence E. Harmon, 

Acting Secretary. 

[FR Doc. E9–7 Filed 1–6–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59189; File No. SR–FINRA– 

2007–021] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving 

Proposed Rule Change, as Modified by 

Amendment No. 1 Thereto, Relating to 

Amendments to the Code of 

Arbitration Procedure for Customer 

Disputes and the Code of Arbitration 

Procedure for Industry Disputes To 

Address Motions To Dismiss and To 

Amend the Eligibility Rule Related to 

Dismissals 

December 31, 2008. 

I. Introduction 

The Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’) (f/k/a 

National Association of Securities 

Dealers, Inc. (‘‘NASD’’)) filed with the 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) on November 

2, 2007, and amended on February 13, 

2008 (Amendment No. 1), pursuant to 

Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change relating to amendments to the 

Code of Arbitration Procedure for 

Customer Disputes (‘‘Customer Code’’) 

and the Code of Arbitration Procedure 

for Industry Disputes (‘‘Industry Code,’’ 

and together with the Customer Code, 

the ‘‘Codes’’) to address motions to 

dismiss and to amend the eligibility rule 

related to dismissals. The proposed rule 

change was published for comment in 

the Federal Register on March 20, 

2008.3 The Commission received 119 

comments in response to the proposed 

rule change.4 This order approves the 

732 Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 

Dickenson Murphy Rex and Sloan, dated April 9, 

2008 (‘‘Rex Letter’’); Bradley R. Stark, Esq., Florida 

International University, dated April 9, 2008 

(‘‘Stark Letter’’); Robert N. Rapp, Esq., Calfee, Halter 

Griswold LLP, dated April 9, 2008 (‘‘Rapp Letter’’); 

Richard J. Babnick, Esq., Sichenzia Ross Friedman 

Ference LLP, dated April 9, 2008 (‘‘Babnick 

Letter’’); Joseph F. Myers, Esq., dated April 9, 2008 

(‘‘Myers Letter’’); Anne T. Cooney, Esq., Morgan 

Stanley, dated April 9, 2008 (‘‘Morgan Stanley 

Letter’’); Jonathan Kord Lagemann, Esq., dated April 

9, 2008 (‘‘Lagemann Letter’’); Frederick S. Schrils, 

Esq., GrayRobinson, dated April 9, 2008 (‘‘Schrils 

Letter’’); Andrew Stoltmann, Esq., dated April 9, 

2008 (‘‘Stoltmann Letter’’); Richard M. Layne, Esq., 

dated April 9, 2008 (‘‘Layne Letter’’); Herb Pounds, 

Jr., Esq., dated April 9, 2008 (‘‘Pounds Letter’’); 

Alan F. Hartman, CLU, ChFC, dated April 9, 2008 

(‘‘Hartman Letter’’); Brian F. Amery, Esq., Bressler, 

Amery Ross, P.C., dated April 9, 2008 (‘‘Amery 

Letter’’); Michael G. Shannon, Esq., Thelen Reid 

Brown Raysman & Steiner LLP, dated April 9, 2008 

(‘‘Shannon Letter’’); Carl J. Carlson, Esq., Carlson & 

Dennett, P.S., dated April 9, 2008 (‘‘Carlson 

Letter’’); Matthew Farley, Esq., Drinker Biddle & 

Reath LLP, dated April 9, 2008 (‘‘Farley Letter’’); 

Joel E. Davidson, Esq., Davidson & Grannum, LLP, 

dated April 9, 2008 (‘‘Davidson Letter’’); Al Van 

Kampen, Esq., dated April 10, 2008 (‘‘Van Kampen 

Letter’’); Theodore M. Davis, Esq., dated April 10, 

2008 (‘‘Davis Letter’’); Lawrence R. Gelber, Esq., 

dated April 10, 2008 (‘‘Gelber Letter’’); Pearl 

Zuchlewski, Esq., Kraus Zuchlewski LLP, dated 

April 10, 2008 (‘‘Zuchlewski Letter’’); Rob Bleecher, 

Esq., dated April 10, 2008 (‘‘Bleecher Letter’’); 

Thomas C. Wagner, Esq., dated April 10, 2008 

(‘‘Wagner Letter’’); John V. McDermott, Esq., Holme 

Roberts Owen LLP, dated April 10, 2008 

(‘‘McDermott Letter’’); Peter J. Mougey, Esq., Beggs 

& Lane, dated April 10, 2008 (‘‘Mougey Letter’’); 

Christopher Gibbons/Lisa A. Catalano, Securities 

Arbitration Clinic, St. John’s University Law 

School, dated April 10, 2008 (‘‘St. John’s Letter’’); 

John W. Shaw, Esq., Berkowitz, Oliver, Williams, 

Shaw Eisenbrandt, dated April 10, 2008 (‘‘Shaw 

Letter’’); Audrey Venezia, Esq., dated April 10, 2008 

(‘‘Venezia Letter’’); H. Nicholas Berberian, Esq., 

Gerber & Eisenberg LLP, dated April 10, 2008 

(‘‘Berberian Letter’’); Michael N. Ungar, Esq., and 

Kenneth A. Bravo, Esq., Ulmer & Berne LLP, dated 

April 10, 2008 (‘‘Ungar/Bravo Letter’’); Jody 

Forchheimer, Esq., Fidelity Investments, dated 

April 10, 2008 (‘‘Forchheimer Letter’’); Jill I. Gross, 

Barbara Black and Teresa Milano, dated April 10, 

2008 (‘‘Gross/Black Letter’’); Michael Weissmann, 

Esq., Bingham McCutchen LLP, dated April 10, 

2008 (‘‘Weissmann Letter’’); Thomas P. Willcutts, 

Esq., Willcutts Law Group, LLC, dated April 10, 

2008 (‘‘Willcutts Letter’’); Mark A. Tepper, Esq., 

Mark A. Tepper, P.A., dated April 10, 2008 

(‘‘Tepper Letter’’); Joe Soraghan, Principal, Danna 

McKitrick, P.C., dated April 10, 2008 (‘‘Soraghan 

Letter’’); Bryan T. Forman, Esq., dated April 10, 

2008 (‘‘Forman Letter’’); Rodney Acker, Esq., 

Fulbright & Jaworski LLP, dated April 10, 2008 

(‘‘Acker Letter’’); Birgitta Siegel, Esq., Securities 

Arbitration & Consumer Law Clinic, Syracuse 

University, dated April 10, 2008 (‘‘Syracuse 

Letter’’); Brett A. Rogers and Jill E. Steinberg, Esq., 

Rogers & Hardin, dated April 10, 2008 (‘‘Rogers/ 

Steinberg Letter’’); Jeffrey Kruske, Esq., dated April 

10, 2008 (‘‘Kruske Letter’’); John Taft, RBC Wealth 

Management, dated April 10, 2008 (‘‘RBC Letter’’); 

Thomas V. Dulcich, Esq., Schwabe, Williamson & 

Wyatt, dated April 10, 2008 (‘‘Dulcich Letter’’); 

Harry T. Walters, Esq., Citigroup, dated April 10, 

2008 (‘‘Citigroup Letter’’); Craig Gordon, RBC 

Correspondent Services, dated April 10, 2008 

(‘‘Gordon Letter’’); William A. Jacobson, Esq., 

Cornell Securities Law Clinic, dated April 10, 2008 

(‘‘Cornell Letter’’); Bradford D. Kaufman, Greenberg, 

Taurig, P.A., dated April 10, 2008 (‘‘Kaufman 

Letter’’); Tim Canning, Esq., Law Offices of Timothy 

A. Canning, dated April 10, 2008 (‘‘Canning 

Letter’’); Peter R. Boutin, Esq., Keesal, Young & 

Logan, dated April 10, 2008 (‘‘Boutin Letter’’); 

Christian T. Kemnitz, Esq., Katten Muchin 

Rosenman, dated April 10, 2008 (‘‘Kemnitz Letter’’); 

Scot Bernstein, Esq, dated April 10, 2008 

(‘‘Bernstein Letter’’); John S. Burke, Esq., Higgins 

Burke, P.C., dated April 10, 2008 (‘‘Burke Letter’’); 

Dayton P. Haigney, Esq., dated April 10, 2008 

(‘‘Haigney Letter’’); Robert J. Anello, Esq., Morvillo, 

Abramowitz, Grand, Iason, Anello & Bohrer, P.C., 

dated April 10, 2008 (‘‘Anello Letter’’); Brad S. 

Karp, Esq., Paul, Weiss, Rifkind, Wharton & 

Garrison LLP, dated April 10, 2008 (‘‘Karp Letter’’); 

Andrew L. Weinberg, Esq., Deutsche Bank 

Securities Inc., dated April 10, 2008 (‘‘DBSI 

Letter’’); Harry A. Jacobowitz, Esq., Securities 

Arbitration Commentator, dated April 10, 2008 

(‘‘Jacobowitz Letter’’); Jenice L. Malecki, Esq., 

Malecki Law, dated April 10, 2008 (‘‘Malecki 

Letter’’); Stephen Krosschell, Esq., dated April 10, 

2008 (‘‘Krosschell Letter’’); Abe Lampart, Esq., 

Offices of Abe Lampart, dated April 10, 2008 

(‘‘Lampart Letter’’); Mark J. Astarita, Esq., dated 

April 10, 2008 (‘‘Astarita Letter’’); Robert S. Banks, 

Esq., Banks Law Offices, dated April 10, 2008 

(‘‘Banks Letter’’); Debra G. Speyer, Esq., dated April 

10, 2008 (‘‘Speyer Letter’’); Joseph Fogel, Sherman 

Oaks, CA (‘‘Fogel Letter’’); Harry J. Buckman, Jr., 

dated April 11, 2008 (‘‘Buckman Letter’’); Jan 

Graham, Esq., dated April 11, 2008 (‘‘Graham 

Letter’’); Patricia Cowart, Esq., Wachovia Securities, 

LLC, dated April 11, 2008 (‘‘Wachovia Letter’’); 

Stuart D. Meissner, Esq., dated April 12, 2008 

(‘‘Meissner Letter’’); Debra B. Hayes, Esq., dated 

April 15, 2008 (‘‘Hayes Letter’’); William P. 

Torngren, Esq., dated April 16, 2008 (‘‘Torngren 

Letter’’); Laurence S. Schultz, Public Investors 

Arbitration Bar Association, dated April 25, 2008 

(‘‘PIABA 2 Letter’’). 

5Although some of the events referenced in this 

rule filing occurred prior to the formation of FINRA 

through consolidation of NASD and the member 

regulatory functions of NYSE Regulation, the rule 

filing refers to FINRA throughout for simplicity. 

6The Codes became effective on April 16, 2007, 

for claims filed on or after that date; the old Code 

continues to apply to pending cases until their 

conclusion. 

7A respondent is a party against whom a 

statement of claim or third party claim has been 

filed. 8A claimant is a party that files the statement of 

claim and other documents that initiate an 

arbitration. 9For example, the Securities Arbitration 

Commentator published a study in Fall 2006 on 

motions to dismiss in customer cases, which 

concludes that, in the universe of cases that went 

to award, there were motions to dismiss in 28% of 

the cases in 2006 as compared to 10% in 2004. 

Securities Arbitration Commentator, Nov. 2006 

(Vol. 2006, No. 5), at 3. 10See Securities Exchange Act Release No. 54360 

(August 24, 2006), 71 FR 51879 (August 31, 2006) 

(SR–NASD–2006–088) (notice). 

11See Securities Exchange Act Release No. 55158 

(January 24, 2007), 72 FR 4574 (January 31, 2007) 

(SR–NASD–2003–158 and SR–NASD–2004–011) 

(approval order). 

proposed rule change, as modified by 

Amendment No. 1. 

II. Description of the Proposed Rule 

Change 

FINRA 5 proposed to provide specific 

procedures to govern motions to 

dismiss, and to amend the provision of 

the eligibility rule related to dismissals. 

The proposal is designed to ensure that 

parties would have their claims heard in 

arbitration, by significantly limiting the 

grounds for filing motions to dismiss 

prior to the conclusion of a party’s case 

in chief and by imposing stringent 

sanctions against parties for engaging in 

abusive practices under the rule. 

Background 

The Code of Arbitration Procedure 

that was in use prior to April 16, 2007, 

did not address motions practice.6

Because motions were becoming 

increasingly common in arbitration, 

FINRA proposed to include in its 

revision of the entire Code of 

Arbitration Procedure (‘‘Code 

Revision’’) some guidance for parties 

and arbitrators with respect to motions 

practice. 

The Code Revision, as initially filed 

with the SEC in 2003, contained a rule 

that would have permitted a panel to 

grant a motion to decide claims before 

a hearing on the merits (a ‘‘dispositive 

motion’’) only under extraordinary 

circumstances. FINRA proposed this 

rule in an attempt to address concerns 

raised by investors’ counsel, SEC staff 

and other constituent groups about 

abusive and duplicative filing of 

dispositive motions. Specifically, 

FINRA received complaints that parties 

(typically respondent 7 firms) were filing 

dispositive motions routinely and 

repetitively in an apparent effort to 

delay scheduled hearing sessions on the 

merits, increase investors’ costs 

(typically claimants 8), and intimidate 

less sophisticated parties.9 In some 

cases, if a party did not receive a 

favorable ruling on a dispositive motion 

filed at a particular stage in an 

arbitration proceeding, that party would 

re-file the same or a similar dispositive 

motion at a later time, which often 

served only to increase investors’ costs 

and delay the hearing and the issuance 

of any award. Moreover, FINRA learned 

through various constituent and focus 

groups that some respondents’ attorneys 

were being counseled by their law firms 

that an acceptable and useful tactic was 

to file multiple dispositive motions at 

various stages of an arbitration 

proceeding. 

When the Code Revision was 

published for comment in the Federal 

Register, commenters opposed the 

dispositive motions rule for a variety of 

reasons. Therefore, FINRA removed the 

rule from the Code Revision and re-filed 

it separately.10 The SEC then approved 

the Code Revision without the 

dispositive motions rule.11

Prior Dispositive Motions Proposal 

As re-filed with the SEC, the 

dispositive motions proposal would 

Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 733 

12See note 10, supra. 

13See Comments on File No. SR–NASD–2006– 

088, Notice of Filing of Proposed Rule Change 

Relating to Motions To Decide Claims Before a 

Hearing on the Merits, available at http:// 

www.sec.gov/comments/sr–nasd–2006–088/ 

nasd2006088.shtml (last visited December 5, 2008). 

14For purposes of the proposal, a party could be 

an initial claimant, respondent, counterclaimant, 

cross claimant, or third party claimant and his or 

her motion to dismiss would be subject to Rules 

12206 and 12504 of the Customer Code or Rules 

13206 and 13504 of the Industry Code. 

15A motion to dismiss on eligibility grounds 

would be governed by Rules 12206 and 13206 of 

the Customer and Industry Code, respectively; the 

amendments to those rules are discussed below. 

have permitted a panel to grant a 

dispositive motion prior to an 

evidentiary hearing only under 

extraordinary circumstances.12 The SEC 

published the proposal for public 

comment on August 31, 2006, and 

received over 60 comment letters,13 the 

majority of which opposed the proposal. 

Based on the comments, FINRA 

recognized that the proposal did not 

provide effective guidance on how 

dispositive motions would be handled 

in the forum. Because the comments 

indicated that various issues involving 

dispositive motions required more 

guidance, FINRA withdrew the 

dispositive motions proposal, and filed 

a new proposed rule change to provide 

specific procedures that would govern 

motions to dismiss. In its new proposed 

rule change, FINRA also proposed to 

amend the separate rule governing 

dismissals made on eligibility grounds. 

Motions To Dismiss on Other Than 

Eligibility Grounds 

FINRA filed the proposed rule change 

to provide specific procedures that 

would govern motions to dismiss. 

Generally, FINRA stated that it believes 

that parties have the right to a hearing 

in arbitration. In certain very limited 

circumstances, however, FINRA 

indicated that it would be unfair to 

require a party to proceed to a hearing. 

The proposal is designed to balance 

these competing interests. In FINRA’s 

view, the proposal should ensure that 

parties 14 have their claims heard in 

arbitration, by significantly limiting the 

grounds for filing motions to dismiss 

prior to conclusion of a party’s case in 

chief and by imposing stringent 

sanctions against parties for engaging in 

abusive practices under the rule. The 

proposal would permit parties to file a 

motion to dismiss at the conclusion of 

a party’s case in chief, based on any 

theory of law. 

The proposed rule change would 

govern motions to dismiss filed prior to 

the conclusion of a party’s case in chief 

(under the Customer Code or Industry 

Code, as applicable), as discussed in 

further detail below. 

Discourage Motions To Dismiss a Claim 

Prior to Conclusion of a Party’s Case in 

Chief 

The proposal would clarify that 

motions to dismiss a claim prior to the 

conclusion of a party’s case in chief are 

discouraged in arbitration. FINRA stated 

that it believes that parties have the 

right to a hearing in arbitration, and 

only in certain very limited 

circumstances should that right be 

challenged. This policy statement 

would not apply to motions filed on the 

basis of eligibility grounds, as discussed 

below. 

Require That Motions To Dismiss Be 

Filed in Writing, Separately From the 

Answer, and After the Answer Is Filed 

FINRA stated that it believes that 

requiring a party to file a motion to 

dismiss in writing separately from the 

answer and only after the answer is filed 

would deter parties from filing these 

motions routinely in lieu of an answer, 

and would prevent parties from 

combining a motion to dismiss with an 

answer. This provision should ensure 

that parties receive an answer that 

responds directly to the statement of 

claim. 

Filing Deadlines 

The proposed rule change would 

require parties to serve motions under 

this provision at least 60 days before a 

scheduled hearing and would provide 

45 days to respond to a motion unless 

the parties agree or the panel determines 

otherwise. FINRA stated that it believes 

that requiring a motion to dismiss to be 

served at least 60 days before a 

scheduled hearing and providing 45 

days for a party to respond to such a 

motion would prevent the moving party 

from filing a motion shortly before a 

hearing as a surprise tactic to force a 

delay in the arbitration process. 

Require the Full Panel To Decide 

Motions To Dismiss 

The proposal would require the full 

panel to decide motions to dismiss. 

Given the ramifications of granting a 

motion to dismiss, FINRA stated that it 

believes that each member of the panel 

should be required to hear the parties’ 

arguments, so that each panel member 

may make an informed decision when 

ruling on the motion. 

Require an Evidentiary Hearing 

Under the proposal, the panel would 

not be permitted to grant a motion to 

dismiss prior to the conclusion of a 

party’s case in chief unless the panel 

holds an in-person or telephonic 

prehearing conference on the motion 

that is recorded in accordance with Rule 

12606 of the Customer Code or Rule 

13206 of the Industry Code, unless such 

conference is waived by the parties. 

FINRA stated that it believes this 

requirement would ensure that the 

panel holds a hearing on the motion and 

that the panel has sufficient information 

to make a ruling. 

Limited Grounds on Which a Motion 

May Be Granted 

FINRA proposed to limit the grounds 

on which a panel may act upon a 

motion to dismiss prior to the 

conclusion of the party’s case in chief. 

The proposal states that a panel may act 

upon a motion to dismiss only after the 

party rests its case in chief unless the 

panel determines that: 

• The non-moving party previously 

released the claim(s) in dispute by a 

signed settlement agreement and/or 

written release; or 

• The moving party was not 

associated with the account(s), 

security(ies), or conduct at issue.15

FINRA stated that it believes that 

limiting the grounds on which a motion 

to dismiss may be granted prior to the 

conclusion of the party’s case in chief 

would minimize the potential for 

abusive practices and ensure that most 

parties’ claims would be heard in the 

forum. 

Require a Unanimous, Explained, 

Written Decision To Grant a Motion To 

Dismiss 

The proposal would require a 

unanimous decision by the panel to 

grant a motion to dismiss as well as a 

written explanation of the decision in 

the award. Under the proposal, each 

member of the panel must agree to grant 

a motion to dismiss. FINRA stated that 

it believes that because these decisions 

are an integral part of the arbitration 

process, all panel members should agree 

to dismiss a claim; otherwise the case 

should continue. Moreover, the 

provision that requires the panel to 

provide a written explanation of its 

decision would help parties understand 

the panel’s rationale for its decision. 

Require Permission From the Arbitrators 

To Re-File a Denied Motion To Dismiss 

Under the proposal, a party would be 

prohibited from re-filing a denied 

motion to dismiss, unless specifically 

permitted by a panel order. FINRA 

stated that it believes this limitation 

would serve to expedite the arbitration 

process and minimize parties’ costs. 

734 Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 

16Rule 12206(b) of the Customer Code and Rule 

13206(b) of the Industry Code. 

Require Arbitrators To Award Fees 

Associated With Denied Motions To 

Dismiss and To Award Fees and Costs 

Associated With Frivolously Filed 

Motions To Dismiss 

The proposal would also require that 

the panel assess forum fees associated 

with hearings on the motion to dismiss 

against the party filing the motion to 

dismiss, if the panel denies the motion. 

Further, if the panel deems frivolous a 

motion filed under this rule, the panel 

must award reasonable costs and 

attorneys’ fees to a party that opposed 

the motion. FINRA stated that it 

believes that imposing monetary 

penalties would minimize abusive 

practices involving motions to dismiss 

and would deter parties from filing such 

motions frivolously. 

Permit Sanctions for Motion To Dismiss 

Filed in Bad Faith 

If the panel determines that a party 

filed a motion under this rule in bad 

faith, the panel also may issue sanctions 

under Rule 12212 of the Customer Code 

or Rule 13212 of the Industry Code. 

FINRA stated that it believes that these 

stringent sanction requirements would 

provide panels with additional 

enforcement mechanisms to address 

abusive practices involving motions to 

dismiss if other deterrents prove 

ineffective. 

When a moving party (governed by 

the Customer Code or Industry Code, as 

applicable) files a motion to dismiss at 

the conclusion of a party’s case in chief, 

the provisions governing motions to 

dismiss filed prior to the conclusion of 

a party’s case in chief discussed above 

would not apply. Thus, a moving party 

could file a motion to dismiss at the 

conclusion of a party’s case in chief, 

based on any theory of law. The rule, 

however, would not preclude the panel 

under this scenario from issuing an 

explanation of its decision if it grants 

the motion, or awarding costs or fees to 

the party that opposed the motion if it 

denies the motion. 

FINRA stated that it believes that 

permitting a moving party to file a 

motion to dismiss at the conclusion of 

a party’s case in chief should balance 

the goal of ensuring that non-moving 

parties have their claims heard by a 

panel against the rights of moving 

parties to challenge a claim they believe 

lacks merit or has not been proved. 

Moreover, FINRA stated that it believes 

that arbitrators should be permitted to 

entertain and act upon a motion to 

dismiss at this stage of a hearing to 

minimize the moving parties’ incurring 

unnecessary additional attorneys’ fees 

and forum fees. If a claimant has 

presented its case in chief and clearly 

failed to present sufficient evidence to 

support a claim, then the moving party 

should not be forced to incur the 

additional expenses and costs 

associated with unnecessary hearings. 

The proposal provides that motions to 

dismiss based on failure to comply with 

the code or an order of the panel under 

Rule 12212 of the Customer Code or 

13212 of the Industry Code, as 

applicable, would be governed by that 

rule. Further, the proposal provides that 

motions to dismiss based on discovery 

abuse filed under Rule 12511 of the 

Customer Code or Rule 13511 of the 

Industry Code, as applicable, would be 

governed by that rule. 

Amendments to the Dismissal Provision 

of the Eligibility Rule 

FINRA proposed to amend Rules 

12206(b) and 13206(b) of the Customer 

and Industry Codes, respectively, to 

address motions to dismiss made on 

eligibility grounds. Under this proposal, 

a party would be permitted to file a 

motion to dismiss on eligibility grounds 

at any stage of the proceeding (after the 

answer is filed), except that a party 

would not be permitted to file this 

motion any later than 90 days before the 

scheduled hearing on the merits. FINRA 

also proposed to amend the rule to 

address the res judicata defense 

claimants could encounter when they 

attempt to pursue in court a claim 

dismissed in arbitration, when the 

grounds for the dismissal are unclear. 

First, FINRA proposed to amend 

Rules 12206(b) of the Customer Code 

and Rule 13206(b) of the Industry Code 

to establish procedures for motions to 

dismiss made on eligibility grounds. In 

light of the new motions to dismiss 

proposal, FINRA stated that it believes 

that similar changes should be 

incorporated into the existing eligibility 

rule to provide procedures and guidance 

for dealing with motions to dismiss 

made on eligibility grounds. The 

proposed changes to the eligibility rule 

contain most of the same provisions as 

those contained in the proposed 

motions to dismiss rule (discussed 

above), except for those criteria that are 

not applicable to eligibility motions, 

that is, the two other grounds on which 

a panel may grant a motion to dismiss 

before a party has presented its case in 

chief (i.e., signed settlement and written 

release and factual impossibility). 

In addition, the filing deadlines 

would be different from those in the 

motions to dismiss proposal. Under the 

proposed rule, a party would be 

permitted to file a motion to dismiss on 

eligibility grounds at any stage of the 

proceeding (after the answer is filed), 

except that a party would not be 

permitted to file this motion any later 

than 90 days before the scheduled 

hearing on the merits. FINRA stated that 

it believes that this requirement would 

encourage moving parties to determine 

in the early stages of the case whether 

to pursue their claims in court or to 

proceed with the arbitration. Further, 

FINRA stated that this requirement 

would prevent the moving party from 

filing this motion shortly before a 

hearing as a surprise tactic to force a 

delay in the arbitration process. 

The proposal also would provide 

parties with 30 days to respond to an 

eligibility motion. If a panel grants a 

motion to dismiss a party’s claim based 

on eligibility grounds, that party must 

re-file the claim in court to pursue its 

remedies, which could further delay 

resolution of the dispute. Therefore, 

FINRA proposed the 30-day timeframe 

to respond to eligibility motions to 

expedite the process, so that the time 

between filing a claim and resolution of 

the dispute is shortened. 

Second, FINRA addressed potential 

problems in the implementation of the 

eligibility rule since it was last amended 

in 2005. Currently, the eligibility rule 

makes clear that dismissal of a claim on 

eligibility grounds in arbitration does 

not preclude a party from pursuing the 

claim in court; it provides that, by 

requesting dismissal of a claim under 

the rule, the requesting party is agreeing 

that the non-moving party may 

withdraw any remaining related claims 

without prejudice and may pursue all of 

the claims in court.16

In certain situations, when a claim is 

dismissed under the eligibility rule, 

FINRA understands that claimants have 

had difficulty proceeding with their 

claims in court, because respondents 

have asserted a res judicata defense 

when the panel’s grounds for dismissing 

the arbitration claim were unclear. For 

example, if a respondent files a motion 

to dismiss based on several grounds, 

including eligibility, and the panel 

issues an order dismissing a claim, but 

without citing reasons, the claimants 

would not know whether or not they are 

afforded the right to pursue the claim in 

court, as provided by the rule. If the 

claimants proceed to file the dismissed 

claim in court, the respondents may 

argue that the panel’s decision on the 

claim is the final decision, and that 

claimants are barred from having the 

court decide the same claim again. In 

such a case, claimants would be 

required to prove that the dismissal was 

based on eligibility, not the other 

Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 735 

17Letter from Mignon McLemore, FINRA, dated 

September 15, 2008 (‘‘FINRA Letter’’). 

18Burke, Canning, Estell, Fogel, Gard, Krosschell, 

Lipner, Meissner, Port, Pounds, Rex, Simpson, 

Speyer, Steiner, Tepper and Willcutts Letters. 

19Acker, Amery, Anello, Astarita, Babnick, 

Berberian, Brodherson, Boutin, Buckman, Carreno, 

Citigroup, Davidson, DBSI, Dulcich, Farley, 

Forchheimer, Gelber, Gordon, Hartman, Henney, 

Karp, Kaufman, Kemnitz, Krebsbach, Lampart, 

McDermott, Morgan Stanley, Rapp, Raymond 

James, RBC, Rogers/Steinberg, Schrils, Schwab, 

Selden, Shannon, Shaw, SIFMA, Soraghan, 

Thurman, Ungar/Bravo, Venezia, Wachovia, Wallis, 

and Weissman Letters. 

20Schwartz and Stark Letters. 

21Aidikoff, Austin, Banks, Bakhtiari, Bernstein, 

Bleecher, Boliver, Buchwalter, Carlson, Caruso, 

Cornell, Davis, Edwards, Evans, Forman, Graham, 

Griffin, Goehring, Greco, Gross/Black, Haigney, 

Hargett, Harrison, Hayes, Heiner, Korsak, Kruske, 

Imbesi, Lagemann, Lawlor, Layne, Ledbetter, 

Lewins, Maddox, Malecki, Miller, Mougey, Myers, 

Neuman, PIABA, PIABA 2, Sadler, Salamon, 

Shewan, Smiley, Sonn, St. John’s, Stoltmann, 

Syracuse, Torngren, Uhl, Van Kampen, Wagner and 

Zuchlewski Letters. 

22PIABA wrote two letters in support of the 

proposed rule. 

23 Jacobowitz, Rosenfield and Struyk Letters. 

24Astarita, Berberian, Berne, Carreno, DBSI, 

Forchheimer, Gordon, Lampart, RBC, Selden, Shaw, 

SIFMA, Ungar/Bravo, Venezia and Wachovia 

Letters. 

25Babnick, Berberian, Citigroup, Kaufman, 

Kemnitz, McDermott, Morgan Stanley, Raymond 

James, Rogers, Schrils, and Thurman Letters. 

26Heiner and Korsak Letters. 

27See, e.g., Caruso, Kruske, Lewins, Shewan and 

St. John’s Letters. 

28See, e.g., Carlson Letters, Lawlor and PIABA 2. 

29Black/Gross Letter. 

30Lipner Letter. 

31See, e.g., Forchheimer, SIFMA, Ungar/Bravo, 

and Wachovia Letters. 

grounds for dismissal that the 

respondents raised. This would be 

difficult or impossible if the arbitrator or 

panel did not explain the reasons for the 

dismissal. 

FINRA proposed to amend the 

eligibility rule to address this issue. As 

amended, the rule would provide that 

when a party files a motion to dismiss 

on multiple grounds, including 

eligibility, the panel must consider the 

threshold issue of eligibility first. First, 

the rule would be amended to require 

that if the panel grants the motion to 

dismiss on eligibility grounds on all 

claims, it shall not rule on any other 

grounds for the motion to dismiss. 

Second, the rule would be amended to 

require that if the panel grants the 

motion to dismiss on eligibility grounds, 

on some, but not all claims, and the 

non-moving party 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. Third, 

the rule would be amended to require 

that, when arbitrators dismiss any claim 

on eligibility grounds, that fact must be 

stated on the face of their order and any 

subsequent award the panel may issue. 

And fourth, the rule would provide that 

if the panel denies the motion to 

dismiss on the basis of eligibility, it 

shall rule on the other bases for the 

motion to dismiss the remaining claims 

in accordance with the motions to 

dismiss rule. FINRA stated that it 

believes that the proposed amendments 

will close a loophole that has resulted 

from implementing the rule by 

eliminating the res judicata defense that 

claimants could face when they attempt 

to pursue claims in court that were 

dismissed in arbitration on eligibility 

grounds. 

III. Comment Letters 

The Commission received 119 

comments relating to FINRA–2007–021 

concerning amendments to arbitration 

procedures for pre-hearing motions to 

dismiss and dismissals on eligibility 

grounds. The Commission also received 

FINRA’s response to comments, which 

is discussed below.17 Of the 119 letters: 

(i) Sixteen commenters 18 (consisting of 

professors and attorneys representing 

investors) opposed the proposed rule 

change on the basis that it does not go 

far enough to end the abuse in motions 

to dismiss, (ii) forty-four commenters 19

(consisting of SIFMA, broker-dealers 

and attorneys representing the financial 

industry) opposed the rule principally 

because of the narrow scope of the 

grounds for filing pre-hearing motions 

to dismiss; (iii) two commenters 20 (an 

attorney representing investors and a 

professor of finance) opposed the 

proposed rule for other reasons; (iv) 

fifty-four commenters 21 (including 

PIABA,22 attorneys representing 

investors, law school clinics and 

professors) supported the proposed rule; 

and (vi) three 23 commenters did not 

express a definitive view. 

Of the 44 commenters that opposed 

the rule on the basis of the narrow scope 

of grounds for filing pre-hearing 

motions to dismiss, 15 commenters 24

expressed concern regarding many of 

the procedural rules in the proposal, 11 

commenters 25 noted that they would 

support the procedural rules in the 

proposal, while the remaining 18 

commenters did not state their views 

regarding the procedural rules. Of the 54 

commenters who supported the 

proposal, two expressed unconditional 

support.26 Many of the remaining 

supporters indicated that the proposal 

should be approved, but also that all 

motions to dismiss should be prohibited 

in FINRA’s arbitration forum.27

Detailed Discussion of Comments and 

FINRA Response 

Policy Statement on Prehearing Motions 

Proposed Rules 12504(a)(1) of the 

Customer Code and 13504(a)(1) of the 

Industry Code would provide that 

motions to dismiss a claim prior to the 

conclusion of a party’s case in chief are 

discouraged in arbitration. Many 

commenters addressed this statement of 

policy regarding motions to dismiss in 

FINRA’s arbitration forum and, in 

particular, the use of the word 

‘‘discouraged.’’ 

Several commenters supported the 

statement of policy, indicating that it 

sets an appropriate tone for the rest of 

the proposal.28 One commenter 

contended that the rule language does 

not sufficiently discourage motions to 

dismiss and should indicate that 

motions to dismiss should be granted 

only in extraordinary circumstances.29

One commenter who opposed the 

proposal contended that, without this 

language, the proposal would appear to 

authorize and encourage motions to 

dismiss in the forum.30 A number of 

commenters opposed the policy 

statement, arguing that it unfairly 

discourages motions to dismiss prior to 

the conclusion of a party’s case in chief 

in the forum, and creates an 

unnecessary bias against these 

motions.31

FINRA responded to these comments 

by stating that, generally, FINRA 

believes that parties have the right to a 

hearing in arbitration and that proposed 

Rules 12504(a)(1) of the Customer Code 

and 13504(a)(1) of the Industry Code 

would reinforce this position by 

clarifying that prehearing motions to 

dismiss are discouraged in arbitration. 

FINRA stated its belief that the word 

‘‘discouraged’’ is appropriately placed 

in the rule language, and accurately 

describes its view of prehearing motions 

to dismiss in the forum. 

FINRA also disagreed with those 

commenters who contended that this 

policy statement unfairly discourages all 

motions to dismiss in the forum. FINRA 

pointed out that, while the proposal 

limits the exceptions under which a 

prehearing motion to dismiss may be 

granted, proposed Rules 12504(b) of the 

Customer Code and 13504(b) of the 

Industry Code would permit parties to 

file a motion on any ground after the 

conclusion of a party’s case in chief. 

FINRA indicated its belief that it would 

736 Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 

32See note 10, supra. 

33See, e.g., Raymond James, Selden, Shannon and 

SIFMA Letters. 

34A ‘‘selling away’’ claim involves a dispute in 

which an associated person is alleged to have 

engaged in securities activities outside his or her 

firm. 

35See, e.g., Banks, Greco, Krosschell, PIABA 2 

and Shewan Letters. 

36See, e.g., Uniform Securities Act § 509(g) 

(2002). 

37FINRA reiterated its position that ‘‘selling 

away’’ claims are arbitrable under the Codes. Under 

the Codes, FINRA accepts cases brought by 

customers against associated persons in selling 

away cases, and cases by customers against the 

associated person’s member firm if there is any 

allegation that the member was or should have been 

involved in the events, such as an alleged failure 

to supervise the associated person. See, e.g., MultiFinancial Securities Corp. v. King, 386 F.3d 1364 

(11th Cir. 2004); see also In the Matter of PFS 

Investments, Inc., 1998 SEC LEXIS 1547, (Exchange 

Act Rel. No. 42069) (July 28, 1998). 

38Burke Letter. 

39See FINRA By-Laws, Article V, § 4(a) 

(Retention of Jurisdiction). 

40Rule 12801 of Customer Code and Rule 13801 

of Industry Code. 

41The three exceptions, as described above under 

II. Description of the Proposed Rule Change, are: (1) 

The non-moving party previously released the 

claim(s) in dispute by a signed settlement 

agreement and/or written release; (2) the moving 

party was not associated with the account(s), 

security(ies), or conduct at issue; or (3) the claim 

is not eligible for arbitration in FINRA’s forum, 

under Rule 12206 of the Customer Code or 13206 

of the Industry Code, as applicable. 

42For example, these commenters contend that 

claims involving defamation on the Form U5 or 

those subject to the doctrine of res judicata should 

be exceptions to the rule. See, e.g., SIFMA, 

Thurman, Morgan Stanley, Rapp, Schrils, Kaufman, 

and Jacobowitz Letters. 

43 Id. 

44 Id. 

45See, e.g., Banks, Lagemann, PIABA 2 and St. 

John’s Letters. 

be unfair to require parties to incur 

additional hearing session fees if there 

is a valid reason to dismiss after the 

claimant’s case. In those cases, FINRA 

suggested that a panel may grant a 

motion to dismiss, under proposed 

subparagraph (b), if the moving party 

proves such action is warranted. 

FINRA emphasized that the proposed 

rules do not constitute an invitation to 

parties to file prehearing motions to 

dismiss. Further, FINRA noted that the 

fact that a motion may be filed under 

one of the exceptions in the proposal 

does not mean that the panel should or 

will grant the motion. 

In a prior, withdrawn proposal, 

FINRA stated that motions to dismiss 

should be granted only in extraordinary 

circumstances.32 Some commenters 

suggested that the absence of that 

language in the current proposal 

effectively authorizes or encourages 

motions to dismiss. FINRA indicated 

that it disagrees, and believes that the 

current proposal removes the ambiguity 

that the ‘‘extraordinary circumstances’’ 

concept created, and expressly outlines 

FINRA’s position concerning motions to 

dismiss. FINRA reiterated that the 

current proposal would provide for 

three limited exceptions under which a 

motion to dismiss may be granted before 

the conclusion of a claimant’s case-inchief, thereby limiting the timing and 

circumstances under which such a 

prehearing motion may be filed. 

Moreover, FINRA pointed out that the 

proposal would require a panel to 

impose strict sanctions against parties 

who file motions to dismiss frivolously 

or in bad faith. Taken together, FINRA 

stated that these provisions reinforce its 

position that prehearing motions to 

dismiss in arbitration are discouraged 

and should be granted only under the 

limited exceptions of the rule. 

Accordingly, FINRA declined to amend 

the proposal to reintroduce the 

reference to ‘‘extraordinary 

circumstances.’’ 

Scope of Proposed Rules 12504(a)(6)(B) 

of the Customer Code and 13504(a)(6)(B) 

of the Industry Code (‘‘Not Associated’’ 

Exception) 

Proposed Rules 12504(a)(6)(B) of the 

Customer Code and 13504(a)(6)(B) of the 

Industry Code would provide that a 

prehearing motion to dismiss may be 

granted prior to the conclusion of the 

claimant’s case, if the respondent was 

not associated with the account, 

security, or conduct at issue. 

Most commenters suggested that 

FINRA should clarify how proposed 

Rule 12504(a)(6)(B) of the Customer 

Code would be applied. Many 

commenters indicated their belief that 

the exception should be interpreted 

broadly, so that senior executives, 

branch managers, and other office 

personnel could be excluded under this 

provision.33 Conversely, a number of 

commenters contended that a broad 

interpretation of the exception could 

wrongly exempt persons or entities not 

directly associated with transactions but 

who are liable under applicable statutes 

or case law (e.g., supervisors in ‘‘selling 

away’’ 34 cases).35

FINRA responded to these comments 

by indicating that it intends this 

exception to apply narrowly, such as in 

cases involving issues of 

misidentification. Thus, under this 

exception, a prehearing motion to 

dismiss could be granted if, for example, 

a party files a claim against the wrong 

person or entity, or a claim names an 

individual who was not employed by 

the firm during the time of the dispute, 

or a claim names an individual or entity 

that had no control over or was not 

connected to an account, security or 

conduct at the firm during the time of 

the dispute. Under this interpretation, 

therefore, a panel would not grant a 

motion to dismiss filed under this 

exception in cases in which a 

respondent may be liable as a supervisor 

or control person under applicable 

statutes 36 or in ‘‘selling away’’ cases.37

One commenter sought clarification 

concerning whether this exception 

would exclude parties in a supervisory 

position, or under control person 

liability when a broker-dealer is 

defunct.38

FINRA stated that if the claim 

involves a respondent who is liable as 

a supervisor or control person and the 

cause of action arose before the firm 

became defunct, a motion to dismiss 

filed under this exception would be 

inappropriate. FINRA noted that under 

its By-Laws, an associated person 

continues to be subject to FINRA’s 

jurisdiction if the conduct occurred 

while the person was associated or 

registered with a firm.39 Moreover, 

FINRA pointed out that if a firm is 

defunct, a claimant may request default 

proceedings against the firm, provided 

certain criteria are met.40

Additional Exceptions for Permissible 

Prehearing Motions 

Numerous commenters, who opposed 

the proposal, argued that the three 

exceptions to the general prohibition on 

prehearing motions to dismiss 41 are too 

narrow and fail to include certain 

situations in which such motions would 

be appropriate.42 These commenters 

suggested that FINRA expand the 

proposed rule to include the following 

exceptions: Clearing brokers, senior 

executives, statutes of limitation, and 

legal impossibility exceptions, such as 

defamation for statements made on 

required forms (which some courts have 

held are protected by an absolute 

privilege) and the doctrine of res 

judicata.43 Several of these commenters 

focused on the lack of an exception for 

clearing firms, arguing that, based on 

the nature of their operations, clearing 

firms do not owe a legal duty to 

claimants and, therefore, cannot be held 

liable for the wrongful acts of the 

introducing firm.44

A large portion of the commenters 

who supported the proposal contended 

that expanding the scope of prehearing 

motions to dismiss would negate the 

intent of the proposal and encourage 

unnecessary and unwarranted motions 

to dismiss.45 Indeed, many of these 

commenters argued that the eligibility 

exception to the general prohibition on 

prehearing motions to dismiss should be 

removed because eligibility motions 

Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 737 

46See, e.g., Greco, Gross/Black, Ledbetter and 

PIABA 2 Letters. 

47See, e.g., McDaniel v. Bear Stearns Co., and 

Bear Stearns Securities Corporation, 196 F.Supp. 2d 

343 (S.D.N.Y. 2002); see also, Koruga v. Fiserv 

Correspondent Services, Inc., 183 F.Supp.2d 1245 

(D. Or. 2001), aff’d, 40 Fed.Appx. 364, 2002 WL 

530548 (9th Cir. 2002). 

48 Id. 

49See, e.g., Babnick, Jacobowitz, Krebsbach, Rapp 

and SIFMA Letters. 

50See, e.g., Greco, Gross/Black, Ledbetter and 

PIABA 2 Letters. 

51 Id. 

52Rule 12206(b) of the Customer Code and Rule 

13206(b) of the Industry Code. 

53See note 41, supra. 

54See, e.g., Banks, Bernstein, Caruso, Davis and 

Wilcutts Letters. 

55See, e.g., Farley, Karp, Krebsbach and Walters 

Letters. 

tend to be fact-based, and would, in 

most cases, require an evidentiary 

hearing.46

FINRA responded by stating that it 

had considered these comments, and 

concluded that expanding the 

exceptions to the rule would negate its 

intent, which is to have clear, easily 

definable standards that do not involve 

fact-intensive issues. FINRA stated that 

the suggested additional exceptions 

would require fact-based determinations 

and, thus, would be inappropriate for 

dismissal before claimants have 

presented their cases. Although these 

exceptions would be inappropriate for 

prehearing dismissal, FINRA noted that 

a party would be permitted to file a 

motion addressing these issues at the 

conclusion of a claimant’s case-in-chief. 

FINRA stated that the proposal strikes 

an appropriate balance by ensuring that 

claimants have their claims heard in 

arbitration, while minimizing the 

parties’ exposure to additional fees in 

the event that the claimant does not 

prove the claims in its case-in-chief. For 

these reasons, FINRA declined to amend 

the proposal to expand the exceptions to 

the rule. 

FINRA also specifically stated that it 

had considered the concerns expressed 

by commenters regarding clearing firms 

and the impact the proposal could have 

on their operations. FINRA indicated 

that it understands the benefits that 

clearing firms provide to the operation 

of the securities markets, but these 

benefits do not warrant an exception to 

the rule. FINRA noted that courts have 

found that a broker-dealer’s status as a 

clearing firm does not immunize it from 

liability.47 Further, FINRA stated that 

the courts have found that clearing firms 

may be liable for the misdeeds of the 

introducing firm, if the clearing firms 

become actively or directly involved in 

fraudulent activity.48 Based on these 

findings, FINRA stated its belief that 

claimants should have the opportunity 

to prove in an evidentiary hearing 

whether a clearing firm’s involvement 

rises to the level of liability. As the issue 

of a clearing firm’s liability in 

arbitration would be a fact-intensive 

determination, FINRA stated that issue 

would be inappropriate for prehearing 

dismissal. Based on these findings, 

FINRA declined to amend the proposal 

to include an exception for clearing 

firms. 

Expansion of the Exception for 

Prehearing Motions Under the 

Eligibility Rule To Include Applicable 

Statutes of Limitation 

The proposed changes to the 

eligibility rules, Rules 12206(b) of the 

Customer Code and 13206(b) of the 

Industry Code, would not include 

applicable statutes of limitation as an 

exception on which a prehearing motion 

would be granted. 

Many commenters argued that 

respondents should not be forced to 

proceed to an evidentiary hearing 

against parties whose claims could be 

deemed stale or time-barred under an 

applicable legal authority.49 Conversely, 

several other commenters contended 

that most statutes of limitation matters 

raise issues of fact which would require 

an evidentiary hearing.50 Some 

commenters urged FINRA to remove the 

eligibility exception from the proposal 

for the same reasons.51

FINRA responded by stating that it 

included the eligibility rule exception in 

the proposal because its eligibility 

standard is uniform for all cases (six 

years from the occurrence or event 

giving rise to the claim), and does not 

vary depending on a particular 

jurisdiction’s laws or the cause of action 

raised by the claim. In addition, FINRA 

noted that claimants whose cases are 

dismissed on eligibility grounds have an 

alternative to resolve their disputes 

because the current rule gives them the 

right to take their cases to court.52 In 

light of the uniform applicability of the 

eligibility exception and the additional 

protections parties receive under the 

eligibility rule, FINRA declined to 

amend the proposal to remove the 

eligibility exception. 

Further, FINRA responded that it did 

not include applicable statutes of 

limitation in the eligibility exception 

because such issues involve fact-based 

determinations, depend on the law of 

the applicable jurisdiction, and depend 

on the type of claims alleged. FINRA 

noted that, in some jurisdictions, courts 

have found that statutes of limitations 

do not apply to arbitration proceedings. 

For these reasons, FINRA stated that it 

would be inappropriate to include an 

exception for prehearing motions to 

dismiss on statute of limitations 

grounds, and thus, declined to amend 

the proposal to include them in the 

eligibility exception. 

Motions Permitted at the Conclusion of 

Claimant’s Case-in-Chief 

Under Proposed Rules 12504(b) of the 

Customer Code and 13504(b) of the 

Industry Code, a motion to dismiss after 

the conclusion of a party’s case-in-chief 

would not be limited to the three 

exceptions described above.53

Many commenters who supported the 

proposal argued that this provision 

would shift abusive motions practice to 

the middle of the hearing, because 

respondents would wait until the end of 

the claimant’s case to file their motions, 

and thus, this provision should be 

deleted.54 Several commenters who 

opposed the proposal argued that the 

ability to file a motion at the conclusion 

of a party’s case-in-chief does not 

address their interests effectively, 

because respondents would have to 

prepare for and incur the costs of a full 

evidentiary hearing.55

FINRA responded by stating that the 

proposal strikes a fair balance by 

sharply limiting prehearing motions to 

dismiss, but permitting motions to 

dismiss after the claimant’s case-inchief. FINRA stated that it would be 

unfair to require the parties to continue 

with a hearing if the claimant has not 

proved its case. FINRA indicated that it 

expects such motions to be relevant to 

the case and based on theories that are 

germane to the issues raised in the casein-chief. FINRA further stated that by 

the close of the claimant’s case, the 

panel would have heard enough to 

decide whether a motion filed at the 

conclusion of a claimant’s case should 

be considered, and, if warranted, 

granted. 

FINRA stated that it will monitor the 

frequency of motions filed pursuant to 

this provision once the proposal is 

implemented. If this analysis indicates 

potentially abusive behavior, FINRA 

stated that it may amend the rule or take 

other appropriate action. 

FINRA also stated it will inform 

arbitrators that, if a party files a motion 

at the conclusion of a case-in-chief, the 

panel is not required to consider or 

grant the motion merely because it was 

filed pursuant to the rule; rather, 

arbitrators will continue to control the 

hearing process. Furthermore, FINRA 

noted that the proposed rule would not 

preclude a panel from assessing 

respondents with sanctions, costs and 

738 Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 

56Rule 12212 of the Customer Code and Rule 

13212 of the Industry Code. 

57See, e.g., Harrison, Mougey, PIABA 2 and St. 

John’s Letters. 

58See also Proposed Rules 12206(b)(5) and 

13206(b)(5) of the eligibility rule. 

59See, e.g., Carreno, Forchheimer, Krebsbach, 

SIFMA and Wallis Letters. 

60 Id. 

61Rule 12414(a) of the Customer Code and Rule 

13414(a) of the Industry Code provide that ‘‘all 

rulings and determinations of the panel must be 

made by a majority of the arbitrators, unless the 

parties agree, or the Code or applicable law 

provides, otherwise.’’ 

62See also Proposed Rules 12206(b)(8) and 

13206(b)(8). 

63See, e.g., Amery, Jacobowitz, Karp, Shannon 

and SIFMA and Letters. 

64See note 41, supra. 

65Rules 12303 and 13303. 

66See Rules 12500–12514 of the Customer Code 

and 13500–13512 of the Industry Code. 

67See also Proposed Rules 12206(b)(9) and 

13206(b)(9) of the eligibility rule. 

68See also Proposed Rules 12206(b)(10) and 

13206(b)(10) of the eligibility rule. 

69See, e.g., Babnick, Kaufman, Krebsbach and 

Morgan Stanley Letters. 

70See, e.g., Deutsche Bank, Lampart, SIFMA and 

Wachovia Letters. 

71 Id. 

72FINRA Letter. 

attorney’s fees, if the panel determines 

that a motion filed at this time is 

frivolous or in bad faith.56

FINRA reiterated that the purpose of 

the proposal is to ensure that claimants 

have their claims heard by a panel while 

permitting respondents, after 

completion of a claimant’s case-in-chief, 

to challenge a claim they believe lacks 

merit or has not been proved. FINRA 

suggested that because arbitrators 

currently deny most prehearing motions 

to dismiss, the proposal to permit 

motions to dismiss at this juncture 

should not have a significant impact on 

parties’ costs in preparing for a hearing. 

FINRA stated its belief that respondents’ 

exposure to attorneys’ fees and forum 

fees should be minimized under the 

proposal because additional hearing 

sessions will not be required if the panel 

grants a motion to dismiss at the close 

of a claimant’s case. Further, FINRA 

stated that, similarly, claimants will not 

incur additional forum costs if 

arbitrators believe they have not proved 

their case and dismiss it before 

respondents present their case, rather 

than at the conclusion of the 

respondents’ case. 

For these reasons, FINRA declined to 

amend the proposal. 

Concerns Regarding the Procedural 

Safeguards in the Proposal 

Several of the commenters who 

supported the procedural safeguards in 

the proposal indicated that these 

provisions provide protection to 

investors by creating an effective 

deterrent to abusive practices.57

However, multiple commenters opposed 

some of the proposed procedural 

safeguards as too stringent. Each 

proposed procedural rule that generated 

significant comment is addressed below. 

• Unanimous panel decision to grant 

a prehearing motion. 

Proposed Rules 12504(a)(7) of the 

Customer Code and 13504(a)(7) of the 

Industry Code would require a 

unanimous decision by the panel to 

grant a prehearing motion to dismiss.58

The commenters who opposed this 

provision stated that this requirement is 

not necessary to ensure a fair decision 

concerning a prehearing motion to 

dismiss.59 Further, these commenters 

argued that the provision is inconsistent 

with other provisions of the Codes, 

which only require a majority 

decision.60

FINRA responded that the type of 

relief requested by a prehearing motion 

to dismiss—the complete dismissal of a 

claim before an evidentiary hearing— 

justifies the requirement that all 

arbitrators agree, based on the moving 

party’s proof, that the motion should be 

granted. FINRA indicated that it 

recognizes that this standard is different 

from the criteria for rendering other 

rulings and determinations.61 In 

practice, however, FINRA noted that 

most awards rendered in its forum are 

unanimous; thus, FINRA stated that this 

requirement is not a significant change 

from current practice. For these reasons, 

FINRA declined to amend the proposal 

to change this provision. 

• Mandatory assessment of forum 

fees. 

Proposed Rules 12504(a)(8) of the 

Customer Code and 13504(a)(8) of the 

Industry Code would require that, if a 

panel denies a prehearing motion to 

dismiss, it must assess forum fees 

associated with hearings on the motion 

against the moving party.62

Commenters who opposed this 

provision stated that it is unfair to 

penalize moving parties who file 

motions to dismiss based on the 

exceptions available under the proposed 

rule, and who rely on a claimant’s 

pleadings being accurate and complete 

when filing these motions.63

FINRA responded by stating that this 

provision on mandatory assessment of 

forum fees will deter parties from filing 

motions that fall outside the scope of 

the three exceptions 64 to the rule, and 

will provide an incentive for parties to 

ensure that their prehearing motions to 

dismiss comply with the intent of the 

rule. 

In response to those commenters who 

argued that the proposal would punish 

respondents when a claimant’s pleading 

lacks specificity, FINRA reminded 

parties that there are no specific 

pleading requirements under the Codes. 

FINRA noted that Rules 12302 of the 

Customer Code and 13302 of the 

Industry Code require a claimant to 

supply only ‘‘[a] statement of claim 

specifying the relevant facts and 

remedies requested’’ along with the 

required fees, copies, and signed 

submission agreement in order to 

initiate an arbitration. Similarly, FINRA 

pointed out that the answer must 

include only ‘‘[an] answer specifying 

the relevant facts and available defenses 

to the statement of claim.’’ 65 Further, 

FINRA stated that parties may obtain 

further information and documents 

through the discovery process.66

For these reasons, FINRA declined to 

amend the proposal to change this 

provision. 

Mandatory Assessment of Costs and 

Attorneys’ Fees and Possible Sanctions 

Proposed Rules 12504(a)(10) of the 

Customer Code and 13504(a)(10) of the 

Industry Code would require that, if a 

panel deems a prehearing motion to 

dismiss to be frivolous, it must award 

reasonable costs and attorneys’ fees to 

any party that opposed the motion.67

Also, proposed Rules 12504(a)(11) of the 

Customer Code and 13504(a)(11) of the 

Industry Code would require that, if a 

panel deems that a prehearing motion to 

dismiss was filed in bad faith, it may 

issue sanctions against the moving 

party.68

Several commenters who opposed the 

proposal nevertheless supported these 

provisions as sufficient deterrents 

against abusive motions practices, and 

suggested that they would eliminate the 

need to restrict prehearing motions to 

dismiss in the forum.69 Other 

commenters who opposed the proposal 

argued that, as drafted, the provisions 

would result in an increase in the 

number of motions for costs, fees, and 

sanctions filed by claimants.70 These 

commenters suggested that FINRA 

should amend the proposal to prohibit 

claimants from filing such motions, and 

permit the panel, on its own initiative, 

to decide whether a motion is frivolous 

or in bad faith and order relief 

appropriately.71

FINRA responded by stating that it 

‘‘anticipates that parties will file fewer 

prehearing motions to dismiss once the 

proposal is implemented, which should 

forestall any increase in the number of 

motions for costs, fees, and 

sanctions.’’ 72 FINRA further stated its 

belief that the risk of monetary penalties 

Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 739 

73Proposed Rules 12504(a)(5) of the Customer 

Code and 13504(a)(5) of the Industry Code. See also 

Proposed Rules 12206(b)(4) and 13206(b)(4) of the 

eligibility rule. 

74St. John’s Letter. 

75 Id. 

76Rule 12105(a) of the Customer Code and Rule 

13105(a) of the Industry Code. 

77See, e.g., Buchwalter, Haigney, Neuman and 

Stoltmann Letters. 

78 Id. See also, e.g., Estell, Forman and St. John’s 

Letters. 

79See, e.g., Hartman, Kemnitz, Morgan Stanley 

and Schrils Letters. 

80See, e.g., Berberian, Davidson, Dulcich and 

McDermott Letters. 

81See Additional statistical support section 

below for updated statistics on motions to dismiss 

filed in FINRA’s forum. 

82See Securities Arbitration Commentator, Nov. 

2006 (Vol. 2006, No. 5) (‘‘Study’’). 

83See, e.g., Astarita, Berberian, Davidson and 

Farley Letters. 

84See, note 82, supra, at 3. 

85 Id. 

86The data do not include cases filed in the NYSE 

Regulation arbitration forum. 

and sanctions, imposed either by the 

panel on its own initiative, or as a result 

of a party’s motion, should deter parties 

from filing such motions frivolously or 

in bad faith. FINRA suggested that, 

taken together, these enforcement 

mechanisms should ensure strict 

compliance with the rules. For these 

reasons, FINRA declined to amend the 

proposal to change these provisions. 

Clarification of the In-Person or 

Telephonic Prehearing Conference 

Criteria 

The proposed rule requires that a 

panel may not grant a motion under the 

rule unless an in-person or telephonic 

prehearing conference is held or waived 

by the parties.73 One commenter 

requested clarification concerning what 

would satisfy the in-person or 

telephonic prehearing conference 

requirement.74 The commenter was 

concerned that the rules imply that the 

panel may grant the motion solely on 

the basis of the submissions from the 

parties.75

FINRA responded by explaining that 

prehearing conferences conducted 

under this provision would be subject to 

Rules 12501 of the Customer Code and 

13501 of the Industry Code. Further, 

FINRA explained that, under the 

proposal, if the parties agree to waive 

the prehearing conference, as is 

permitted currently under the Codes,76

the panel may grant the motion based 

solely on the submissions of the parties. 

FINRA also stated that, if, however, the 

parties do not agree to waive the 

prehearing conference, then the panel 

must hold an evidentiary hearing on the 

motion at which time the parties will 

have an opportunity to present their 

arguments concerning the motion. In 

this situation, FINRA explained that the 

panel will have received the 

information necessary to make an 

informed decision. 

Effect of the Proposal on the Parties’ 

Costs 

Many commenters argued that current 

practice permits respondents to file 

numerous motions that are rarely 

granted, and that serve only to delay the 

hearings, harass claimants, and increase 

claimants’ costs through higher forum 

fees and lower award amounts once 

expenses are paid.77 In general, these 

commenters indicated that defending 

these motions to dismiss is a waste of 

time and resources and, ultimately, will 

result in the denial of access to the 

forum for investors with small claims.78

A number of commenters argued that 

the proposal prohibiting most 

prehearing motions to dismiss would 

increase all parties’ costs, particularly 

firms’, because their attorneys charge on 

an hourly basis, whereas claimants’ 

attorneys charge on a contingency basis, 

so claimants are not incurring any 

costs.79 Others contended that 

prohibiting prehearing motions to 

dismiss nullifies their most important 

objective—to avoid the expense of 

preparing for and attending an 

evidentiary hearing.80

FINRA responded by stating that it is 

not privy to the fee structure used by 

investors’ attorneys or counsel for 

brokerage firms. However, based on 

internal data 81 and other statistical 

studies tracking motions to dismiss in 

FINRA’s forum,82 FINRA noted that it is 

aware that when motions to dismiss are 

filed, they serve to delay the hearings 

and increase all parties’ costs through 

higher forum fees. As a result, FINRA 

stated its concern that the current 

practice by some respondents of filing 

motions to dismiss, and sometimes 

multiple motions in one case, could 

cause investors’ attorneys not to take 

smaller claims, because the costs 

incurred in defending these motions 

could exceed the amount in dispute. 

FINRA stated that it anticipates that the 

proposal will continue to make the 

forum accessible to investors, 

particularly those with small claims, by 

minimizing the number of motions to 

dismiss filed in the forum, and by 

shifting the costs and fees associated 

with denied motions to dismiss to the 

moving party. FINRA stated that the 

proposal’s benefits protecting investors’ 

access to the forum and their ability to 

have claims heard in arbitration 

outweigh the possibility of increased 

costs and expenses firms might incur 

under the rule. For these reasons, 

FINRA declined to amend the proposal 

to address this concern. 

Additional Statistical Support 

Several commenters who opposed the 

proposal argued that FINRA did not 

provide enough objective evidence to 

support the changes proposed.83 These 

commenters suggested that anecdotal 

evidence of abuse is not sufficient proof 

that prehearing motions to dismiss 

should be prohibited. 

FINRA responded that it disagrees 

with these commenters. FINRA stated 

that a significant number of changes to 

FINRA’s arbitration rules have begun 

with users of the forum expressing a 

concern or complaint to FINRA. FINRA 

further stated that it relies on its 

constituents to inform it of concerns 

with its rules, arbitrator conduct, or 

abusive practices. Moreover, FINRA 

noted that once FINRA staff members 

become aware of a problem, they 

investigate further, and propose changes 

to the rules to address the concern, if 

necessary. 

FINRA stated that, in the case of 

motions to dismiss, it received many 

complaints from users of the forum 

documented with copies of motions to 

dismiss, responses, and the panels’ 

denials of those motions. FINRA stated 

that it also learned through a Securities 

Arbitration Commentator study that the 

number of motions to dismiss filed in 

customer cases had begun to increase 

over a two year period, starting in 

2004.84 The Study was conducted on 

motions to dismiss in customer cases 

and concluded that, of the cases that 

went to award in 2006, 28% had 

motions to dismiss as compared to 10% 

of cases that went to award in 2004.85

FINRA found the results of the Study 

‘‘alarming’’ not only because of the 

significant increase in the motions filed 

in these cases, but also because the 

Study did not include cases that settled 

during that time. As a result of this 

analysis, FINRA indicated that it 

became concerned that, if left 

unregulated, this type of motions 

practice would limit investors’ access to 

the forum, which is antithetical to 

FINRA’s goals of investor protection and 

market integrity. 

In light of the Study and concerns 

raised by constituents, FINRA began 

tracking motions to dismiss in 2007. 

FINRA noted that from January 1, 2007 

to July 1, 2008, there have been 6,079 

arbitration cases filed in the forum,86

and a total of 754 motions to dismiss 

filed in these cases. Further, FINRA 

740 Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 

87See Notice to Parties on Motions to Dismiss 

under the Code of Arbitration Procedure for 

Customer and Industry Disputes available at 

http://www.finra.org/ArbitrationMediation/ 

ResourcesforParties/NoticestoParties/p037078. The 

Notice continues to be effective. 

88See, e.g., Gross/Black, Honigman, Van Kampen 

and Wachovia Letters. 

89 Id. 

90Tepper Letter. 

91Canning Letter. 

92See Supplemental Response to Comments from 

Linda D. Fienberg, President, Dispute Resolution, 

dated May 29, 2007. The SEC approved the 

consolidation of member firm regulatory operations 

of NASD and NYSE on July 26, 2007. Securities 

Exchange Act Rel. No. 56145, 72 FR 42169 (Aug. 

1, 2007) (SR–NASD–2007–023) (approval order). 

93See, e.g., Amery, Buckman, Gelber and 

Shannon Letters. 

94See, e.g., Buchwalter, Haigney, Neuman and 

Stoltmann Letters. 

95Harry A. Jacobowitz, ‘‘Roadblocks at the Exits: 

FINRA’s Proposed Dispositive Motions Rule,’’ 

Securities Arbitration Commentator, February 2008 

(Vol. 2007, No. 4), at 1. 

96See also Rules 13105 and 13207 of the Industry 

Code. 

97Rule 12902(d) of the Customer Code and Rule 

13902(d) of the Industry Code. 

noted that in 10% of the 6,079 cases, 

parties filed one or more motions to 

dismiss, and in 2% of the 6,079 cases, 

parties filed two or more motions to 

dismiss. FINRA stated that these current 

statistics suggest that the number of 

motions to dismiss filed in the forum 

may be declining since the Study was 

conducted. FINRA opined that the 

reduction in these motions reflects its 

focus on this issue, through enhanced 

arbitrator training as well as a 2006 

Notice to Parties to remind parties of the 

forum’s policy and parties’ 

responsibilities when filing motions to 

dismiss.87 FINRA indicated that even 

though the number of motions filed 

appears to be declining in the forum, the 

proposal will serve to reduce further the 

number of prehearing motions to 

dismiss filed, and, in particular, should 

prevent parties from filing multiple 

motions in a case. For these reasons, 

FINRA stated that its statistical and 

anecdotal evidence is sufficient support 

for the proposal, and that the proposal 

should be approved as drafted. 

Alternate Criteria To Provide Specific 

Guidance to Arbitrators When Deciding 

Motions To Dismiss 

Several commenters suggested that 

the proposal should establish a specific 

standard for arbitrators to use when 

deciding motions to dismiss.88 Most of 

these commenters suggested that panels 

should deny prehearing motions to 

dismiss whenever: (1) Credibility is an 

issue; (2) there are disputed issues of 

material fact; or (3) the panel believes a 

hearing is necessary in the interests of 

justice.89

FINRA responded by stating that it 

considered incorporating these criteria 

into the rule but determined that this 

would be inconsistent with the Codes, 

which do not contain such specific 

standards for arbitrator decision making. 

FINRA further stated that because 

arbitration is an equitable forum, the 

panel may consider any evidence or use 

any method to achieve a fair result. 

FINRA indicated that it did not intend 

for the proposal to change this practice. 

Moreover, FINRA stated that 

establishing a specific approach for 

arbitrators to follow would infringe on 

arbitrators’ discretion to decide 

arbitration cases. FINRA stated that the 

intent of the proposal was to select a 

very limited number of exceptions for 

granting prehearing motions to dismiss 

that would be relatively clear-cut for the 

panel to apply at this stage of the 

proceedings. FINRA stated that parties 

should argue their positions and 

arbitrators should be permitted to use 

their discretion in determining how 

motions to dismiss should be decided. 

For these reasons, FINRA declined to 

amend the proposal to incorporate a 

specific standard for arbitrators to use 

when deciding motions to dismiss. 

Motion To Dismiss Policies of Other 

Securities Arbitration Forums 

One commenter contended that the 

former New York Stock Exchange 

(‘‘NYSE’’) arbitration forum did not 

permit prehearing motions to dismiss.90

Another commenter stated that the 

NYSE Regulation arbitration forum 

would not permit arbitrators to grant 

motions to dismiss before an investor 

had the opportunity to present his or 

her claims at an evidentiary hearing on 

the merits.91

FINRA stated that it responded to this 

comment previously in regard to the 

consolidation of the member firm 

regulatory functions of NASD and NYSE 

Regulation, Inc.92 FINRA noted that the 

NYSE Regulation arbitration forum had 

neither a rule nor a written policy on 

motions to dismiss, and FINRA was not 

aware that motions to dismiss were 

prohibited in the NYSE Regulation 

arbitration forum. Rather, FINRA stated 

its understanding that, in the NYSE 

forum, the panel determined whether 

and if so, when, a motion to dismiss 

would be heard. 

Proposal’s Impact on the Parties’ 

Negotiations 

A number of commenters argued that 

the proposal would create settlement 

value for claimants because respondents 

would have to conduct a cost-benefit 

analysis to determine whether the cost 

of settling the dispute is more beneficial 

than losing a prehearing motion to 

dismiss and proceeding to evidentiary 

hearing.93 Generally, the commenters 

who supported the proposal stated that 

it would reduce all parties’ costs 

because the parties would no longer 

waste resources arguing frivolous 

prehearing motions to dismiss that are 

rarely granted.94

FINRA responded that it agrees with 

those commenters who believe the 

proposal would reduce all parties’ costs 

because the number of prehearing 

motions to dismiss in the forum should 

decrease once the proposal is 

implemented. Moreover, FINRA stated 

that it believes that respondents are 

more likely to conduct a cost-benefit 

analysis concerning whether to proceed 

with an arbitration based on the strength 

or weakness of their claims or defenses, 

not the existence of a motion to dismiss 

rule. For this reason, FINRA declined to 

amend the proposal at this time. 

Proposal’s Effect on Parties Who Settle 

Claim Before Hearing 

Proposed Rules 12504(a)(3) of the 

Customer Code and 13504(a)(3) of the 

Industry Code provide that, unless the 

parties agree or the panel determines 

otherwise, parties must serve motions to 

dismiss at least 60 days before a 

scheduled hearing, and parties have 45 

days to respond to the motion. 

The author of a February 2008 

Securities Arbitration Commentator 

(‘‘SAC’’) article suggested that, under 

the proposal, parties would not be 

permitted to settle a claim and have it 

dismissed before the evidentiary 

hearing, if the 60-day deadline has 

passed and the parties have not yet filed 

a prehearing motion.95

FINRA responded to the suggestion in 

the article by noting that the proposal 

does not preclude parties from agreeing 

to settle at any time. FINRA pointed out 

that Rules 12105 and 12207 of the 

Customer Code 96 permit the parties to 

agree to extend the deadlines for filing 

or responding to motions. FINRA stated 

that the proposal would not prohibit the 

parties from taking these actions. 

Moreover, FINRA stated that the 

proposed rule is not intended to apply 

to motions made jointly by all parties to 

dismiss a case because of a settlement. 

FINRA pointed out that, under the 

Codes, if all parties agree to settle a case, 

FINRA will close the case based on the 

settlement agreement.97 FINRA stated 

that this process is different from that 

contemplated by the proposal, in which 

a panel grants one party’s motion to 

Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 741 

98Richard P. Ryder, ‘‘Disposing of Dispositive 

Motions: The Process to Date,’’ Securities 

Arbitration Commentator, February 2008 (Vol. 

2007, No. 4), at 10; see also Jacobowitz Letter. 

99Rule 12100(b) of the Customer Code and Rule 

13100(b) of the Industry Code. 

100 In approving this proposal, the Commission 

has considered the proposed rule’s impact on 

efficiency, competition and capital formation. See 

15 U.S.C. 78c(f). 

101 15 U.S.C. 78o–3(b)(6). 

102As described above, under the existing rule, if 

a respondent files a motion to dismiss based on 

several grounds, including eligibility, and the panel 

issues an order dismissing a claim, but without 

citing reasons, the claimants would not know 

whether or not they are afforded the right to pursue 

the claim in court. If the claimants proceed to file 

the dismissed claim in court, the respondents may 

argue that the panel’s decision on the claim is the 

final decision, and that claimants are barred from 

having the court decide the same claim again. 

103See, e.g., NASD Rules 12507(a)(1), which 

states that ‘‘interrogatories are generally not 

permitted in arbitration,’’ while setting forth limited 

types of written discovery requests and 12510 

(Depositions), which states that ‘‘depositions are 

strongly discouraged in arbitration,’’ while setting 

forth a list of the limited circumstances in which 

depositions are permitted. 104See SIFMA Letter. 105See, e.g., NYSE Rule 382, NASD Rule 3230, 

Amex Rule 400. 106See Katz v. Fin. Clearing & Serv. Corp., 794 F. 

Supp. 88, 90 (S.D.N.Y. 1992). 107 Dillon v. Militano, 731 F. Supp. 634, 636 

(S.D.N.Y. 1990). 108Stander v. Fin. Clearing & Serv. Corp., 730 F. 

Supp. 1282, 1285 (S.D.N.Y. 1990). 

dismiss a case before an evidentiary 

hearing is held. 

Motions To Dismiss as Awards 

The author of a different February 

2008 SAC article argued that arbitrator 

decisions on motions to dismiss are 

awards and should be published as 

required under the Code.98

FINRA responded to the comments in 

this article by stating that, under the 

Code, an award is a document stating 

the disposition of a case.99 FINRA 

explained that, if a motion to dismiss all 

claims is granted and disposes of all 

open issues, it would be reported as an 

award. FINRA further explained that a 

decision to grant a motion to dismiss 

that does not dismiss all of the parties 

or end the dispute would not be an 

award; rather, it would be considered an 

order of the panel and would not be 

made publicly available. 

IV. Discussion and Findings 

After careful review of the proposed 

rule change, the comments and FINRA’s 

response to the comments, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act, and the rules 

and regulations thereunder that are 

applicable to a national securities 

association.100 In particular, the 

Commission believes the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act, 101

which requires, among other things, that 

FINRA rules must be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. The Commission 

believes that the proposed rule change 

would enhance investor confidence in 

the fairness and neutrality of FINRA’s 

arbitration forum by ensuring that nonmoving parties have their claims heard 

in arbitration, while preserving the 

moving parties’ rights to challenge the 

necessity of a hearing in certain limited 

circumstances. Further, the Commission 

believes the proposed changes to the 

eligibility rule would help prevent 

manipulative practices by closing a 

loophole in the existing rule, so that 

parties may pursue their claims in court 

without facing an unintended legal 

impediment, in the event their claims 

are dismissed in arbitration on 

eligibility grounds.102

Policy Statement on Prehearing Motions 

The Commission believes that FINRA 

has adequately responded to the 

comments regarding FINRA’s proposed 

policy statement on prehearing motions. 

The Commission agrees that parties 

have the right to a hearing in arbitration, 

and that prehearing motions to dismiss 

should be limited. The Commission also 

agrees with FINRA that proposed Rules 

12504(a)(1) of the Customer Code and 

13504(a)(1) of the Industry Code 

reinforce this position by clarifying that 

prehearing motions to dismiss are 

discouraged in arbitration. 

Further, the Commission believes that 

FINRA adequately responded to the 

commenters who contend that this 

policy statement unfairly discourages all 

motions to dismiss in the forum, by 

pointing out that the proposal permits 

parties to file a motion to dismiss on 

any ground after the conclusion of a 

party’s case in chief. 

Finally, given the comments that were 

received in response to the original 

proposal, which stated that motions to 

dismiss should be granted only in 

extraordinary circumstances, the 

Commission believes that FINRA has 

appropriately refined the statement to 

reflect FINRA’s policy while eliminating 

any ambiguity created by the words 

‘‘extraordinary circumstances.’’ 

The Commission’s oversight of the 

securities arbitration process is directed 

at ensuring that it is fair and efficient. 

As noted above, FINRA had received 

complaints that parties were filing 

dispositive motions routinely and 

repetitively in an apparent effort to 

delay scheduled hearing sessions on the 

merits, increase investors’ costs, and 

intimidate less sophisticated parties. 

This type of abusive motions practice 

undermines the fairness and efficiency 

of the securities arbitration process. The 

proposed rules, which strictly limit the 

grounds for filing pre-hearing motions 

to dismiss, and impose sanctions on 

parties that engage in abusive practices, 

are designed to enhance the fairness and 

efficiency of the process. The 

Commission believes that FINRA’s 

policy statement sets a clear tone that 

commands a narrow reading of the 

provisions setting forth the grounds on 

which parties may bring a motion to 

dismiss prior to the conclusion of a 

party’s case in chief. A narrow reading 

of those provisions is essential to help 

achieve FINRA’s overarching goal of the 

proposal: To enhance investor 

confidence in the fairness and neutrality 

of FINRA’s arbitration forum by 

ensuring that non-moving parties have 

their claims heard in arbitration, while 

preserving the moving parties’ rights to 

challenge the necessity of a hearing in 

certain limited circumstances. 

Furthermore, this policy statement is 

consistent with other parts of the Codes, 

where FINRA sets forth procedures that 

are only permitted to be used in limited 

circumstances.103

Scope of Proposed Rules 12504(a)(6) of 

the Customer Code and 13504(a)(6) of 

the Industry Code With Respect to 

Clearing Firms 

The Commission carefully considered 

a commenter’s arguments that when a 

statement of claim does not make 

factual allegations of direct misconduct 

by a clearing firm, the clearing firm 

should be dismissed from the case.104

Under applicable rules of self-regulatory 

organizations, all clearing agreements 

must identify the division of duties 

between the introducing and clearing 

brokers.105 Typically, an introducing or 

correspondent broker deals directly 

with the public and originates customer 

accounts 106 while the clearing broker 

handles functions related to the 

clearance and settlement of trades in the 

accounts of its introducing broker.107

The clearing broker usually has no 

direct contact with the customers of its 

introducing broker, except for the 

periodic mailing of reports and other 

records relating to their accounts.108

However, a clearing broker may expose 

itself to liability with respect to the 

introducing broker’s misdeeds ‘‘where a 

clearing firm moves beyond performing 

mere ministerial or routine clearing 

functions [with actual knowledge] and 

becomes actively and directly involved 

742 Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 

109McDaniel v. Bear Stearns & Co., 196 F. Supp. 

at 353. 

110See, e.g., id; see also, Koruga, 183 F.Supp.2d 

at 1247. 

111To the extent that firms and other interested 

parties have access to information or statistics that 

would be relevant, such firms and parties are 

invited to send such information to the attention of 

the staff of FINRA Dispute Resolution. 

in the introducing broker’s [fraudulent] 

actions. * * *’’ 109 Although findings of 

liability against clearing brokers are 

unusual, courts have upheld arbitration 

awards against clearing brokers, finding 

that the arbitrators did not act with 

‘‘manifest disregard of the law.’’ 110

Because claimants generally need to 

be able to develop the facts to argue the 

liability of a clearing firm in a particular 

dispute, the Commission agrees with 

FINRA’s analysis that it would be 

inappropriate for clearing firms to be 

eligible for prehearing dismissal based 

solely on their status as clearing brokers. 

Under the proposed rule, however, 

clearing firms will continue to be 

permitted to file motions to dismiss for 

any reason after the conclusion of the 

claimant’s case in chief. The 

Commission believes that this strikes an 

appropriate balance between providing 

claimants an opportunity to resolve 

factual disputes and limiting clearing 

firms’ needless involvement in disputes. 

The Commission staff has asked FINRA 

to request that SIFMA provide it with 

available statistics regarding all motions 

to dismiss filed by clearing firms in the 

past and until the effective date of the 

proposed rule change.111 Further, the 

Commission has asked FINRA to 

maintain statistics on motions to 

dismiss filed by clearing firms for a 

period of six months from the effective 

date of this proposed rule change, to 

shed greater light on any burdens 

imposed on clearing firms. The 

Commission has also asked FINRA to 

consider additional steps it could take 

to inform parties of the distinction 

between introducing brokers and 

clearing brokers. 

Scope of Proposed Rules 12504(a)(6)(B) 

of the Customer Code and 

13504(a)(6)(B) of the Industry Code 

(‘‘Not Associated’’ Exception) 

With respect to the comments 

regarding the ‘‘not associated’’ 

exception, the Commission believes that 

FINRA responded appropriately. 

Specifically, FINRA indicated that it 

intends this exception to apply 

narrowly, such as in cases involving 

issues of misidentification. FINRA 

further clarified the meaning of ‘‘not 

associated’’ by providing examples of 

ways in which the exception could be 

invoked. The Commission agrees with 

FINRA that the ‘‘not associated’’ 

exception would be inappropriate in 

cases in which a respondent may be 

liable as a supervisor or control person 

under applicable statutes or in ‘‘selling 

away’’ cases. 

The Commission recognizes that 

certain situations, such as cases 

involving mistaken identity, would 

merit a prehearing dismissal, which is 

why the Commission supports the 

existence of a ‘‘not associated’’ 

exception within the rules. However, as 

stated above, the Commission believes 

that a narrow interpretation of the 

exceptions is appropriate. 

Additional Exceptions for Permissible 

Prehearing Motions 

With respect to the comments 

requesting that FINRA incorporate 

additional exceptions for prehearing 

motions to dismiss, the Commission 

believes that FINRA responded 

appropriately. Specifically, the 

Commission agrees with FINRA’s 

conclusion that expanding the 

exceptions to the rule would negate its 

intent, which is to have clear, easily 

definable standards for permissible 

prehearing motions to dismiss that do 

not involve fact-intensive issues. 

Moreover, the Commission agrees that 

the suggested additional exceptions 

would require fact-based determinations 

and, thus, would be inappropriate for 

dismissal before a claimant has 

presented its case. As FINRA pointed 

out, a party is permitted to file a motion 

to dismiss on any basis after the 

conclusion of a party’s case in chief. 

The Commission believes that, 

particularly with respect to the limited 

exceptions to prehearing motions, the 

proposal strikes an appropriate balance 

by ensuring that claimants have their 

claims heard in arbitration, while 

minimizing the parties’ exposure to 

additional fees in the event that the 

claimant does not prove the claims in its 

case-in-chief. 

Expansion of the Exception for 

Prehearing Motions Under the 

Eligibility Rule To Include Applicable 

Statutes of Limitation 

With respect to the comments 

regarding statutes of limitations, the 

Commission believes that eligibility is 

an appropriate ground for a prehearing 

motion to dismiss because of its uniform 

application in all cases, and because of 

the additional protections parties 

receive under the eligibility rule. As 

FINRA explained, statutes of limitations 

involve fact-based determinations, 

depend on the law of the applicable 

jurisdiction, and depend on the type of 

claims alleged. Moreover, FINRA noted 

that, in some jurisdictions, courts have 

found that statutes of limitations do not 

apply to arbitration proceedings. For 

these reasons, the Commission agrees 

with FINRA’s conclusion that it would 

be inappropriate to include an 

exception for prehearing motions to 

dismiss on statute of limitations 

grounds. 

Motions Permitted at the Conclusion of 

Claimant’s Case-In-Chief 

With respect to the argument that this 

provision will shift abusive motions 

practice to the middle of the hearing, 

because respondents will wait until the 

end of claimant’s case to file their 

motions, the Commission believes 

FINRA responded appropriately. In 

particular, the Commission agrees with 

FINRA’s assertion that it would be 

unfair to require the parties to continue 

with a hearing if the claimant has not 

proved its case. 

The Commission staff has requested 

that FINRA gather statistics on a goingforward basis, to determine whether 

abusive motions practice becomes 

apparent in the post-hearing phase of 

arbitration. In response, FINRA stated 

that it will monitor the frequency of 

motions filed pursuant to this provision 

once the proposal is implemented. 

FINRA has agreed to analyze the 

information to determine whether 

potentially abusive behavior develops, 

and FINRA stated that it may propose 

further amendments to the rules that are 

subject to this proposal or take other 

appropriate action. 

In addition, further to discussions 

with the Commission staff, FINRA noted 

in its response that the proposed rule 

would not preclude a panel from 

assessing respondents with sanctions, 

costs and attorney’s fees, if the panel 

determines that a motion filed at this 

time is frivolous or in bad faith. 

Concerns Regarding the Procedural 

Safeguards and Mandatory Assessment 

of Costs and Attorneys’ Fees and 

Possible Sanctions 

With respect to the comments 

regarding the procedural safeguards and 

mandatory assessment of costs and fees 

and possible sanctions, the Commission 

believes FINRA responded 

appropriately. The Commission believes 

that the proposal’s procedural 

safeguards are carefully designed to 

enhance the fairness and neutrality of 

FINRA’s arbitration forum. The 

Commission further believes that the 

mandatory assessment of costs and 

attorneys’ fees and possible sanctions 

serves the necessary function of 

deterring parties from filing such 

motions frivolously or in bad faith, and 

Federal Register / Vol. 74, No. 4 / Wednesday, January 7, 2009 / Notices 743 

112See, e.g., Hartman, Kemnitz, Morgan Stanley 

and Schrils Letters. 

113 15 U.S.C. 78s(b)(2). 

114 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

should ensure strict compliance with 

the rules. 

Effect of the Proposal on the Parties’ 

Costs 

With respect to the comments 

suggesting that the proposal prohibiting 

prehearing motions to dismiss except on 

limited grounds would increase all 

parties’ costs, particularly firms’, 

because their attorneys charge on an 

hourly basis (whereas claimants’ 

attorneys charge on a contingency basis, 

so claimants are not incurring any 

costs),112 the Commission is 

unconvinced. The Commission believes 

FINRA responded appropriately by 

highlighting the effect of motions to 

dismiss on all parties’ costs and the 

potential for claimants’ attorneys to be 

reluctant to take on small cases due to 

costs associated with motions to 

dismiss. Furthermore, the Commission 

agrees with FINRA’s ultimate 

determination that the proposal’s 

benefits of protecting investors’ access 

to the forum and their ability to have 

claims heard in arbitration outweigh the 

possibility of increased costs and 

expenses firms might incur under the 

rule. 

General 

In general, the Commission believes 

that FINRA has responded to the 

comments adequately and 

appropriately, and has explained how 

the proposed rule change is consistent 

with the requirements of the Act, and 

the rules and regulations thereunder 

that are applicable to a national 

securities association. As noted above, 

the Commission believes that the 

proposal would help achieve the 

overarching goal of ensuring that parties 

would have their claims heard in 

arbitration, by significantly limiting the 

grounds for filing motions to dismiss 

prior to the conclusion of a party’s case 

in chief and by imposing stringent 

sanctions against parties for engaging in 

abusive practices under the rule. At the 

same time, the Commission believes 

that the proposal would not unduly 

limit the rights of parties to seek 

dismissal, because it would allow 

prehearing motions to dismiss in certain 

limited circumstances, and it would not 

affect the ability of parties to seek 

dismissal after the conclusion of the 

claimant’s case in chief. As such, the 

Commission finds that the proposal 

would contribute to the fairness and 

efficiency of the securities arbitration 

process. 

V. Conclusions 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,113 that the 

proposed rule change (SR–FINRA– 

2007–021), as modified by Amendment 

No. 1, be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.114

Florence E. Harmon 

Acting Secretary. 

[FR Doc. E9–12 Filed 1–6–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59186; File No. SR– 

NASDAQ–2008–103] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Filing and Order Granting Accelerated 

Approval of Proposed Rule Change To 

Extend the Pilot Program for NASDAQ 

Last Sale Data Feeds 

December 30, 2008. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on December 

24, 2008, The NASDAQ Stock Market 

LLC (‘‘NASDAQ’’ or ‘‘Exchange’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I and II below, which Items have 

been prepared by the Exchange. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons, and is 

approving the proposal on an 

accelerated basis. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to extend for 

three months the pilot that created the 

NASDAQ Last Sale (‘‘NLS’’) market data 

products. NLS allows data distributors 

to have access to real-time market data 

for a capped fee, enabling those 

distributors to provide free access to the 

data to millions of individual investors 

via the internet and television. 

Specifically, NASDAQ offers the 

‘‘NASDAQ Last Sale for NASDAQ’’ and 

‘‘NASDAQ Last Sale for NYSE/Amex’’ 

data feeds containing last sale activity in 

U.S. equities within the NASDAQ 

Market Center and reported to the 

jointly-operated FINRA/NASDAQ Trade 

Reporting Facility (‘‘FINRA/NASDAQ 

TRF’’). 

This pilot program supports the 

aspiration of Regulation NMS to 

increase the availability of proprietary 

data by allowing market forces to 

determine the amount of proprietary 

market data information that is made 

available to the public and at what 

price. During the current pilot period, 

the program has vastly increased the 

availability of NASDAQ proprietary 

market data to individual investors. 

Based upon data from NLS distributors, 

NASDAQ believes that since its launch 

in July 2008, the NLS data has been 

viewed by over 50,000,000 investors on 

websites operated by Google, Interactive 

Data, and Dow Jones, among others. The 

text of the proposed rule change is 

available at NASDAQ, the Commission’s 

Public Reference Room, and http:// 

nasdaq.complinet.com. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

self-regulatory organization included 

statements concerning the purpose of, 

and basis for, the proposed rule change 

and discussed any comments it received 

on the proposed rule change. The text 

of those statements may be examined at 

the places specified in Item III below. 

The Exchange has prepared summaries, 

set forth in sections A, B, and C below, 

of the most significant parts of such 

statements. 

A.Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Prior to the launch of NLS, public 

investors that wished to view market 

data to monitor their portfolios 

generally had two choices: (1) Pay for 

real-time market data or (2) use free data 

that is 15 to 20 minutes delayed. To 

increase consumer choice, NASDAQ 

proposed a four-month pilot to offer 

access to real-time market data to data 

distributors for a capped fee, enabling 

those distributors to disseminate the 

data via the internet and television at no 

cost to millions of internet users and 

television viewers. NASDAQ now 

proposes a three-month extension of 

that pilot program asset [sic] forth in the 

original proposal as described below. 

The NLS pilot created two separate 

‘‘Level 1’’ products containing last sale 

activity within the NASDAQ market and 

reported to the jointly-operated FINRA/