FINRA Rule 12206 – Eligibility

Thursday, April 25th, 2013

The following is a brief breakdown of the FINRA Eligibility Rule and caselaw applicable to its application:

FINRA Rule 12206 reads as follows:

“12206.   Time Limits

(a) Time Limitation on Submission of Claims

No claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim.  The panel will resolve any questions regarding the eligibility of a claim under this rule.” (Emphasis added)

The seminal case applicable to Rule 12206 is Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002).  In the Howsam case, the United States Supreme Court determined that the predecessor NASD six year rule was a procedural matter that is presumptively for the Panel to decide and is not a substantive limitation.  In other words, when the “occurrence or event giving rise to the claim” occurred is a factual matter to be determined on a case-by-case basis by the FINRA arbitration panel.

Prior to the Howsam decision, lower courts had been divided on whether arbitrators were entitled to interpret or toll the six year rule based on the particular facts before them.  Since Howsam was decided, courts that had previously held that the six-year rule could not be tolled have now recognized that the rationale they had relied upon in the prior cases was abrogated by HowsamSee, e.g., Smith v. Dean Witter Reynolds, Inc., 2004 WL 1859623, *3 (6th Cir. Aug. 18, 2004) (Howsam abrogates the Sixth Circuit precedent cited by Respondent); Gregory J. Schwartz and Co. Inc. v. Fagan, 660 N.W. 2d 103, 105-106 (Mich. App. 2003) (noting that prior decisions rejecting tolling of the eligibility rule “relied on cases whose rationales have effectively been superseded by the recent Howsam case”).  Mid-Ohio Securities Corp. v. Est. of Burns, 790 F. Supp. 2d 1263, 1270-72 (D. Nev. 2011).

Two recent federal courts have also expressly held that Rule 12206 is not akin to a statute of limitations, and therefore, “the arbitrators [are] free to interpret the rule as they [see] fit, including adding in tolling provisions or a discovery rule.”  See, Mid-Ohio Securities Corp. v. Est. of Burns, 790 F. Supp. 2d 1263, 1270-72 (D. Nev. 2011).  A California federal court agreed, holding that a FINRA panel was “free to interpret Rule 12206. . . in particular with respect to the triggering date, i.e., the ‘occurrence of event giving rise to the claim.’”  Oshidary v. Purpura-Andriola, 2012 WL 2135375 (N.D. Cal. June 12, 2012)(denying motion to vacate award even though claims were filed more than six years after transaction was executed).

In consequence, the Supreme Court and the most recent precedent available make clear that the actual occurrence or event giving rise to the claim is a factual determination to be made by the Panel.

The foregoing information has been provided by The White Law Group.  The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, visit http://www.whitesecuritieslaw.com.

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