The following is a primer on FINRA’s Eligibility Rule (FINRA Rule 12206) and why the time to file a claim for purposes of FINRA eligibility does not inherently run from the date of purchase – as brokerage firms almost always try to argue.
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)
This is the rule applied by arbitration panels when deciding whether a claim is eligible for submission to FINRA arbitration. Since this is currently one of the only pre-hearing Motion to Dismiss that a brokerage firm is permitted by rule to file, the majority of firms will file an eligibility rule if the date of purchase of the investments at issue is more than six years – always taking the position that the “occurrence or event giving rise to the claim” is the date of the purchase of the investment. We have successfully argued on a number of occasions that the “occurrence or event giving rise to the claim” is when the client knew or should have known about their claims. The following is a brief primer on some of the reasons we believe (particularly in the context of alternative investments like non-traded REITs, oil and gas limited partnerships, TICs, equipment leasing funds, etc.) that the appropriate standard for what constitutes the occurrence or event giving rise to a FINRA arbitration claim is when the investor knew or should have known they had a claim.
The first thing of note here is that nowhere in Rule 12206 does it say that the occurrence of event giving rise to the claim is the date of purchase. This is significant because the FINRA Code of Arbitration Procedure was updated in 2007, with FINRA revising the language of the FINRA arbitration code to make it simpler and easier for people to understand. FINRA also addressed any rule clarifications it deemed necessary at that time.
Notwithstanding the fact that broker-dealers have been attempting to make this same argument for years—that the purchase date is the triggering date for the six year bar on FINRA claims – tellingly FINRA elected not to revise this particular rule, instead keeping the original language. It seems evident that had FINRA intended for the “occurrence or event giving rise to the claim” to inherently be the date of purchase, then this is exactly what the new language would have said.
Ultimately the appropriate standard for determining the “occurrence or event giving rise to a claim” is completely up to the arbitration panel. In Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002), the United States Supreme Court determined that the predecessor NASD six year rule was a procedural matter that is presumptively for this 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.
The very fact that the courts have determined that the tolling of Rule 12206 must be determined by the panel on a case-by-case basis establishes that the “occurrence or event” is not inherently the date of initial purchase of the investment as brokerage firms always assert.
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 Howsam. See, e.g., Smith v. Dean Witter Reynolds, Inc., 2004 WL 1859623, *3 (6th Cir. Aug. 18, 2004) (Howsam abrogates all prior case law standing for the proposition that the date of purchase is the only date which could be the “occurrence or event giving rise to the claim”); 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) (Emphasis Added). 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).
As such, the U.S. Supreme Court and the most recent precedent available makes clear that not only is FINRA Rule 12206 not an absolute or bright line rule that tolls from the date of purchase—as brokerage firms almost always erroneously claim, but that the actual occurrence or event giving rise to the claim is a factual determination to be made by the Panel (i.e. the appropriate standard to apply for purposes of eligibility is entirely up to that Panel to determine for that case).
While Howsam makes clear that a bright line “date of purchase” standard is erroneous, here are some of the reasons we believe such a standard is certainly not the appropriate standard when evaluating claims involving alternative investments.
Unlike a stock or mutual fund that is sold on an exchange, there is no market for private placements (i.e. investors cannot simply go to an exchange to determine the current market value of their investments). As such, the investors in these products are often led to believe—for years—that their investments are performing exactly in line with the representations of the agents that sold the products to them.
An example of the problems investors may have in understanding the true terms of private placement investments can be seen with non-traded REITs, a type of private placement investment. Securities laws and FINRA Rules only require non-traded REITs to re-value their value per share eighteen (18) months after the cessation of the offering of shares. See “SEC Investor Bulletin: Real Estate Investment Trusts (REITs);” see also FINRA Investor Alert “Public Non-Traded REITs – Perform a Careful Review Before Investing.” These offerings generally take several years, so the “cessation” of the offering is often many years after the first investors bought the offering.
In the case of other types of alternative investments, like oil and gas limited partnerships and equipment leasing funds, these product do not even provide a share price. Instead, the only indicators of the risk, prognosis and performance to date of those investments are the periodic distributions the investor receives (making it even more difficult to determine that the investment’s risk or prognosis have been misrepresented).
Unfortunately, while typically these investments do start out performing as promised, it is only later (often years later) that investors are abruptly given notice that the investment are no longer paying out at nearly the same rate as the investors had been receiving, or in some cases they suddenly stop paying altogether. Only then do these investors have any ability to question the veracity of the representations that their brokers had made to them initially about the investments – since there had been no reason previously to question those representations. Until something goes wrong, investors in these investments simply have no reason to question those past representations or to even consider the need to bring a claim.
As such, we have argued (successfully on a number of occasions) that it is therefore impossible for investors in these types of investments to know that they have claims at the date of purchase because they believe for the first few years of their ownership in a particular offering that everything is fine as the investment does not show as having declined in value on their statements.
Ultimately, according to Howsam, the appropriate standard for determining the occurrence of event giving rise to a FINRA claim ( i.e. “date of purchase” or “when you knew or should have known”), we believe is a factual determination for arbitrators to determine on a case by case basis. However, given the facts in the case of alternative investors arbitrators seem to be agreeing with our position that the occurrence or event giving rise to the claim with those investments is the trigger event that caused the investor to realize that the investment had been misrepresented.
The foregoing information is being 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 Vero Beach, Florida.
For a free consultation with a securities attorney, please call the firm’s Chicago office at 312/238-9650. For information on The White Law Group and its representation of investors in claims against brokerage firms, visit https://www.whitesecuritieslaw.com.