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Only Unwary Investors Delay Bad Conduct Broker Claims

Statutes of limitations are sometimes a little loosely called statutes of repose. In plain English, any claim not filed by a certain date is dead on arrival at the courthouse. But, that’s the only easy part. More challenging is determining when the time for filing a claim starts to run. Or whether after it has begun to run it has been temporarily stopped and subsequently started running again and on which date that was. Often that turns on whether the claimant is seeking redress under a securities statute or under principles of common law, like breach of contract or fraud.

When limitations begin to run foretells the date on which a claim is barred. How nice it would be were the time to start at A and in a straight line end at Z. Not only does it not work that way, it is even unclear what time barrier applies inasmuch as each state has its own, questions of federal law have their own and other forums of dispute resolution have their specific time limits. So, geography alone can stamp out an investor’s rights.

Under Rule 12206(a) the Financial Industry Regulatory Authority (FINRA) sets a national time limit for filing a claim at “six years . . . from the occurrence or event giving rise to the claim”.  FINRA is what is called an SRO, a Self-Regulatory Organization. It is made up of Securities Broker Dealers and their sales people or brokers who often call themselves financial advisors. FINRA’s rules and regulations are subject to approval by the Securities and Exchange Commission. One of FINRA’s roles is to resolve disputes between investors and their broker dealers. The principal means of FINRA dispute resolution is arbitration.

Investors Forced To Waive Jury Rights

Virtually every person engaging a broker to buy or sell a stock or bond signs a broker dealer agreement.  In that contract he or she waives a right to make a claim to a court about the broker’s advice or conduct, waives a trial by jury and agrees to submit the complaint or claim to binding arbitration under the auspices of FINRA. The enforceability of these agreements is absolute.  In the event an investor refuses to waive his Constitutional right to invoke the jurisdiction of a court, broker dealers will decline to do business with that person.

In many states, the limitations periods for breach of contract, negligence and other bad conduct are shorter than the six years provided to submit a claim before FINRA. Recently, whether the FINRA six year rule or often shorter state limitations rules govern claims filing deadlines have been the subject of controversy. The outcome is important because many longer standing claims would proceed to decision on the merits under the six year rule while a shorter deadline would bar them.

Heads Brokers Win, Tails Investors Lose

Thus, in initiating a FINRA claim an investor and counsel may be confronted with multiple conflicts and contradictions for which there is no “off the cuff” resolution. Recently, the courts of Florida decided that the state statutes of limitations applied to FINRA arbitration claims, thus barring an investor’s claim under the Florida shorter limitations period, notwithstanding the six year time provided by FINRA. The arbitration agreement’s provision at issue in the case said it would not “limit or waive the application of any relevant state or federal statute of limitation.” Obviously, the broker dealer, Raymond James, wanted the benefits of forcing an investor to an arbitration forum without a jury trial while slickly preserving only for itself whatever benefit might inure to it from a court setting.

Given the use of the word “relevant” in the arbitration agreement the answer to the governing time within which a claim must be made turned on the breadth of that word’s meaning. The Florida limitations statute provides that “A civil action or proceeding . . . shall be barred unless begun within the time prescribed in this (statutory) chapter.” A Florida intermediate appellate court, after a thorough analysis, found that neither the phrase “civil action” not the word “proceeding” were intended to apply to arbitrations. Thus, its decision was that the Florida statute of limitations was inapplicable, in effect not “relevant”, to the investor’s claim.

Nonetheless, the Supreme Court of Florida decided otherwise reversing the decision of the intermediate appellate court that favored the investor.  In short, that court decided that the word “proceedings” in the state limitations statute encompassed arbitrations. Thus, despite the FINRA time rule, the shorter Florida time period barred the investor’s claim.

Don’t Gamble With Your Nest Egg

Some but not all states have dealt with the issue in the Raymond James case. In Washington State a different result was reached holding that the state statute of limitations did not apply to arbitrations. On the other hand, in New York, which does not even recognize a private right of suit under its securities statutes, enforces its state statute of limitations in FINRA arbitration claims. In Delaware, where the general limitations period is three years, a broker may employ the state time limit in arbitration cases by going to court to bar the arbitration or raise a limitations defense before the arbitrators who remarkably may, in their sole discretion, apply the state limitations period or not. Moreover, their decision is not reviewable by any court.

Maryland is one of the many states which has yet to decide the issue. The Maryland limitations statute provides that a “civil action at law must be filed within three years from the date it accrues . . .”  In a recent issue of a Maryland State Bar publication, attorneys Michael A. Schollaert and Christopher C. Dahl offered their opinion that the state limitations period would not routinely apply to construction arbitration cases. Their reasoning is sound, inasmuch as arbitration is unlikely to be deemed a “civil action” and most likely would be looked upon much the same in securities arbitration cases as in construction arbitration. But, delaying a claim is still an unnecessary gamble. Since we don’t know, don’t wait. To prove that point, on November 26 , 2013, the highest Maryland Court held that in civil action securities statute cases, limitations would be strictly enforced in accord with the literal time limits in the statute but that in common law fraud claims (even involving securities) some time latitude might granted based upon judicially created exceptions. The Court did not make any finding on whether “arbitration” is to be deemed a “civil action”. As to that question’s answer, we remain in the dark.

If No Claim Now, Maybe Never

The limitations controversy is far from over. Obviously, a careful study by the investor of any broker dealer agreement is critical before signing. Yet, because investors attempts to modify the industry agreements are nearly certain to be rebuffed, investors can only protect themselves by seeking counsel at the first whiff of suspicion about their broker’s conduct — a sad state of affairs.  And remember, your friendly broker will be rooting against you, and in the limitations game there is no overtime.