FINRA Arbitrator Invokes Ineligibility Sua Sponte To Bar Expungement

In a FINRA Arbitration Statement of Claim filed in September 2017, associated person Claimant Horst sought the expugnement of a customer complaint from his Central Registration Depository Record ("CRD"). Respondent Wells Fargo did not object or oppose the requested relief. The Horst Decision states in part that:

On January 8, 2018, the Arbitrator ordered Claimant to submit a memorandum of points and authorities by March 23, 2018 regarding the Arbitrator's authority to render a decision on the merits if the case filing does not meet FINRA Code of Arbitration Procedure ("Code") Rule 12206/13206 claim eligibility guidelines. On March 23, 2018, Claimant filed a Memorandum in Support of Chairperson's Authority to Recommend Expungement in this Matter. 

After an evidentiary hearing at which Respondent Wells Fargo participated but did not contest the requested expungement, the sole FINRA Arbitrator denied Claimant Horst's expungement for "failing to file action within the claim eligiblity period listed in FINRA Rule 13206."

Pursuant to Horst's Motion to Vacate the FINRA Arbitration Award, FINRA appeared at the oral argument, at which Wells Fargo appeared without opposition. Horst named FINRA as a Defendant in its capacity as an arbitration forum but not as a self-regulatory-organization. The Court stated that as "the neutral arbitration forum, FINRA does not take a position at this time on the substantive issue of Mr. Horst's underlying claim for expungement." Absent from the Arbitration Decision, the Court explains the underlying nature of the customer complaint at issue; namely, that it was a September 2008 customer complaint involving Auction Rate Securities. In denying Horst's Motion to Vacate, the Court found, in part that, FINRA Rule 13206:

speaks for itself, as does the Rule on the Arbitrator's ability to apply all the Rules in FINRA's Code of Arbitration Procedure. In order to be eligible for resolution by a FINRA arbitration panel, a claim must be less than six years old. Here, the customer complaint was made in 2008-well past the six-year eligibility threshold. Contrary to Mr. Horst's arguments, FINRA Rule 13206's eligibility requirements is jurisdictional-it may be raised sua sponte by an arbitrator and not only when a party to the arbitration raises it in a motion. Complaint, ¶¶ 37-43. To the contrary, both FINRA Rule 13206 and FINRA Rule 13413 are jurisdictional in nature, and make clear that the Arbitrator had authority and was well within that authority to determine the eligibility of the claim before him.

This Court also rejects Mr. Horst's arguments that the arbitrator did not give him an opportunity to be heard regarding eligibility. The Complaint specifies that the Arbitrator raised the eligibility issue at the IPHC in January 2018, and asked Mr. Horst to provide a memorandum of law on the eligibility issue in his January 8, 2018 IPHC Scheduling Order. Complaint, ¶¶ 25- 26. Pursuant to this IPHC Scheduling Order, Mr. Horst submitted the required memorandum. Complaint, ¶ 27. The Arbitrator then gave counsel for Mr. Horst an opportunity to present oral argument on the issue at the April 13, 2018 hearing. Complaint, ¶ 30. As such, Mr. Horst had several opportunities to address this issue. That the Arbitrator determined the claim did not meet the eligibility issue does not form a basis, under Nevada or Federal law, to vacate the Award.  

This case was filed on May 6, 2019. The event or occurrence giving rise to the claim occurred in June 2011, when the Customer sold an annuity with the advice and assistance of Claimant, thereby incurring a tax liability of approximately $50,000.00. More than seven and a half years have elapsed since the filing of the claim. Due to the lapse of over six years between the event or occurrence giving rise to the claim and the date of filing the claim, the case is not eligible for decision under FINRA Rule 13206. Under FINRA Rules 13206 and 13413, the Arbitrator has the authority to raise the eligibility issue sua sponte. . .  

December 3 Brief 

Claimant's December 3 Brief contained two major arguments. The first is that FINRA Rule 13206 does not establish a "bright line" rule regarding the "occurrence or event giving rise to the claim." The second is that because Rule 13206 is a contractual provision, the eligibility of Claimant's claim is not a jurisdictional issue, but one of procedure.

The brief cites the 2002 U. S. Supreme Court case of Howsam v. Dean Witter Reynolds, 537 U.S. 79 for the proposition that "the applicability of the NASD time limit [R]ule is a matter presumptively for the arbitrator not for the judge . . . moreover, the NASD arbitrators, comparatively more expert about the meaning of their [R]ule, are comparatively better able to interpret and apply it." (Brief). The Arbitrator agrees with this statement of law. Thus, the Arbitrator has the power and latitude to determine the eligibility of any claim submitted to it for decision. 

The brief goes on to describe the history of BrokerCheck and the CRD system in support of the argument that the earliest possible "event or occurrence" giving rise to his expungement request could be January 30, 2013, when Claimant's broker-dealer reported the Underlying Complaint on his CRD. "That date is the very earliest Claimant could have filed his expungement request." The Arbitrator disagrees with this interpretation of the Rule because it uses the harm to Claimant rather than the harm to the customer in the Underlying Complaint ("Customer") to trigger the running of the sixyear period. Claimant claims additional harm when FINRA amended Rule 2210 in 2016 requiring members' websites to include a hyperlink to BrokerCheck making it much easier for potential customers to check broker records. The Arbitrator rejects this argument as, once again, it focuses on alleged harm to Claimant rather than the time of the event giving rise to the Underlying Complaint - the sale of an annuity in June 2011 which resulted in an unanticipated $50,000.00 tax liability to the Customer. 

The December 3 Brief concludes with the argument that "the Rule does not contemplate the issue being raised by the Chairperson sua sponte, because the Rule is contractual and procedural, not jurisdictional." 

The foregoing argument flies in the face of well-established authority that Rule 13206 is jurisdictional in nature and an absolute bar to claims filed more than six years from the event or occurrence of the claim. 

The brief recognizes that both FINRA Rules 12206 and 13206 contain the same language and were derived from the same source - Section 15 of the NASD Code of Arbitration Procedure ("Section 15"). Thus, it is appropriate to consider cases interpreting one rule when interpreting the other. 

Rule 13206(a) serves as an absolute base to claims submitted for arbitration more than six years after the event giving rise to the dispute. Paine Webber v. Farnam, 870 F.2d, 1286, 1292 (7th Cir. 1989). Further, "Section 15 is an eligibility requirement that must be met in order for a claim to be arbitrable before the NASD it goes to the very power (i.e. subject matter jurisdiction) of the NASD. It is not a statute of limitations." Edward D. Jones & Co. v. Sorrells, 957 F.2d, 509, 512 (7th Cir. 1992).

January 3 Brief 

The focus of Claimant's January 3 Brief is that Rule 13206 is not jurisdictional. As set forth above in Sorrells, Rule 13206 is clearly jurisdictional and not merely procedural as argued by Claimant.  

The Horst Case 

The facts and issues presented in the Horst case are strikingly similar to those in this case. The Arbitrator is persuaded that Horst was correctly decided and its holdings should be followed here. 

The claimant in Horst was trying to get the court to overturn a FINRA Panel's decision that it lacked authority to determine his expungement request because the claim did not meet the eligibility period described in FINRA Rule 13206. The eligibility issue was raised by the sole arbitrator acting for the Panel sua sponte at the initial pre-hearing conference. As in this case, briefs and oral argument on the eligibility issue were requested. The Horst court recognized the broad authority given to arbitrators under Rules 13206 ad 13413. 

In finding that the arbitrator properly applied FINRA Rule 13206, the court stated: 

The rule of claim eligibility speaks for itself, as does the Rule on the Arbitrator's ability to apply all Rules in FINRA's Code of Arbitration Procedure. In order to be eligible for resolution by a FINRA arbitration panel, a claim must be less than six years old . . . Contrary to Mr. Horst's arguments, FINRA Rule 13206's eligibility requirements is jurisdictional - it may be raised sua sponte by an arbitrator and not only when it is a motion . . . Both FINRA Rules 13206 and 13413 are jurisdictional in nature, and make it clear that the Arbitrator had authority to determine the eligibility of the claim before him. (Horst) (emphasis added). 

The Horst case refutes all of Claimant's arguments. Yet, Claimant failed to address Horst in the final briefing. . . .

For Claimant Haider Sharifi ("Claimant"): Dochtor Kennedy, J.D., MBA, and Erica Harris, Esq., AdvisorLaw LLC, Westminster, Colorado.

• FINRA
• expungement
• Horst
• Howsam
• Sua Sponte
• CRD
• Rule 13206
• Rule Eligibility Rule
• Rule 13413
• Kaplow Rule
• BrokeAndBroker
• Bill Singer