Securities Arbitrations and State Law: Statutes of Limitations Supersede FINRA Rules in Florida

Most securities brokerage agreements require customers to resolve their disputes with brokers through arbitration by Financial Industry Regulatory Authority (FINRA) Dispute Resolution, which, as a result, has become one of the largest dispute resolution providers in the country.

Typically, under FINRA rules, in a securities arbitration customers may file a complaint within six years from the event giving rise to the case.  However, in a recent case, Raymond James Financial Services Inc. v. Phillips, Case No. SC 11-2513 (May 16, 2013), the Florida Supreme Court ruled that the state statute of limitations supersedes the FINRA rules.  In this case, the statute of limitations for a negligence action required filing within four years from the event giving rise to the claim.  A group of customers had argued that the statute of limitations applies only to cases filed in court but not to arbitration proceedings.

This case is limited to Florida, for now.  It is particularly meaningful there since the large retiree population who depend on their investments makes for an active community of users of the FINRA arbitration system.  However, the logic of the court’s decision has potential persuasive authority throughout the country.  Depending on the nature of the claim, state statutes of limitations generally run between two and six years, with general tort claims, like negligence, falling somewhere in the middle and most contracts claims falling toward the longer end.  We can anticipate that customers and brokers will respond in a few different ways:

  • Brokerage firms should look carefully at the timing of claims to decide whether to raise a statute of limitations challenge.
  • The Raymond James brokerage agreement specifically referred to statutes of limitations.  Not all these agreements do.  Brokerage firms may start to change their forms in order to take advantage of a shorter time for making claims than under standard FINRA rules.
  • Customers and their lawyers may begin writing arbitration claims to advantage of longer statutes of limitations – in other words, they may start to add in breach of contract claims explicitly.The problem for customers is thatcontract claims against brokers may be harder to prove than negligence claims.
  • We may see more state court action if the underlying language permits.  Under federal precedent – the First Options case from 1996 – a court will decide arbitrability absent the “clear and unmistakable” agreement of the parties, so many contracts and the rules of many arbitration forums provide that the arbitrator makes that decision.  The court in the Raymond James case decided that under the circumstances, it, rather than the arbitration panel, could make the substantive decision.  Parties may seek more of the same when the law regarding statutes of limitations in a particular state is not clear.

Despite the Florida case law, it will be surprising at this point to see more FINRA arbitrators dismissing cases on their own based on statutes of limitations, since under FINRA Rules, “Motions to dismiss a claim prior to the conclusion of a party’s case in chief are discouraged in arbitration.” Like many judges, arbitrators may reserve their decision on a dispositive motion until later in the proceeding.  It will be interesting to see whether and to what extent FINRA gives guidance to its pool of arbitrators about these new case law developments.  It will also be interesting to see if FINRA Dispute Resolution considers changing its own rules to reflect the holding of the Raymond James case.