We often advise readers of this blog to act promptly if they suspect that their stockbroker mishandled their accounts or gave them unsuitable or misleading recommendations. Usually, we just post a general warning that potential filing deadlines can bar investment claims. But we thought it might be a good idea to explain a bit more about these potentially catastrophic limitation periods.
When we talk about deadlines for pursuing claims against brokers and brokerage firms, we’re referring to two different types of time limitations.
FINRA Eligibility Rule
The first type of limitation is an eligibility cutoff that can bar access to the arbitration forum operated by the Financial Industry Regulatory Authority, better known as FINRA. Disputes between a customer and his or her broker or brokerage firm almost always must be resolved exclusively through FINRA arbitration. Rule 12206 of FINRA’s Code of Arbitration states in part that “[n]o 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.” This rule does not legally extinguish a claim that is more than six years old, but it bars use of FINRA’s arbitration system to resolve the claim. Once the claim is barred under Rule 12206, it technically can be refiled in court. But for reasons too complicated to go into here, the odds of successfully pursuing the case in court are slim. As to the question of what constitutes the “occurrence or event” that starts the clock running under Rule 12206, the answer can vary based on the nature of the claim and the whims of the arbitrators, so you’ll need an experienced arbitration lawyer to advise you.
Securities Law Statute of Limitations
The second type of filing deadline is the statute of limitation. Federal and state courts enforce statutory cutoffs for commencing different kinds of claims and vary widely in length from one jurisdiction to another. Remember, however, that claims against brokers and brokerage firms cannot be brought in court; they must be arbitrated. While a number of states explicitly enforce statutes of limitation in arbitrations, some state courts hold that statutes of limitation have no application at all in arbitration. Many other states have not yet had a court resolve the issue, so if you’re arbitrating in one of those jurisdictions, it is essential to understand the compelling arguments for why statutes of limitation should not be applied.
Whether one is talking about the FINRA eligibility rule or a statute of limitation, it can be challenging to determine with precision the date by which claims must be commenced. Thus, it’s always best to file a case as early as possible. Unfortunately, we’ve had to give many investors bad news over the years because they waited too long to contact us and thus allowed their potential claims to become time-barred. That’s why we always warn investors not to dither or drag their feet when their gut feelings tell them that their broker stole stock, or may have mishandled their accounts and made unsuitable recommendations.
William Shakespeare observed in Twelfth Night, “In delay there lies no plenty.” Of course, he wasn’t referring to filing deadlines, but the sentiment fits nicely nonetheless. Acting promptly to have your accounts reviewed by an experienced investment lawyer likely will cost you nothing. Failing to do so could cost you a lot.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.