Arbitration is a formal alternative to courtroom litigation for resolving issues with neutral third party “arbitrators” issuing a binding decision after the litigants present their facts and argument. Compared to the usual courtroom procedures, arbitration is a faster, affordable and less formal legal proceeding. FINRA, a self-regulatory-agency for the securities industry, controls the largest, most prominent arbitration forum for securities disputes. A full FINRA arbitration proceeding from initiation through hearing can take on average 16 months, but cases often are settled before the end. Sick or elderly claimants may request an expedited arbitration process within nine months.
There is a wide range of reasons that investors might want to make a legal claim against their broker-dealer and broker firm. When opening an account with brokerage firms, investors sign a contract that often contains a clause that makes handling disputes through FINRA arbitration mandatory. Notably, investors are bound to arbitrate their securities claim after the Supreme Court upheld binding arbitration provisions in Shearson/American Express Inc. v. McMahon. FINRA registered broker-dealers, and registered representatives are similarly obligated to handle disputes arising through their employment in FINRA arbitration.
The FINRA arbitration process commences when the plaintiff, known as the claimant, submits a statement of claim, outlining the case’s relevant facts, dates, names of involved parties, type of relief requested and name of accused parties. The statement of claim must be filed within the allotted time, which is within six years after the dispute. Compared with a courtroom complaint, a statement of claim is less formal and usually a more detailed account of the background story. In addition to the statement of claim, the claimant needs to pay fees and submit a Submission Agreement. The fees owed for filing a FINRA arbitration claim are based off the sought remedies, hearing sessions, discovery motions and postponement fees. Fortunately, some individuals with financial difficulties can request a fee waiver.
After the claimants sufficiently file, FINRA then serves the statement of claim to the named brokerage firm and/or broker-dealer, known as the “respondent”. Upon receipt of the statement of claim, the respondent has 45 days to file a written answer with their facts and legal defenses along with a signed Submission Agreement. Once the statement of claim and responses are satisfactorily received, FINRA will select a convenient location for the hearing.
The next stage of the process is the selection of arbitrators, which is the equivalent of a court judge and jury in respective power. FINRA sends the respondent and defendant a randomly generated list of potential arbitrators from their Neutral List Selection System. The list will contain background information such as employment history, previous rulings, and other pertinent information. Each side’s attorneys will then be able to rank and strike out certain arbitrations to exclude from their panel. Investors with claims over $100,000 will have three arbitrators, and others will have one. Both claimant and respondent can challenge the selection if any bias is suspected.
The selected arbitrators will then hold a pre-hearing conference through a phone call with the claimants, respondents and their attorneys. During the pre-hearing conference, the involved participants go over the preliminary details of the case, including the scheduling of important dates including the discovery timelines and hearing.
The end of the prehearing conference brings the official start of the discovery process leading up to the trial. In discovery, the parties request documents and information from each other to build their case. FINRA provides a “Discovery Guide” with guidelines to help with important document requests. When responding to discovery requests, the parties need to produce all relevant documents or object. Otherwise, the arbitration panel will have to compel a response or FINRA will have to enforce a sanction on the non-cooperating party.
Within 30 days following the hearing, the arbitration panel renders a decision in an “award” which is binding and final. From there, the losing party needs to pay the owed damages or move to vacate the award in state or federal court. The documents produced in the FINRA arbitration process are confidential, but the awards are listed publicly online on FINRA’s website. Furthermore, the FINRA arbitration award will show on the involved FINRA member and registered representative’s CRD records, publicly accessible on Broker Check.
While FINRA arbitration may be less complicated than courtroom litigation, investors still need an experienced securities attorney knowledgeable about FINRA rules and procedures. The opposing party, whether a financial professional or brokerage-firm will almost certainly have representation from seasoned attorneys with ample experience defending against claims in FINRA arbitration. Our New York securities attorneys have extensive experience representing investors, broker-dealers, financial advisors and other professionals in FINRA arbitration. It is important to note that our securities lawyers do not ever represent broker-dealers.