Understanding FINRA Arbitration - Part I

When investors are harmed by some type of stockbroker misconduct or fraud, they're often surprised to learn that arbitration is typically required to resolve the dispute, and that they can't get their family  lawyer to file a lawsuit at the county courthouse.  Instead, once the investor reviews the account agreement that he or she entered into with their brokerage firm, they discover that the agreement contained a "pre-dispute arbitration clause" that states that the investor and firm will arbitrate any disputes relating to their account or broker/customer relationship.  While there are pros and cons of arbitration, whatever they are aren't all that important since typically the investor is stuck with arbitration.  Most investors are unfamiliar with the arbitration system, and have many questions about it.  Today, and in a series of posts to follow on understanding arbitration, I'll cover some of the basics about the securities industry arbitration process.

The arbitration process is sponsored by FINRA Dispute Resolution, a part of FINRA - the Financial Industry Regulatory Authority.  FINRA is not a part of the government, but instead is what's called a "self-regulatory organization."  All brokerage firms doing business with the public are members of FINRA, and are required to follow to FINRA's rules and regulations.  FINRA conducts examinations of these brokerage firms and stockbrokers.  Many of these examinations result in the regulator taking disciplinary action against a firm or broker for some type of rule violation.  The Dispute Resolution section administers the arbitration and mediation program to resolve disputes between brokerage firms and customers, as well as industry-related disputes such as cases between firms, or a broker and a firm.

An arbitration case is begun when a claimant (the plaintiff) files a Statement of Claim with FINRA (and pays the applicable filing fee, etc.).  FIRNA then serves the Statement of Claim on the Respondents (the defendants) and provide them with a deadline to file their answer.  Following that, in most cases, a panel of arbitrators is selected by the parties, discovery is conducted (the excange of certain documents and information that may be evidence in the case) and the case is scheduled for hearing.  Like court, the process may be time-consuming.  In fact, many cases may take over a year to be resolved through hearing and a written award by the aribtration panel.  Many cases settle before hearing, like in court, after the parties enter into confidential settlement agreements. 

Each arbitration case in unique and the facts relating to it, as well as the law, govern the outcome.  Many cases are similar, and involve the more common type of broker misconduct such as fraud (misrepresentations and omissions) unsuitable recommendations, churning, or unauthorized trading.  Read more about these by clicking on the Common Broker Misconduct category of topics on the right of the screen.

Over the next several posts in this series, I'll discuss more of the details about arbitration proceedings, including some items on what to expect if you are involved in a securities arbitration case.