Understanding FINRA Arbitration - Part II

In the last post on this topic, I provided information about FINRA, the sponsor of the securities industry arbitration program, and noted that most investors are forced to arbitrate their disputes with a stockbroker and brokerage firm under the account agreement that the investor entered into with the firm.  We learned that an arbitration case begins with the filing of a Statement of Claim, which is comparable to the filing of a lawsuit in civil court.  Today, we'll cover a bit about the responses to the Statement of Claim, and then the appointment of arbitrators, the next step in the process.

Once an investor files the Statement of Claim, FINRA serves it on the respondents and provides them with a deadline to file their answer.  A respondent is given 45 days to file their Answer following service of the claim on them.  The respondent will file their Answer, admitting or denying the allegations made by the Claimant.  Like in court, a Respondent may assert a counter-claim, bringing allegations against the claimant for alleged wrongdoing as well.

Once the Answer has been filed, FINRA will provide the parties with a list or lists of possible arbitrators to hear the case.  The arbitrators are not full-time employees of FINRA, but are drawn from the community.  Many times, the arbitrators may be lawyers, may be professors, or may be local business men and women, or come from other walks of life.  For one-arbitrator cases, the arbitrators are "public" meaning that they do not work for a brokerage firm, or have not worked for one, and are not engaged in representing or working for firms as a lawyer or consultant.  For cases that have three arbitrators, two of them are public and one is non-public.  The disclosure  list includes the name of the arbitrator, any disclosures they have provided, such as what brokerage firms they have accounts at, what brokerage firms or brokers they may have worked for, sued or represented, etc.  The list also contains the arbitration awards issued on prior cases on which that arbitrator served.  These awards can be searched online and may provide the parties with some limited information about the arbitrator.  The parties then rank the list for each arbitrator slot, and are also allowed to strike a limited number from the case as well.  FINRA then appoints the arbitration panel from the ranked lists submitted by the parties. 

Currently, claims seeking damages of less than $25,000 are resolved by a single arbitrator through submission of the claim, answer and written documents.  No hearing is held for those cases.  For a claim seeking damages between $25,000.01 up to $50,000, one arbitrator will be appointed unless any party asks for three.  For claims seeking damages of $50,000 or more, a panel of three arbitrators will be selected.  Note that FINRA has filed (In September 2008) a proposal to change this, to provide for one arbitrator to hear cases up to $100,000 unless all parties agree in writing to a panel of three.  The SEC has not yet acted on that rule change.

Coming up in this series, I'll discuss the discovery process, more pre-hearing matters, and then on to the hearing.