The FINRA Arbitration Process

Arbitration is an alternate to a trial in court to solve legal disputes. In the securities industry, FINRA (Financial Industry Regulatory Authority), which regulates securities firms as well as industry professionals, handles most securities arbitrations, with limited exceptions.

Why Do Investors or Professionals Bring a Claim with FINRA?

As an investor, any account agreement that he/ she signs to open a new account, provides that any disputes arising under the agreement will be arbitrated at FINRA. Even if the brokerage firm does not have an arbitration clause, FINRA Rule 12201 states that parties can still arbitrate with FINRA, in the absence of a written agreement.

As a result of signing a Form U4, industry professionals are required by their broker-dealers to arbitrate disputes, unless a specific agreement has been signed designating another forum for the dispute.

An investor is required to arbitrate at FINRA if there is a written agreement, the dispute is with a registered FINRA member broker or firm, and the dispute involves securities related business of the member.

FINRA cannot arbitrate class action claims. Usually larger disputes with investment advisory firms are arbitrated by American Arbitration Association (AAA) or JAMS Endispute.

What is the Time Limit and Eligibility for Investors to File a FINRA Claim?

According to FINRA Rule 12206, an investor or a securities industry participant is required to bring a claim within 6 years of the date the event occurred leading to the dispute. After that, the claimant can pursue the case in court if the statute of limitations allows it.

How is the Statement of Claim Filed?

The arbitration process starts with a party filing a Statement of Claim with FINRA. The party that files the claim is known as the claimant and the party against whom the claim has been filed is called a respondent. The statement of claim must specify all relevant details of the dispute like names of individuals and entities, identify the respondent, dates, relief or damage requested, and against which specific actions.

Additionally, the claimant also has to submit the FINRA filing fees and an uniform submission agreement.

Only after the filing requirements are fulfilled, FINRA will serve the Statement of Claim to the respondents. The respondent is obligated to respond to the Statement of Claim within 45 days of being served, with relevant facts and explain its defenses. At this point, the respondent might bring counterclaims and signs a submission agreement.

Find out more about filing FINRA Arbitrations here: How Do I File A FINRA Arbitration?

Who Settles FINRA Arbitrations?

FINRA claims are settled by a panel of three arbitrators, a mix of public non-securities industry arbitrators and sometimes a non-public securities industry arbitrator. This holds true for claims exceeding $100,000. For cases, where the claim is less than $100,000, there is one arbitrator appointed.

After the respondents file their answer, FINRA uses the Neutral List Selection System (NLSS) to generate random lists of arbitrators from their roster. Each party gets to review this list and are allowed to rank the arbitrators and strike out those they do not want, up to 4 names out of the 10 listed. FINRA combines the ranking scores and appoints the highest ranked arbitrators that are available.

Once the arbitrators are chosen, FINRA sets a date for Initial Prehearing Conference, where both the parties, their counsel and arbitrators set a date for the hearing. The pre hearing usually takes place over the telephone, where the arbitration panel will schedule and establish dates for evidentiary hearing, discovery, briefing and motion. They also discuss if there is a possibility of mediation.

What Happens Leading Up To A Hearing?

FINRA arbitrations follow the Codes of Arbitration Procedure which, necessitate both parties to cooperate to the fullest extent voluntarily and exchange documents and information critical to the arbitration process.

FINRA has a detailed Discovery Guide for investor claimants. There is a list of documents that is considered discoverable in all customer cases, including tax returns and financial statements. Either party may object to a discovery document they feel is too burdensome, not relevant or has privileged information. If the parties cannot agree to a discovery dispute, they may make a motion to the arbitrator to Compel Discovery.

In a FINRA arbitration, arbitrators may also issue a subpoena to a third party, if they believe this non-party witness may have valuable information, after either party makes a written motion to the arbitrator.

Except in extreme circumstances, depositions are strongly discouraged in FINRA arbitrations.

Twenty days prior to the arbitration hearing, both parties tell the other what witnesses they will be calling at the hearing and exchange copies of exhibits.

What Happens At An Arbitration Hearing?

FINRA usually selects a neutral venue close to the investor claimant’s residence. It could even be a FINRA office. Each side makes an opening statement, then the claimant presents witnesses and evidence and calls in any expert witnesses with specialized knowledge to weigh in on technical aspects. Respondents get an opportunity to cross examine the claimants’ witnesses.

After the claimants lay out the case, the respondents also present exhibits and expert witnesses. Claimants may cross-examine the respondents' witnesses. Both parties present their closing arguments. The arbitration panel meets to decide on the case based on the arguments and evidence presented. Within 30 days, the panel issues a written decision, either awarding the total amount claimed, a smaller sum or none. They are not required to provide an explanation for their decision.

What Happens After The FINRA Hearing and Award Decision?

The respondent has 30 days to pay the arbitration panel award to the investor, or file a motion to vacate the arbitration award in court (a rarely filed and rarely granted motion), failing which, FINRA can suspend the respondent, either a broker or a firm. FINRA arbitration panel decisions are not subject to appeals.

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