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The FINRA Arbitration Proceessby Andrew Whiteman

The FINRA Arbitration Process

Almost all disputes involving securities brokers and their customers are resolved by arbitration under a process administered by the Financial Industry Regulatory Authority (“FINRA”).  FINRA was created on July 30, 2007, through the merger of the National Association of Securities Dealers, Inc. and the New York Stock Exchange. FINRA is the largest non-governmental regulator of securities firms doing business in the United States. It oversees nearly 5,100 brokerage firms and more than 676,000 registered securities representatives. FINRA operates under a charter granted by the Securities and Exchange Commission to regulate the activities of its broker-dealer members and the members’ registered representatives.

When a customer opens a brokerage account with a broker-dealer, the customer is usually required to sign new account papers that call for arbitration under the rules of FINRA Dispute Resolution, an arm of FINRA. FINRA Dispute Resolution operates an arbitration program for the resolution of disputes related to the activities of its members. As a result, virtually all disputes between customers and brokerage firms will be decided by a panel of arbitrators appointed by FINRA Dispute Resolution.

FINRA arbitration may be likened to a private court system. The case is initiated by the customer’s attorney filing a complaint on behalf of the customer. Sixty days after the complaint is served, the respondents will be required to serve an answer. After the answer is filed, FINRA distributes lists of potential arbitrators. The parties are asked to reject arbitrators they do not want and rank those remaining. FINRA then selects three arbitrators from the lists returned by the parties. Typically, one of the three arbitrators will have a background in the securities business. The other two arbitrators are typically professionals (often attorneys) or businesspersons.

After arbitrators are selected, the panel will confer with the attorneys via telephone for the purpose of ironing out any discovery disputes and establishing a hearing schedule.  The customer can expect that the hearing will take place approximately six to nine months after the telephone conference.

After the initial pre-hearing conference, the parties engage in a process called “discovery” by which information and documents are exchanged. Discovery in FINRA cases is much more limited than what is allowed in court litigation. Extensive interrogatories and depositions are generally not allowed.

The customer has the right under FINRA arbitration rules to have the hearing take place where the customer resided at the time the transactions in question took place. The hearing of the dispute is typically held in an informal setting such as a hotel conference room. Each side presents evidence by witnesses and documents, with the claimant having the right to go first. Hearings typically continue for three to four days. The parties are generally notified of the decision within 15 to 30 days after the hearing concludes.

The customer, in addition to paying legal fees, is responsible for expenses charged by FINRA for administering the case. FINRA charges a filing fee of up to $2,250 depending on the amount that is being claimed. Up to $1,500 of the filing fee will be refunded if the case is settled before ten days prior to the first scheduled arbitration hearing date. FINRA also assesses hearing session fees for each half-day hearing session. Like the filing fee, the hearing session fee is assessed on a sliding scale based on the amount in dispute. The maximum half-day hearing session fee is $1,500. The arbitrators have the discretion to allocate the hearing session fees between the parties. Oftentimes, the arbitrators split the hearing session fees equally between the parties.

After the close of the hearing, the arbitration panel deliberates and decides whether the claimant is entitled to relief. Majority rules, a unanimous decision is not required.

FINRA does not have an appeals process by which a party may challenge the arbitrators’ decision. A party may challenge the arbitration award in court, but the grounds on which a court may overturn an arbitration award are quite limited. Under federal and state laws, a court may vacate an arbitration award if (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption by the arbitrators; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing, or in refusing to hear relevant evidence, or of any other misbehavior by which the rights of any party was prejudiced; (4) the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award on the subject matter submitted was not made; (5) the arbitrators disregarded a clearly defined law or legal principle that they were aware applied to the matter before them; or (5) there is no factual or reasonable basis for the award. Most arbitration awards are upheld by the courts.

Absent a challenge to the award, an industry party must pay arbitration awards within 30 days or risk suspension of his or its FINRA licenses.

While securities arbitration is a more streamlined process than litigation in court, the rules at play are complex. Investors need representation by attorneys who are experienced in FINRA rules and arbitration practice.

© Andrew Whiteman 2019

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Whiteman Law Firm has handled hundreds of securities matters over the past 40 years. Click here for more information about our securities litigation and arbitration practice. Please contact us for more information.

Andrew Whiteman Assists Securities Law Clinics with Amicus Brief Filingby Andrew Whiteman

Andrew Whiteman Assists Securities Law Clinics with Amicus Brief Filing

On April 19, 2019, Andrew Whiteman filed an amicus curiae brief in the United States Court of Appeals for the Fourth Circuit on behalf of three law school law clinics: University of Miami School of Law Investor Rights Clinic, Elizabeth Haub School of Law at Pace University Investor Rights Clinic, and St. Johns University School of Law Securities Arbitration Clinic (the “Clinics”).

An amicus curiae brief, also known as a “friend of the court brief,” is filed in an appellate court by a non-party to the dispute who has an interest in the outcome of the court’s disposition. The Clinics filed their brief in support of the appeal by the plaintiff-appellants, Rohit Saroop, Preya Saroop, and George Sofis (“Plaintiffs”). The Plaintiffs won their FINRA arbitration case. However, the arbitration decision was vacated by a judge of the United States District Court for the Eastern District of Virginia. The Plaintiffs then appealed the case to the Fourth Circuit Court of Appeals.

The case involves the following facts. In January 2017, an arbitration panel appointed by the Financial Industry Regulatory Authority (“FINRA”) rendered an arbitration award in favor of Plaintiffs against the defendant, Interactive Brokers LLC (“Interactive”). Interactive filed a motion in the District Court to vacate the arbitration award. The Plaintiffs moved to confirm it. The District Judge remanded the arbitration decision back to the panel of arbitrators for clarification of the basis for their award in favor of the Plaintiffs. After the remand, the panel issued a slightly modified version of their initial award in January 2018, again in favor of the Plaintiffs.

Upon review of the modified award, the District Court granted Interactive’s motion to vacate the award and remanded the arbitration case to a new panel of FINRA arbitrators for reconsideration of Interactive’s counterclaims against the Plaintiffs. The District Judge decided to vacate the award after finding that arbitrators based their award against Interactive solely on the ground that Interactive violated a FINRA conduct rule, Rule 4210. The Court ruled that the arbitrators’ decision constituted “manifest disregard of the law” because the law is clear that there is no private right of action to enforce FINRA conduct rules, the panel knew of and understood the law on this point, they found the law to be applicable to the case, and they ignored it.

The Clinics’ amicus brief makes several points. FINRA’s arbitration rules do not require the claimant to specify any cause of action or legal theory in a statement of claim. FINRA arbitration rules do not require the arbitrators to specify any cause of action or legal theory in an award. Under established legal precedent, the arbitrators did not manifestly disregard the law, and the District Court erred in its finding concerning the arbitrators’ rationale for the award.

This is an important case for several reasons. First and foremost, the judicial power to review of arbitration decisions is extremely limited. Judicial review of arbitration decisions has been described as “severely circumscribed” and “among the narrowest known at law.” Apex Plumbing Supply, Inc. v. U.S. Supply Co., 152 F.3d 188, 193 (4th Cir. 1998). The Fourth Circuit has stated that “a court sits to determine only whether the arbitrator did his job – not whether he did it well, correct, or reasonably, but simply whether he did it.” Wachovia Securities, LLC v. Brand, 671 F.3d 472, 478 (4th Cir. 2012). In this case, the District Court’s finding that the arbitrators’ decision was based solely on a violation of a FINRA rule is highly questionable. The Court’s analysis of the “manifest disregard” standard seems deeply flawed. It rests in part on the premise that the case law is clear that an arbitration award cannot be based on a violation of a FINRA rule. The Court cited numerous cases that have held that a FINRA Rule may constitute evidence of the broker-dealer’s duty of care to his customer, but held that those cases were inapplicable because “it was apparent on the face of the arbitrator’s decision that a violation of FINRA Rule 4210” was the sole basis for liability. Finally, the Court’s ruling that the arbitrators knew the law, understood it, knew the law was controlling, and disregarded it is based on what was in Interactive’s arbitration brief. This finding is problematical because the Plaintiffs’ submission to the panel contested Interactive’s argument and cited contrary authority.

This case provides the Fourth Circuit to provide additional guidance on the scope of judicial review of arbitration decisions.

A copy of the District Court’s opinion is here.

A copy of the Clinics’ amicus brief is here.

It is expected that the Fourth Circuit will rule on the case within six to nine months.

© Andrew Whiteman 2019

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The lawyers at Whiteman Law Firm have been handling securities matters for over 30 years. Please contact us for more information.

 

Securities arbitration – Should you hire an attorney?by Andrew Whiteman

Here is a well-written article, co-authored by FINRA and PIABA, about why investors who are considering securities arbitration should hire an attorney.

Securities Arbitration – Should You Hire an Attorney?

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The lawyers at Whiteman Law Firm have been representing investors in securities claims for over 30 years. We represent individuals and businesses who have suffered financial losses due to fraudulent investment schemes sold by unscrupulous or inept investment promoters, stockbrokers, investment advisors or insurance salesmen. If you have suffered losses due to the misconduct of an investment professional, you need competent attorney representation to help you recover your losses. Whiteman Law Firm assists investors to recover losses through litigation and arbitration. Our attorneys represent investors in all types of securities disputes. We handle everything from complex federal and state court litigation to individual customer arbitrations. We can review the facts of your case on a confidential, no-cost basis, and advise you on your options for recovering your investment losses.

Please contact us for more information.

 

A Third of FINRA Arbitration Awards Go Unpaidby Andrew Whiteman

A third of FINRA arbitration awards are unpaid.

Richard W. Berry, FINRA Executive Vice President of Dispute Resolution, recently provided a statement to the SEC Investment Advisory Committee on customer recovery in FINRA arbitration cases. According to Mr. Berry, “about a third” of cases in which FINRA arbitrators award damages to customers result in unpaid awards. Unpaid awards represent only about 2% of the 13,000 customer arbitrations closed between 2012 and 2016. The vast majority of cases are closed by settlement, not by a decision by the arbitrators. However, the fact that a third of arbitration awards go unpaid is significant and disturbing.

Investors should be aware that most broker-dealers do not carry insurance for the types of claims typically brought in FINRA arbitration cases. To make matters worse, the regulatory capital required to conduct business as a FINRA broker-dealer is surprisingly low. The continued existence of a thinly-capitalized firm may be jeopardized if the firm experiences a number of customer claims within a short period of time.

Mr. Berry’s statement indicates that FINRA will consider advocating for rulemaking by the SEC to maintain additional capital.

Until that happens, investors are encouraged to investigate the financial position of a broker-dealer before doing business with that firm. A broker-dealer’s annual financial statements are required to be submitted to the SEC on Form X-17A-5 and are available to the public through the SEC’s Edgar Company Filings database.

Mr. Berry’s entire statement may be accessed here.

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The lawyers at Whiteman Law Firm have been representing investors in securities claims for over 30 years. We represent individuals and businesses who have suffered financial losses due to fraudulent investment schemes sold by unscrupulous or inept investment promoters, stockbrokers, investment advisors or insurance salesmen. If you have suffered losses due to the misconduct of an investment professional, you need competent attorney representation to help you recover your losses. Whiteman Law Firm assists investors to recover losses through litigation and arbitration. Our attorneys represent investors in all types of securities disputes. We handle everything from complex federal and state court litigation to individual customer arbitrations. We can review the facts of your case on a confidential, no-cost basis, and advise you on your options for recovering your investment losses.

Please contact us for more information.

 

 

 

 

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