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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


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


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


FINRA Requires Brokerage Firms to Communicate with Customers when a Broker Leaves the Firmby Andrew Whiteman

Ask questions if your broker leaves his firm.

According to new regulatory guidance from the Financial Industry Regulatory Authority, known as FINRA, member firms are required to do the following:

  1. In the event of a registered representative’s departure, the member firm should promptly and clearly communicate to affected customers how their accounts will continue to be serviced; and
  2. The firm should provide customers with timely and complete answers when the customer asks questions about a departing registered representative

The new requirements are spelled in Notice to Members 19-10, which was issued on April 5, 2019. The purpose of the new guidance is to ensure that customers can make a timely and informed choice about where to maintain their assets when their registered representative leaves a firm. Customers should not experience any interruption in service as a result of a representative’s departure. Member firms should have policies and procedures in place to assure that customers serviced by a departing registered representative will continue to be serviced, including how and to whom the customer may direct questions and trade instructions and the identity of the representative to whom the customer will be assigned at the member firm.

NTM 19-10 also states that the member firm should “communicate clearly, without obfuscation, when asked questions” by customers about the departing registered representative. Provided the departed representative has consented to disclosure of his or her contact information to customers, the firm must provide the departed representative’s contact information, such as phone number, e-mail address, or mailing address. All information provided by the member firm about the departing representative must be “fair, balanced and not misleading.”

Thus, under NTM 19-10, a member firm (1) must immediately notify customers that their representative has departed and assign a new representative to the customers, (2) may not attempt to hinder or delay customers’ efforts to contact their former registered representative by refusing to provide his contact information when authorized to disclose it, and (3) must provide fair, balanced, and not misleading answers to all customer questions resulting from the representative’s departure.

FINRA Extends Deadline for Firms to Self-Report Violations under its 529 Share Class Initiativeby Andrew Whiteman

FINRA has extended the deadline for firms to self-report violations under its 529 Plan Share Class Initiative.

The Financial Industry Regulatory Authority (“FINRA”) announced on March 6, 2019, that it is extending the deadline for firms to self-report violations under FINRA’s 529 Plan Share Class Initiative to April 30, 2019. Participating firms must confirm their eligibility by submitting the additional evidence specified in Regulatory Notice 19-04 by May 31, 2019. In addition, FINRA has published a set of frequently asked questions about its 529 Plan Share Class Initiative in response to inquiries it has received from firms and trade associations.

On January 28, 2019, FINRA issued Regulatory Notice 19-04 and announced its “529 Plan Share Class Initiative.” According to the Notice, the purpose of the 529 Plan Share Class Initiative is to allow firms the opportunity to self-report violations related to recommendations that customers of 529 plans purchase shares in classes that carry expenses that are higher than the expenses charged by otherwise identical funds offered by the same issuer.

A 529 plan is a popular investment vehicle that allows individuals to invest money for the educational expenses of a designated beneficiary. According to FINRA’s Regulatory Notice, Class A shares typically impose a front-end sales charge, but lower annual fees compared to other classes. Class C shares typically impose no front-end sales charge but carry higher annual fees than Class A shares. These classes may have a different cost impact on the customer depending on the length of time the customer holds the securities. For most long-term investors, the fees charged by Class C share funds over the life of the investment will be greater than if the customer had purchased Class A shares. FINRA’s Notice suggests that the break-even point may be six or seven years, meaning that when assets are expected to be invested for more than six to seven years (for example, in a 529 plan purchased for the future college expenses of a beneficiary who is 12) an A share fund might be the more cost-effective choice.

FINRA’s Department of Enforcement will recommend that FINRA accept favorable settlement terms for firms that self-report violations and provide FINRA with a detailed remediation plan. FINRA anticipates that the settlement of a self-reported violation will include restitution to customers for the financial impact of the higher-cost share class and a censure, but no fine. Recommended settlements will also include either an acknowledgment that the firm has or will voluntarily undertake corrective actions.

© Andrew Whiteman 2019


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



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