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.