FINRA Arbitration

What is FINRA Arbitration?

With a few exceptions, all broker-dealer firms are required to be members of FINRA – the Financial Industry Regulatory Authority. FINRA sponsors a forum for the arbitration of disputes between investors and FINRA member firms and their representatives. Arbitration is similar to litigation, but the case is decided by an arbitrator or a panel of arbitrators (usually lawyers), rather than a judge, and the rules are a bit more relaxed in arbitration than they are in court.

Do I have to file my claims in arbitration?

FINRA member firms generally require their clients to sign account agreements containing arbitration clauses (agreements to resolve all disputes in FINRA arbitration proceedings, rather than court proceedings). The U.S. Supreme Court has held that these arbitration clauses are enforceable. In the absence of an arbitration clause, a customer still has the option to arbitrate.

Is the arbitration process fair?

Many attorneys who represent investors dislike arbitration and feel that their clients would be better off in court. While we appreciate the arguments on both sides of this debate, we have generally found the process to be fair. Rather than bemoan the situation, we focus on the many advantages that arbitration provides for our clients.

What is the process for filing a claim in FINRA Arbitration?

To initiate a FINRA arbitration proceeding, an investor has to file a Statement of Claim with FINRA setting forth the basis for the claims and the relief that is being sought. FINRA serves the Statement of Claim on the Respondents (the broker and/or his firm). The Respondents then have an opportunity to file an Answer to the Statement of Claim.

Who will decide my case?

After the initial pleadings are filed, FINRA sends a list of potential arbitrators to the parties. The parties are allowed to strike a certain number of arbitrators from the list. The remaining arbitrators have to be ranked in order of preference. The rankings are submitted to FINRA, which then utilizes a formula to select the arbitrator (for smaller cases) or arbitration panel (for larger cases).

What happens after the arbitrators are appointed?

FINRA schedules an initial pre-hearing conference. At the IPHC, the parties (or their attorneys if they are represented) and the arbitrators establish a schedule for the arbitration. The schedule will include dates for the final hearing, a deadline for completing discovery, and may include a deadline for pre-hearing motions to be filed. After the IPHC, the parties engage in limited discovery (exchange of documents and basic information). Occasionally, the Respondents will file a motion to dismiss, but the grounds for dismissal are very narrow in FINRA arbitration. Cases that do not settle go to a final hearing before the arbitration panel.

Do most cases settle?

Many cases do settle, but some do not. When a case does not settle, it is often said that one of the parties must be misjudging its prospects if the case goes to a final hearing. Claimants should be open minded to the possibility of settlement, but ready to press their claims if necessary.

What happens at the final hearing?

Final hearings can last anywhere from one day to several weeks, and even months in some cases. The hearing is similar to a trial, but less formal. Both sides have an opportunity to make an opening statement. After the opening statements, both sides have an opportunity to call witnesses and cross examine the other side’s witnesses, and to submit documentary evidence to the arbitrators. Once all of the testimony and documentary evidence has been introduced, the parties get the opportunity to make a closing statement. That concludes the hearing. After the hearing, the arbitrators confer and either issue an award of damages for the Claimant or find for the Respondent and dismiss the claims.