The FINRA Arbitration Process

In a perfect world, all your investments would increase in value over time. Everyone in the financial industry would have your best interest in mind. You could trust brokerage firms, stockbrokers, and financial advisors to follow the rules. Unfortunately, we don't live in a perfect world.

Participants in the securities industry need protection. Investors and securities industry professionals rely on the guidance and oversight of regulatory organizations like the Financial Industry Regulatory Authority (FINRA). FINRA has several tools to resolve disputes and hold industry professionals accountable.

This article discusses the FINRA arbitration process for resolving disputes. It explains the timeline for arbitration cases and other procedures related to FINRA arbitration proceedings.

What Is FINRA?

FINRA, or the Financial Industry Regulatory Authority, is a non-governmental, not-for-profit organization. FINRA works under Security and Exchange Commission (SEC) supervision. It seeks to safeguard the integrity of the securities markets by serving as the first line of oversight in the brokerage industry.

Congress authorized FINRA to write and enforce broker-dealer rules that strengthen investor safeguards. It protects investors by facilitating a fair and ethical broker-dealer industry. FINRA also provides mechanisms for resolving disputes and disciplining violators.

Arbitration and mediation are two forms of dispute resolution. Parties often pursue one of these dispute resolution processes to avoid costly and time-consuming litigation. Arbitration is an efficient, cost-effective means to resolve a legal dispute.

It's usually more efficient to pursue alternative dispute resolution procedures. Litigation can involve the time-consuming and costly discovery process, including depositions and document production.

FINRA Dispute Resolution Services offers arbitration and mediation. FINRA mediation involves parties negotiating a mutually agreeable solution. A third-party mediator conducts the mediation.

What Is FINRA Arbitration?

When FINRA constituents have a securities dispute involving a brokerage firm or one of its brokers and they seek monetary relief, FINRA Dispute Resolution Services can help. A party can file an arbitration claim or request mediation. The FINRA arbitration process is compulsory. FINRA members must answer claims.

The arbitration forum employs an impartial intermediary who listens to both sides' arguments. In most cases, attorneys represent the parties.

In many ways, an arbitration dispute resolution forum resembles court. For example, the process typically involves:

  • Pleadings (e.g., answer, counterclaims, cross-claims, third-party claims, etc.)
  • Hearing sessions
  • Opening statements
  • Closing arguments
  • Discovery
  • Subpoenas
  • Witness testimony under oath

The particulars of the FINRA arbitration process depend on the claim's value. For example, the amount in dispute determines the number of arbitrators. The parties will select one or three arbitrators.

The FINRA arbitration process involves a panel of arbitrators. The panel's final decision is called an “award." Arbitration decisions by neutral third-party arbitrators are binding on the parties.

The FINRA Arbitration Process

A FINRA arbitration case involves several stages. FINRA rules govern the securities arbitration process. From start to finish, the process generally proceeds as outlined below. But the parties may agree to settle their case before the FINRA arbitration process concludes.

Filing a Claim

Filing a claim is the first step in a FINRA arbitration. The arbitration process begins when someone files a Statement of Claim. This statement includes the following:

  • The details and facts surrounding the dispute
  • The parties involved
  • The type of relief requested

A claimant can request any of the following depending on the circumstances:

  • Actual damages
  • Interest
  • Specific performance
  • Other types of remedies

The claimant must also file a Submission Agreement and pay the applicable filing fees.

Answering the Claim

After a claimant meets the filing requirements, FINRA serves the Statement of Claim on the other parties (called respondents). Each respondent must answer the claim. The respondent has 45 days to file an answer to the claim. The answer must include the relevant facts and defenses to the claim.

Arbitrator Selection

Arbitrator selection involves selecting arbitrators from a list of potential arbitrators. A FINRA computer algorithm randomly generates arbitrator lists. Parties can object to a given arbitrator for any number of reasons, including the following:

  • Personal bias
  • Financial interest in the subject matter
  • Other such justifications

Both parties have a say in arbitrator selection. Both sides can remove some of the arbitrators on the list from consideration.

Prehearing Conferences

Once the arbitrator selection concludes, the panel holds an initial prehearing conference. The parties and arbitrators meet at the Initial Prehearing Conference (IPHC). At the IPHC, they set a schedule for the case. This includes setting dates for the following:

  • Evidentiary hearing
  • Discovery deadlines
  • Briefing and motion deadlines
  • Other preliminary issues

Subsequent prehearing conferences may be necessary to resolve related preliminary issues.

Discovery

Through discovery, the parties request documents and information from each other. These documents and information help the parties prepare their case for the arbitration hearing.

Parties must cooperate and may receive a sanction for failing to do so. The Code of Arbitration Procedure also includes rules for objecting to discovery requests.

Hearings

FINRA arbitration hearings are similar in format to a trial. They generally include the following:

  • Opening statements
  • Presentations of facts, documents, testimony, and rebuttal evidence
  • Motions
  • Closing statements
  • Post-hearing submissions

During the hearing, claimants try to prove their case. On the other hand, respondents attempt to establish defenses to those claims. Each side can call witnesses and cross-examine the other side's witnesses.

Arbitration Decisions and Awards

After the record is closed, the arbitrator considers all the evidence. The arbitrator has 30 business days to decide whether the claimant is entitled to relief.

If the panel has three arbitrators, they base their decision on a majority vote. The final decision, or award, will be in writing. It will detail the following:

  • Damages awarded
  • Any assessments of costs and fees against the parties
  • A statement of the issues resolved
  • Other pertinent information

Under limited circumstances, a party may challenge an arbitration award.

Arbitration Timeline

The amount of time it takes to go through the FINRA arbitration process varies depending on several factors. These factors can include:

  • The complexity of the issues
  • The number and schedule of the parties
  • The volume of discovery

Generally, the average arbitration takes over a year to complete.

Get Help With a FINRA Arbitration

Understanding securities law and applicable rules and regulations takes years of practice. A claimant or respondent is not required to have legal representation during a FINRA arbitration. But it's usually a good idea. This is especially true because the other side will probably have lawyers fighting for their interests.

Contact an experienced securities attorney who can prepare you for and protect your interests throughout the FINRA arbitration process.

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