Understanding Securities Arbitration

If you invest in the stock market, you're concerned with managing your finances and setting sound financial goals. For guidance, you may work with investment advisers, financial planners, or stock brokers.

Fair markets are critical to investors. To protect investors and ensure the reliability of the markets, the Financial Industry Regulatory Authority (FINRA) oversees broker-dealers.

Among FINRA's functions are two dispute resolution processes: arbitration and mediation. FINRA has an arbitration process to handle disputes in the securities industry between broker-dealers and their customers. Arbitration forums typically handle such claims. It's rare for a customer to bring a lawsuit in court.

For more information about securities-related consumer protection, see the following articles:

• Securities Law
• Proving Securities Fraud
• The ABCs of Securities Litigation Claims
• Securities Law: Links

This article discusses the FINRA and its arbitration process for resolving securities and business disputes.

What Is FINRA?

FINRA is a non-profit organization that oversees U.S. broker-dealers. FINRA is a self-regulatory organization responsible for overseeing brokerage firms and registered brokers. It's not a government agency but seeks to ensure investor protection. FINRA oversees over 600,000 brokers across the country.

The merger of the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) created FINRA. The U.S. Securities and Exchange Commission (SEC) oversees FINRA. Congress authorized FINRA to take action to ensure the broker-dealer industry operates fairly and honestly.

The Arbitration Process Under FINRA Rules

You may find yourself in arbitration to recover investment losses caused by stockbroker or brokerage firm misconduct. If so, it's wise to know the FINRA arbitration procedure.

FINRA Dispute Resolution Services handles arbitration cases for disputes involving the business activities of a brokerage firm or one of its brokers when they seek monetary or other relief.

What Is Arbitration?

Arbitration is an alternative dispute resolution process. It's similar to going to court. However, instead of a judge and jury, a panel of one to three impartial people hears the evidence. The panel reaches an arbitration decision about your claim for losses. The panel's decision, called an "award," is final and binding on the parties.

Securities arbitration is a common way to resolve disputes in securities litigation. Litigation in court is rarely available to investors. The panel engages in any of the following to render a decision:

• Reviewing the claims filed by the party initiating the arbitration
• Reviewing the claims filed by the other parties
• Weighs arguments of the parties
• Considers the evidence
• Renders an award

Arbitration is a private process. Unlike documents filed in state or federal court, documents submitted in arbitration forums are not publicly available. This is also true under FINRA's arbitration rules. FINRA's rules are approved by the SEC but FINRA has no part in deciding the award. The proceedings are confidential.

Typical Securities Arbitration Claims

Customers may bring a wide variety of claims against brokers and brokerage firms in arbitration, including:

• Churning
• Unsuitability to investor's investment objectives
• Negligence
• Insider trading
• Misappropriation
• Failure to Diversify
• Unauthorized Trading
• Material Misrepresentation or Omission
• Breach of Fiduciary Duty

There are time limits that a customer has to bring a claim, even in arbitration. The act resulting in the claim must have occurred within the past six years. However, the time limit may be longer if the act continues. If you suspect broker wrongdoing has contributed to investment losses, you should promptly contact a securities attorney to protect your rights.

Arbitration Clauses in Securities

Arbitration of securities-related claims has dramatically increased over the last few decades. A 1987 United States Supreme Court decision cleared the way for industry-drafted arbitration clauses in agreements. The Court authorized arbitration to settle disputes in the securities industry. Since the decision, broker-dealers typically require customers to enter into agreements to arbitrate disputes concerning services.

If an investor experiences a loss and thinks they received unfair treatment, contact an attorney with experience handling securities claims. If the parties cannot directly settle the dispute, the customer can initiate arbitration.

Securities Arbitration Basics

Arbitrations may only be used if the parties agree to them or have a contract requiring them to arbitrate. The parties in an arbitration case must agree to have their dispute heard by a panel of one or more arbitrators. They must also agree to be bound by the panel's decision.

Most investment account opening agreements between broker-dealers and their customers require customers to arbitrate any disputes with their broker-dealers. A broker-dealer may not compel its customer to arbitrate without an arbitration agreement.

Most Claims Require Arbitration

You have probably already agreed to arbitrate claims against your broker and their brokerage firm. Most brokerage industry members put language regarding mandatory arbitration in customer paperwork. If so, you are required to arbitrate.

The FINRA arbitration process is usually faster and cheaper than going to court. According to FINRA, the arbitration will last around one year if the case settles. If the case goes to a hearing, it typically takes 16 months to resolve.

Stages in the FINRA Arbitration Process

Constituents can file an arbitration claim through FINRA Dispute Resolution Services when they have a dispute involving a brokerage firm or a broker. Independent arbitrators decide arbitration cases. The parties select the arbitrators that will issue final binding decisions. The type of case determines whether the panel consists of a single arbitrator or three. The mediators must make decisions based on the facts and merits of the case. They take an oath to remain neutral.

The arbitration process is mandatory for FINRA members. They must answer claims and participate in the process. There are several stages to the arbitration process, which include the following:

• The claimant files a claim
• Respondent submits answer
• Parties select arbitrators
• Parties attend the initial prehearing conference
• Parties exchange discovery
• Parties attend hearings
• Arbitrators deliberate and render a decision

During the arbitration, the arbitrators determine the evidence presented. The panel considers all evidence presented to reach a decision. The decision-makers already understand the securities industry, so most arbitrations usually take less time than jury trials.

At the close of the case, the panel renders a decision called an "award." An investor usually receives a decision about their claim from the arbitration panel within 30 days of the arbitration proceeding. FINRA's arbitration awards are available to the public on its online database.

Get Legal Help With Securities Arbitration

Although the arbitration proceeding is not a court proceeding, it is critical to have legal representation to get the most favorable outcome. Most investors do not have adequate knowledge about federal securities law and other securities regulations to present the strongest case.

Contact an experienced securities attorney who can explain your legal options, prepare your case for the arbitration proceeding, and protect your interests throughout the FINRA arbitration process.