If you are an investor and have a dispute against your financial advisor or brokerage firm involving financial losses, it is likely that you will have to bring your dispute in arbitration before the Financial Industry Regulatory Authority (FINRA)*.
*What is FINRA? The Financial Industry Regulatory Authority (FINRA) is the primary regulator of brokerage firms, and is tasked with ensuring the integrity of America’s financial system by informing and educating investors, writing and enforcing industry rules, and monitoring brokerage firms for compliance.
An investor filed a claim against his financial advisor and the advisor’s brokerage firm, alleging the financial advisor misrepresented the risk of various investment products. The action related to the investor’s investments in the brokerage firm’s managed accounts and a margin (a high balance credit line) collateralized with the securities held in the managed accounts. The advisor and firm were found liable in FINRA arbitration for negligent misrepresentations, unsuitable investment advice, and breach of fiduciary duty and had to pay the investor $1,100,000 in compensatory damages.
An investor filed a claim in FINRA arbitration against a financial advisor for breach of contract, unjust enrichment, and unauthorized trading fraud for stealing money from the investor’s account. Through the FINRA arbitration, the investor was awarded $1,525,000 in compensatory damages, $500,000 in punitive damages, and $400,000 in attorney fees plus expenses.
Mandatory arbitration has been a hot subject in the news. Companies frequently require their employees to sign binding arbitration clauses and to bring any dispute in arbitration rather than in court. Oftentimes, these proceedings are confidential and not disclosed to the public.
Likewise, most brokerage firms embed a mandatory arbitration clause in the customer agreements they make their customers sign before opening a brokerage account. These arbitration clauses mandate that any dispute be brought in FINRA arbitration. Such arbitration agreements are enforceable and, as such, investors generally do not have a choice to bring their dispute in court before a jury but, rather, must have their dispute heard in FINRA arbitration.
FINRA arbitration is a less formal process of resolving disputes than federal or state court litigation. Rather than a judge or jury, disputes in FINRA arbitration are decided by “arbitrators.” Generally, either 1 arbitrator (in smaller disputes) or 3 arbitrators (in larger disputes) are appointed to listen to the arguments and decide the case. In a way, they are acting as judge and jury. If you have specific questions about what arbitration is, head over to our FINRA arbitration FAQ.
Impartiality – arbitrators are supposed to be unbiased
Privacy - most arbitration proceedings are private and confidential
Less formal, more cost effective and quicker than court litigation
Certainty and finality of the dispute – appeals are non-existent and overturning an award is extremely difficult and uncommon
Expediency – arbitrations are typically resolved with 1-1½ years instead of several years in court
If you have an adverse decision, it is difficult to overturn the award to try to arbitrate again for a more favorable award
Your dispute is decided by a panel of arbitrators, rather than a jury of your peers
For more complex cases, it can be difficult to obtain evidence and depositions of witnesses are not permitted
A claim must be filed with FINRA, usually via FINRA’s online web portal for its Dispute Resolution program. The claim is generally referred to as a Statement of Claim.
The investor files a Statement of Claim that identifies the parties and wrongdoing, the details of the claim, and the damages being sought.
FINRA charges the parties to administer a dispute. A filing fee will be collected based on the amount of the claim. This varies based on the amount of the damages sought. Filing fees vary from a few hundred to a few thousand dollars.
FINRA then notifies the wrongdoer (the financial advisor and/or brokerage firm) and serves the Statement of Claim on them.
The wrongdoer (the financial advisor and/or brokerage firm) has 45 days to respond to the investor’s allegations, by filing a Statement of Answer which details various defenses and why the investor should not be awarded any money.
FINRA then appoints “arbitrators” who will decide the investor’s case. The number of arbitrators needed will be determined based on the amount of the claim:
$50,000 or less:
“Simplified arbitration” where one arbitrator makes the decision is typically decided on filed documents, only
One arbitrator decides on the case and there is an evidentiary hearing
$100,000 or more:
Three arbitrators decide on the case and there is an evidentiary hearing
Within 30 days of the Statement of Answer due date, FINRA sends a list* of potential arbitrators with background information and a list of past FINRA awards they have issued. Parties then rank the arbitrators on the list. Then, FINRA appoints arbitrators based on the rankings.
*FINRA uses a computer algorithm called the Neutral List Selection System (NLSS) to randomly generate this list from the 8,000+ arbitrators.
Once arbitrators are appointed, a conference call is held between arbitrators and the parties to schedule hearing dates for the arbitration hearing (another name for the “trial”), set important motion and discovery deadlines, and provide a “roadmap” for how the case will proceed.
After the case is filed, each party will be allowed to seek relevant documents from the opposing party. The documents are used as evidence to either prove or disprove a claim.
The term hearing in arbitration is synonymous with a court trial. At the prehearing conference, the parties select hearing dates. The hearing is less formal than a state or federal court trial but follows a similar format with opening statements, oral arguments, witness testimony, evidentiary objections, and closing statements.
After the hearing, the arbitrators decide* if the investor is entitled to the relief sought and, if so, how much. The arbitrators’ award is issued in writing within 30 days of the record being closed.
*If there are three arbitrators, the majority determines the award. The decision does not need to be unanimous.
The decision of the arbitrators is final and binding and cannot be overturned unless the circumstances are unusual or extreme.
If the arbitrators award the investor money, the wrongdoer (financial advisor and/or brokerage firm) must pay the monetary amount ordered by the arbitrators to the investor within 30 calendar days of the arbitrators’ award.
The answer to this will vary based on the complexity of your case, whether you decide to mediate or arbitrate, the number of parties involved, and the amount of your claim, but on average, FINRA proceedings take about 18 months* from start to finish.
*In situations in which the investor is severely ill or a senior citizen, the cases may be “expedited” and could conclude sooner.
While hiring an attorney is not required by FINRA, it is crucial to have one represent you in FINRA arbitration, given the complexity of the arbitration process and the knowledge and experience of the wrongdoers’ attorneys. Below are some of the advantages of working with an investment fraud attorney:
An attorney can help you right from the start, assisting you in determining whether or not you have a case so you don’t waste time or money filing a claim that does not have a chance for a successful outcome.
Brokers and brokerage firms will be represented by a team of well-qualified attorneys and you will want one on your side fighting for you.
An attorney can provide guidance on how to select arbitrators.
FINRA proceedings are complex and involved, and likely will be unfamiliar to you.
FINRA proceedings are complex and involved, and likely will be unfamiliar to you. Without an attorney, you risk missing crucial paperwork or steps in the process, which could cost you the case.
Attorneys often work on a contingency basis for these types of cases, which means you will not have to pay them money. Instead, they will be compensated for expenses and paid attorney fees from the recovery, i.e., they don’t get paid unless you recover money.
Is someone you generally like and feel confident hiring
Has experience with both mediation and arbitration
Has had successful outcomes with cases like yours
Has a fee structure that suits your needs
When your hard-earned money is on the line, the right lawyer is crucial to your recovery.
Learn more about what an investment fraud attorney does and what to look for when choosing one.
Talk to an Experienced Attorney Today
Call and speak to one of our attorneys* for a no-cost consultation to discuss your situation, answer your questions, and help you determine the next steps. This call usually takes about 15 minutes, but we are happy to talk to you as long as you would like!
Quick Review of Your Paperwork
If we think you might have a case, we will need to review a few basic documents. If we determine you have a case, then you will have the option to hire us as your attorneys to pursue it.
Signed Attorney/Client Agreement
If you decide to hire us to pursue your case, we will have you sign an attorney-client agreement so we can begin the process of trying to recover your losses.*
*In the vast majority of cases, our agreement is contingent – meaning you won’t owe us any money unless we recover money for you.