Nearly every brokerage account agreement includes an arbitration clause mandating that all disputes between investors and their brokers or brokerage firms are to be resolved in private arbitration rather than in state or federal court. Consequently, when you signed your account opening documents with your brokerage firm, you likely gave up your right to sue in court and instead agreed to submit any disputes to arbitration.
What is Arbitration?
Arbitrations are essentially privately administered legal proceedings in which each party to a dispute submits written and/or oral arguments in support of its position to a neutral third-party. As in court trials, arbitrations may include documentary evidence and the direct and cross-examination of witnesses. Securities arbitrations between investors and their brokers or brokerage firms are conducted primarily by the Financial Industry Regulatory Authority (FINRA).
What is FINRA?
FINRA is a non-governmental self regulatory organization headquartered in Washington, D.C. that performs financial regulation of securities firms. It is the largest independent regulator of securities firms doing business in the United States, with oversight of roughly 4,300 brokerage firms, 162,000 branch offices, and 630,000 individual stockbrokers. It is responsible for rule writing, enforcement of those rules, securities firm examinations, and securities arbitration and mediation. FINRA’s stated mission is that it is “dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.”
FINRA Arbitration Process
If you feel that you may have suffered financial loss because of the wrongdoing of your stockbroker or financial advisor and would like to explore your options with Lucking LLC, the first step is to contact our office and schedule a free consultation. At that meeting, we will discuss your financial situation, your investment experience, your relationship with your broker, and the nature of your complaint. You will then be asked to provide our office with copies of any key documents you may have in your possession, such as account statements, account opening documents, and any correspondence between you and your broker. Our office will then examine the trading in your accounts to determine if it was consistent with your risk profile and investment objectives and, if not, to determine any damages you may have suffered. When this investigation is complete, we will meet again to discuss whether there is a legal foundation for your claim and whether the losses suffered make it worthwhile for you to pursue that claim in arbitration.
Statement of Claim
If your case merits the filing of a formal complaint, then we will draft a Statement of Claim (FINRA’s term for “complaint”) outlining the facts of the case, the nature of the wrongdoing, and the damages or other relief sought. We will work closely with you to assure that the Statement of Claim is accurate and complete. We will then file the Statement of Claim with FINRA, which will, in turn, serve a copy on your brokerage firm and/or stockbroker.
Within 45 days of receipt of the Statement of Claim, the stockbroker / brokerage firm (“Respondent”) is required to file with FINRA and serve to the aggrieved investor (“Claimant”) an Answer to the Statement of Claim. Answers typically address the Claimant’s allegations, outline the the relevant facts as the Respondent sees them, and assert any defenses.
Arbitration Panel Selection
Soon after the Respondent files an Answer, FINRA sends a letter to the parties stating that the dispute is ready for arbitrator selection. Accompanying FINRA’s letter is a list of potential arbitrators. After reviewing the potential arbitrators’ profiles and qualifications, each party is permitted to strike a certain number of names and to rank in order of preference the remaining candidates. The lists are then returned to FINRA, which appoints an arbitrator panel based on the combined rankings of the candidates not struck by the parties.
Initial Pre-Hearing Conference
Once an arbitration panel has been appointed, FINRA schedules an initial pre-hearing conference, which is usually held by telephone. During this call, the panel will schedule evidentiary hearing dates, establish discovery deadlines, set briefing and motion deadlines, and address other preliminary matters.
Discovery is the next phase of the arbitration process. This is simply the exchange of relevant documents and information between the parties. The process is governed by the FINRA Discovery Guide, which identifies certain documents as being “presumptively discoverable,” meaning that they must be turned over to the opposing party unless there is a good-faith objection to producing the document. Additional requests may be made for documents not otherwise listed in the Discovery Guide. Disputes about which documents should be produced are decided by the arbitration chairperson.
Twenty days before the arbitration hearing, the parties are required to exchange a list of witnesses who may testify and documents that may be offered into evidence. Witnesses usually include the Claimant, the broker, the broker’s manager, and expert witnesses. Additional witnesses who have direct knowledge of the facts at issue may also be included.
Assuming there has been no settlement, the process culminates in an arbitration hearing before the FINRA panel. The hearing usually takes place in a conference room at a hotel or office building in a city near the Claimant’s place of residence. The hearing is conducted much like a civil trial, with opening statements by the attorneys, direct and cross-examination of witnesses, and closing remarks recapping the evidence presented. Hearings typically last about three or four days, but can last longer in more complex cases.
Within 30 business days after the hearing, the arbitration panel issues a decision (officially called an “Award”). The panel may grant the Claimant’s request in full, deny it in full, or issue an award for a portion of the claimed damages. Arbitrators are not required to issue a written “opinion” explaining the rationale for their decision.
If damages are awarded, the Respondent has 30 days to either pay the Claimant or to file an appeal in state or federal court. Appeals are rarely filed and even more rarely successful.