The Finra Arbitration Process – Investor Disputes Against Brokers

by Robert Neary | March 2019
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Millions of investment transactions take place every day in the U.S. and investors often use brokers to manage their investments. Brokers—either firms or individuals—make their money from commissions. With the amount of activity and money being invested daily, there is bound to be a high potential for a broker to defraud or otherwise take advantage of investors. What recourse do investors have when their brokers mismanage the investments (often for their financial gain)?

Typically, investors enter into agreements with brokers that have an arbitration clause. Should a dispute arise regarding the broker’s investment decisions, the clause will preclude the investor from filing a lawsuit against the broker in court and instead requires the dispute to be decided in arbitration. These arbitrations are typically conducted by the Financial Industry Regulatory Authority or “FINRA.”

FINRA is a self-regulatory organization (SRO) that polices various aspects of the securities industry and oversees more than 4,500 brokerage firms in the U.S. Unless a different SRO regulates a brokerage, FINRA must license all investment brokers. FINRA is sanctioned by the SEC to discipline registered representatives and member firms that fail to comply with securities laws and FINRA’s own rules and regulations.

The FINRA Arbitration Process

If an investor believes that his or her broker defrauded or otherwise took advantage of them, they can file a claim to be arbitrated with FINRA. An investor who initiates the arbitration with FINRA is called the Claimant, and the broker or brokerage firm is called the Respondent. The Claimant starts the arbitration process by filing a “Statement of Claim.” The Statement of Claim is similar to a Complaint filed in court and should detail the broker’s fraud and other allegations and set forth the various rules, regulations, or laws that the broker violated. FINRA will serve the Statement of Claim on the Respondent(s), and the arbitration process begins.

The FINRA arbitration process is similar to filing a lawsuit in court but is generally a less formal process and has some important differences. For example, the parties do not usually serve interrogatories or take depositions during the “discovery” phase of the arbitration. The parties can serve document requests and FINRA publishes a list of documents that are presumptively discoverable. There are also limits placed on the Respondent’s ability to file a motion to dismiss before providing the Claimant with documents.

After the Statement of Claim has been served and the Respondent’s attorneys have made their appearances in the arbitration, the parties will have to choose their arbitrators. The arbitration panel will consist of either a single arbitrator or a panel of three depending on the amount of damages requested in the Statement of Claim. Disputes that are $50,000 or less will be decided by a single arbitrator and may be decided on the parties’ papers without a hearing. FINRA provides each side a list of arbitrators to choose from. The list contains both public and non-public arbitrators. Public arbitrators have no affiliation with the securities industry and non-public have some connection—usually because they once worked in the industry or have clients in the industry. The lists include the ten-year biographies and award histories for the arbitrators. Each side can strike up to four arbitrators and then must rank the remainder. FINRA will match up the parties’ lists and appoint the highest ranking candidates.

The arbitration hearing will be assigned to one of FINRA’s seventy-one locations in the U.S. and is based on where the Claimant lived at the time of the dispute. There are opening and closing arguments and direct and cross exam of witnesses during the hearing but rules of evidence are looser and arbitrators can consider hearsay. Unlike a jury trial, the arbitrators play a dual role and are both the finders of fact and the judges on matters of law. An arbitration award before FINRA is final and binding on the parties and only subject to court review on a limited basis. The time from filing a Statement of Claim to a resolution before the FINRA arbitration panel averages approximately 14 months.

A few final points if you are an investor contemplating bring a claim against your broker. The statute of limitations to file a FINRA arbitration is six years. However, there may be shorter periods for certain claims based on state law. Also, if you would like to bring claims against additional companies that are not registered with brokers (e.g. affiliates or unregistered brokers), you will only be able to pursue them in FINRA arbitration if they voluntarily submit to FINRA jurisdiction. Otherwise, you will need to file a Statement of Claim against the registered broker before FINRA and a Complaint against the other companies in court. Finally, while FINRA allows an investor to proceed with the arbitration pro se, it is wise to consider hiring an attorney. Having your own attorney to help navigate the process will go a long way towards recovering the funds that were lost because the brokers or brokerage firms are almost guaranteed to have lawyers that are very familiar with the arbitration process.