Securities Arbitration Overview
In the United States securities industry, arbitration has long been the preferred method of resolving disputes between brokerage firms, and between firms and their customers. The securities industry uses a pre-dispute arbitration agreement, where the parties agree that if a dispute arises they will arbitrate any such dispute. The majority of all disputes involving brokerage firms are resolved in arbitration. Arbitration is a dispute resolution process, which is an alternative to the traditional lawsuit in court. Rather than have a matter decided by a judge and jury, participants to an arbitration proceeding have their dispute resolved by impartial persons who are knowledgeable in the areas in controversy. Those persons are called arbitrators.
Although arbitration and mediation have existed as dispute resolution mechanisms for well over 200 years, it was not until the decision of the United States Supreme Court, in Shearson v. MacMahon, 482 U.S. 220 (1987) that arbitration became the most widely used means of resolving disputes in the securities industry. Arbitration of broker-dealer disputes has long been used as an alternative to the courts because it is a prompt and inexpensive means of resolving complicated issues.
Arbitration, while being styled a “businessman’s” method of resolving disputes, is governed by state and federal law, as well as, by the rules of the arbitration forum itself. A host of arguments can, and do, arise in arbitration regarding the location of the hearings, the composition of the panels, which disputes can be arbitrated, what discovery can be obtained, and other disputes.
Most states have provisions in their civil practice rules for arbitration, which provide a basic framework for the arbitration and due process considerations, as well as, procedures for confirmation of an arbitrators’ award, a procedure which gives an arbitration award the force and effect of a judgment after a trial in a court. Arbitration is generally confidential, and documents submitted in arbitration are not publicly-available, unlike court-related filings. Securities arbitrations are primarily filed with the Financial Industry Regulatory Authority (“FINRA”).
The Basics of FINRA Arbitration
How long does an arbitration case proceed from beginning to end?
On average, an arbitration claim takes between 12-14 months to complete from the time the claim is filed until an award is rendered. The turnaround time varies, and can be affected by many factors, including the number of parties and witnesses involved, the complexity of the issues, the volume of discovery and the schedules of the parties and arbitrators. Additionally, the Claimant may request an expedited proceeding under certain circumstances.
Can cases be expedited under certain circumstances?
Various state statutes provide for speedy trials in civil actions involving seniors or seriously ill parties. FINRA recognized a need for expedited hearings in arbitrations involving such parties in its dispute resolution forum. Therefore, FINRA has implemented various measures to expedite arbitration proceedings in matters involving seniors or seriously ill parties.
Under these proceedings, FINRA Dispute Resolution staff endeavors to complete the arbitrator selection process, schedule the initial pre-hearing conference, serve the final award and determine whether the parties are interested in mediation on an expedited basis. Additionally, when a case is granted expedited status by FINRA, the arbitrators are encouraged to consider the health and age of a party when scheduling hearing dates, considering postponement requests, and setting discovery deadlines.
Although FINRA staff cannot shorten the time requirements set forth in the FINRA code of arbitration procedure, upon a party’s request, staff will expedite the administration of arbitration proceedings in matters involving seniors or seriously ill parties. In such situations, staff will begin the arbitrator selection process, schedule the Initial Prehearing Conference (IPHC), and serve the final award as quickly as possible. By mutual agreement, parties are also free to reduce the time requirements contained in the Customer Code. Staff will also determine promptly whether the parties are interested in mediation, which could further expedite resolution of the dispute.
FINRA encourages its arbitrators to be sensitive to the needs of seniors or seriously ill parties when scheduling hearing dates, resolving discovery disputes, and determining the reasonableness of postponements. If a party to the proceeding is a senior or seriously ill party, the arbitration panel is expected to press for hearing dates and discovery deadlines that will expedite the process, yet still provide a fair amount of time for case preparation.
How much does it cost to file an arbitration claim?
The cost of an arbitration case varies. The amount of the filing fee is affected by the amount of the claim, the number of hearing sessions, number of discovery motions, and any postponements. Please see the FINRA fee schedule below. Part of the fee is non-refundable and part is potentially refundable.
Filing Fees for Claims Filed by Customers, Associated Persons and Other Non-Members
|Amount of Claim
(exclusive of interest and expenses)
|$.01 to $1,000
|$1,000.01 to $2,500
|$2,500.01 to $5,000
|$5,000.01 to $10,000
|$10,000.01 to $25,000
|$25,000.01 to $50,000
|$50,000.01 to $100,000
|$100,000.01 to $500,000
|$500,000.01 to $1 million
|$1 million to $5 million
|Over $5 million
What claims are eligible for arbitration?
Arbitration cases are eligible to be heard in FINRA’s forum if the following criteria are met:
- The cases involve an investor and an individual or entity registered with FINRA, such as cases between investors and brokers, between investors and brokerage firms, and between investors and brokers and brokerage firms; and
- The cases involve an individual or entity registered with FINRA, such as cases between brokerage firms, between brokers, and between or among brokerage firms and brokers.
- The claim is filed within 6 years from the time the events giving rise to the dispute occurred.
- An investor must arbitrate at FINRA if the arbitration is required by a written agreement, the dispute is with a member of FINRA, which could be a broker and/or brokerage firm and the dispute involves the securities business of the broker and/or brokerage firm.
- A broker or a brokerage firm must arbitrate at FINRA if the dispute arises out of the securities business activities of a broker and/or a brokerage firm; and the dispute is between or among the following members of FINRA: brokerage firms, brokerage firms and brokers, or brokers.
What are the typical resolutions or results of arbitration?
The resolution of arbitration cases vary. Some cases are decided by the arbitrators; others are resolved by settlement of the parties or through mediation or negotiations. In a significant number of cases, investors receive monetary or non-monetary relief, either from an award rendered by the panel or a settlement of the parties.
A Claimant initiates an arbitration by filing a statement of claim that specifies the relevant facts and remedies requested.
Statement of Claim
The arbitration process begins with a party filing a Statement of Claim with FINRA. The party who files the Statement of Claim is called a Claimant. The party against whom the Statement of Claim is filed is called the Respondent. The Statement of Claim should provide the details of the dispute, including relevant dates, names of entities and individuals involved, and the type of relief requested and the Respondents from whom the Claimant is seeking relief or damages. The type of relief a Claimant may request, includes, but is not limited to, actual monetary damages, interest, and specific performance.
In addition to the Statement of Claim, a Claimant must also file an Arbitration Submission Agreement and pay the appropriate FINRA filing fees.
Once the filing requirements are met, FINRA will serve the Statement of Claim on the Respondents identified in the Statement of Claim and Arbitration Submission Agreement. If the filing requirements have not been met, FINRA will notify the Claimant of the deficiency, so that the Claimant may correct the problem. Once the Claimant corrects the deficiency, FINRA will serve the Statement of Claim on the Respondents identified in the Statement of Claim and Arbitration Submission Agreement.
Statement of Answer
A Respondent responds to an arbitration claim by filing an answer that specifies the relevant facts and available defenses to the statement of claim. An answer is a written document that specifies the relevant facts and available defenses to the Statement of Claim. A Respondent files an answer to the Claimant’s Statement of Claim. The Respondent must file with FINRA an answer within 45 days of receipt of the Statement of Claim. When answering a claim, a Respondent must serve every party, all Claimants and Respondents, with copies of the signed Submission Agreement and answer. In addition to this requirement, a Respondent must file an original and three copies of the signed Submission Agreement and answer with FINRA Dispute Resolution at the same time.
Arbitrator selection is the process in which the parties receive lists of potential arbitrators and select the panel to hear their case. The number of arbitrators appointed to a case depends on the amount and type of relief requested in the Statement of Claim.
For claims of $50,000 or less, FINRA will appoint one arbitrator and the claim will be subject to the simplified arbitration procedures. Generally, for claims of more than $50,000 and up to $100,000, the parties will select and FINRA will appoint one arbitrator, unless the parties agree in writing to three arbitrators. For claims of more than $100,000, the parties will select and FINRA will appoint three arbitrators.
FINRA uses the Neutral List Selection System (NLSS) to generate random lists of arbitrators from FINRA’s arbitrator rosters to appoint a panel. Generally, the arbitrator selection process begins after the answer is due, regardless of whether the Respondent answers a claim. After the answer is due, FINRA will generate a list of arbitrators, which will include their background information, called arbitrator disclosure reports. FINRA will send the lists and arbitrator disclosure reports to the parties for their review. Parties will review the information, strike any arbitrators from the lists that they do not want on their panel, and rank the remaining choices. After parties have ranked their choices, they submit their ranked lists to FINRA. FINRA combines the parties’ ranked lists and appoints the highest ranked available arbitrator from each list to serve on the panel.
Cases Decided by One Arbitrator
For claims of more than $50,000 up to $100,000, the arbitrator will be a public arbitrator selected from the public chairperson roster. FINRA will send one list with 10 chair-qualified public arbitrators to each of the parties. Each separately represented party may strike up to four arbitrators on the list, leaving at least six arbitrator names remaining on each party’s list. In the event no ranked public chairpersons remain on the combined list, or if all remaining public chairpersons are not available to serve, FINRA will randomly appoint a public chairperson.
Cases Decided by Three Arbitrators
For claims of more than $100,000 or for unspecified or non-monetary claims, the parties will select and FINRA will appoint three arbitrators. FINRA will send the parties three lists – one with 10 chair-qualified public arbitrators, one with 10 public arbitrators, and one with 10 non-public arbitrators. Each separately represented party may strike up to four arbitrators on each of the chair-qualified public list and up to four of the arbitrators from the public list, leaving at least six arbitrator names remaining on each party’s lists. By striking all of the arbitrators on the non-public list, any party can ensure that the panel will have three public arbitrators. FINRA will not appoint a non-public arbitrator to the panel who has not been selected by the parties. Rather, FINRA will appoint the next highest ranked available public arbitrator to complete the panel. If none of the remaining arbitrators on the public list are available to serve, FINRA will appoint the next highest-ranked arbitrator appearing on the chair-qualified public list to complete the panel. If none of the remaining arbitrators on the chair-qualified public list are available to serve, FINRA will randomly appoint a public arbitrator.
For arbitration claims that involve only industry parties and that do not contain a statutory discrimination claim, the arbitrators are selected by the parties as follows:
Disputes Between Brokers and Between or Among Brokerage Firms and Brokers
Cases Decided by One Arbitrator
For claims of more than $50,000 up to $100,000, the arbitrator will be a public arbitrator selected from the public chairperson roster, FINRA will send one list with 10 chair-qualified public arbitrators to each of the parties. Each separately represented party may strike up to four arbitrators on the list, leaving at least six arbitrator names remaining on each party’s list. In the event no ranked public chairpersons remain on the combined list, or if all remaining public chairpersons are not available to serve, FINRA will randomly appoint a public chairperson.
Cases Decided by Three Arbitrators
For claims of more than $100,000 for unspecified or non-monetary claims, FINRA will send three lists – one with 10 chair-qualified public arbitrators, one with 10 public arbitrators, and one with 10 non-public arbitrators. Each separately represented party may strike up to four arbitrators on each list, leaving at least six arbitrator names remaining on each party’s lists. In the event no ranked arbitrators remain on the list of the required classification, or if all remaining arbitrators of the required classification are not available to serve, FINRA will randomly appoint an arbitrator of the required classification.
Prior to the hearing, the arbitrators and parties meet telephonically to schedule hearing dates and resolve preliminary issues.
Initial Prehearing Conference
Once the panel is appointed, FINRA schedules the Initial Prehearing Conference (IPHC). The IPHC is the first time that the parties and arbitrators meet to set the schedule for the case and the IPHC is usually held by telephone. During this telephone conference, the arbitration panel will schedule evidentiary hearing dates, establish discovery deadlines, set briefing and motion deadlines, determine whether mediation is desirable, and address other preliminary matters.
Other Prehearing Conferences
After the IPHC, the arbitrators may need to convene additional prehearing conferences with the parties to resolve issues or disputes such as discovery and dispositive motions.
Discovery is the exchange of documents and information in preparation for the hearing.
Overview of the Discovery Process
The discovery process allows the parties to obtain facts and information from other parties to the arbitration in order to support their own case and prepare for the hearing. The Codes of Arbitration Procedure requires parties to cooperate with each other to the fullest extent practicable in the voluntary exchange of documents and information to expedite the arbitration process. The Code of Arbitration procedure contains rules that govern the discovery process, including making discovery requests, responding to such requests, objecting to discovery requests, and arbitrator authority to issue sanctions against parties for discovery abuses.
The Discovery Guide
For disputes in which an investor is a party, FINRA provides the Discovery Guide, which is a set of guidelines to help parties and arbitrators during the discovery process. The Discovery Guide contains lists of documents that the parties should exchange automatically.
Objecting to Discovery Requests
Any party may object to a discovery request if it asks the party to provide documentation and information that a party believes is, for example, overly burdensome, not relevant to the case, or involves confidential or privileged information. Objecting to a discovery request means the party that is the subject of the request argues that the party does not have to provide the documentation or information requested. The objection must clearly state in writing the request to which the party is objecting and why.
Motion to Compel Discovery
If the parties cannot agree on their own how to resolve any discovery dispute, then the party seeking additional documents or information may make a motion to compel the opposing party to produce the requested documents. In the motion, the requesting party should explain to the arbitrator why the discovery is relevant and necessary to the case and ask the panel to issue an order compelling production.
A motion is a request for the arbitrators to direct some act by issuing an order or ruling. For example, if a party wishes to force a party to produce documents or other information in discovery, the party must make a motion. A party may make motions in writing or orally during a hearing session. A motion is a request for the arbitrators to direct some act, whether by issuing an order or ruling. For example, a party must make a motion to change the hearing location or amend the Statement of Claim after the arbitration panel is appointed.
A party may make motions in writing or orally during a hearing session. However, FINRA requires that a party make an effort to resolve the matter with the other parties before making a motion, and to include a description of those efforts as part of the motion.
A subpoena is a legal document that compels a person or an entity to show up at the specified date, time and place to testify under oath. It is a useful tool to gather information that is relevant to the case. A subpoena duces tecum compels a person or an entity to produce the listed documents to the requesting party at a particular time and place.
In a FINRA arbitration, only arbitrators, not attorneys for the parties, may issue a subpoena to non-parties (persons or entities that are not Claimants or Respondents in the arbitration). If a party believes that the case requires information from third parties and wants the arbitrators to issue a subpoena, the party must make a written motion for the arbitrators to do so. The arbitrators will then determine whether the subpoena should be issued and how costs will be assessed.
Orders of Production or Appearance without Subpoenas
If a broker or brokerage firm that is a FINRA member, but is not a party to an arbitration case, has access to information that a party believes is relevant to the case, the panel may order the production of documents or appearance of witnesses upon a motion of a party without the use of subpoenas. Specifically, the panel may order the appearance of any employee or brokers of a member of FINRA; or the production of any documents in the possession or control of such persons or members.
If a party fails to produce documents or information required by a discovery order, the arbitrators may issue sanctions against that party. Sanctions could include assessing fees or penalties, including attorneys’ fees; prohibiting a party from admitting evidence; drawing an adverse inference against the party; and even dismissing a claim, defense, or even the entire case. The panel may also initiate a disciplinary referral against a registered broker or brokerage firm that is involved in the proceeding.
The parties and arbitrators meet in person to conduct the hearing in which the parties present arguments and evidence in support of their respective cases.
Location: Cases Involving Investors
The Director of FINRA will decide which of FINRA’s hearing locations will be the hearing location for the arbitration. Generally, the Director will select the hearing location closest to the investor’s residence at the time of the events giving rise to the dispute. The investor may seek to change the hearing location by obtaining the other party’s agreement or by writing to FINRA and requesting a change in location.
The hearing will take place in a conference room either at a regional FINRA office or in an office building or hotel arranged by FINRA.
Location: Cases Involving Industry Parties
The FINRA Director will decide which of FINRA’s hearing locations will be the hearing location for the arbitration. In cases involving an associated person, the Director will generally select the hearing location closest to where the associated person was employed at the time of the events giving rise to the dispute. In cases involving members only or more than one associated person, the Director will consider a variety of factors to determine the hearing location, such as whether the parties have a signed agreement to arbitrate.
The hearing will take place in a conference room either at a regional FINRA office or in an office building or hotel arranged by FINRA in the city where the hearing will take place.
Record of the Hearings
FINRA digitally records all hearings, and the digital recording is the official record of the proceeding, even if the recording is transcribed. Any party may make a stenographic record of the hearing. Even if a stenographic record is made, the digital recording will be the official record of the proceedings, unless the panel determines otherwise.
Elements of a Hearing
Testimony and Evidence
During the arbitration hearing, a Claimant seeks to prove the claims that are alleged in the Statement of Claim, and Respondents try to establish any defenses to those claims and seek to prove any counterclaims.
Arbitrators usually accept two types of proof: oral testimony by witnesses and documentary evidence. Parties are required to inform the other party or parties of witnesses they intend to call and provide copies of any documents or other materials that they plan to use at the hearing as evidence. Also, parties need to arrange for witnesses and all documentary evidence to be available for presentation at the hearing. Witnesses will testify under oath.
At the hearing, all parties will be present in the room with the arbitrators. The arbitrators open the hearing by reading from a script prepared by FINRA to cover administrative matters. Each party then has the option to give an opening statement outlining what it intends to prove during the hearing.
Direct and Cross Examination
Generally, each Claimant then calls witnesses to testify on his or her behalf as to facts within the witnesses’ personal knowledge. In addition, each Claimant can ask expert witnesses who have specialized training or knowledge to testify as to their opinion on a technical matter to help the arbitrators draw conclusions and render a decision. The Claimant conducts a direct examination, or asks questions of any witnesses he or she calls to testify.
Each Respondent may ask questions of Claimant’s witnesses, too, during what is known as “cross examination,” and the arbitrators may also question these witnesses. The Respondents may use rebuttal evidence to contradict the Claimant’s arguments or evidence.
Once the Claimants have presented their case, the Respondents also have the right to call fact and expert witnesses, and offer relevant exhibits to present their case to the arbitrators. Each Claimant may cross-examine the Respondents’ witnesses and the arbitrators may also question these witnesses. The Claimants may use rebuttal evidence to contradict the Respondents’ arguments or evidence.
Parties may offer into the record as exhibits any documents they would like the arbitrators to consider as evidence. An exhibit is a document produced and shown to an arbitration panel during a hearing. Parties may argue that any evidence presented by another party should not be considered in the arbitrators’ decision by objecting orally at the hearing. After considering the objecting party’s reasons for excluding the evidence, the arbitrators will examine the documents presented to determine if they will be admitted into evidence and into the case record.
Once all parties have presented all of their evidence on any claims and counterclaims, each party generally makes a closing statement, summing up the evidence and arguing to the panel what they believe they have proven and what they contend the other side has not proven.
Claimants will usually repeat their request for damages and any other relief, and provide specific calculations supporting their request for a damages amount.
Order of a Hearing
If arbitrators hold a hearing, it will be conducted in this order generally, although the arbitrators have authority to change the order:
- Swearing in of arbitrators, parties and witnesses;
- Opening statement from each party;
- Claimants presentation of facts of the case to arbitrators, including documents and live or written testimony;
- Respondents presentation of facts of the case to arbitrators, including documents and live or written testimony;
- Presentation of any counter-claims, cross-claims or third-party claims;
- Rebuttal evidence;
- Closing statements;
- Scheduling post-hearing submissions before closing the record; and
- Arbitration panel closes the record.
Decision & Awards
After the conclusion of the hearing, the arbitrators deliberate the facts of the case and render a written decision called an award.
After closing the record, the arbitration panel considers all of the evidence, deliberates together, and decides what relief the Claimant is entitled to, if any.
In a three-arbitrator panel, an award is based on the vote of a majority of the arbitrators; a unanimous decision is not required.
Awards must be in writing, but arbitrators are not required to write opinions or provide explanations or reasons for their decision. The panel will issue an award within 30 business days from the date the record is closed.
All awards rendered under the Codes are final and are not subject to review or appeal, except under limited circumstances. In an award, the panel will decide whether to assess any costs and forum fees against any party, and how to allocate those costs and fees among the parties.
Once the award is signed by a majority of the arbitrators, FINRA will send copies of the signed award to each party or representative of the party. FINRA makes all arbitration awards publicly available for free by posting them on Arbitration Awards Online.
An award will contain the following information:
- Names of the parties;
- Names of the parties’ representatives, if any;
- An acknowledgement by the arbitrators that they have each read the pleadings and other materials filed by the parties;
- A summary of the issues, including the types of any security or product in controversy;
- Damages and other relief requested;
- Damages and other relief awarded;
- A statement of any other issues resolved;
- Allocation of forum fees and any other fees allocable by the panel;
- Names of the arbitrators;
- Dates the claim was filed and the award rendered;
- The number and dates of hearing sessions;
- Location of the hearings; and
- Arbitrator signatures.
Challenges to an Arbitration Award
FINRA does not have an appeals process through which a party may challenge an award. This means that FINRA does not hear appeals on arbitration awards. However, under federal and state laws, there are limited grounds on which a court may hear a party’s appeal of an arbitration award. Specifically, the law permits a district court to vacate or overturn an arbitration award if it finds that:
- the award was procured by corruption, fraud, or undue means;
- there was evident partiality or corruption in the arbitrators;
- the arbitrators were guilty of misconduct in refusing to postpone the hearing, even in light of sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced;
- the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made;
- the arbitrators disregarded a clearly defined law or legal principle applicable to the case before them; or
- there is no factual or reasonable basis for the award.
Collecting an Award or Settlement
Many arbitration cases end with a settlement between parties, either through direct negotiation or through mediation. Others end with an award. If a Claimant is awarded damages, the Respondent must pay within thirty days of receiving the written award, unless the Respondent files a motion to vacate. A motion to vacate is a challenge to the validity of the award. Courts decide these motions and can either vacate or overturn, confirm, or modify the award. A confirmed award stands as issued by the arbitrators. An award vacated by the courts is voided.
Failure to Pay an Award or Settlement
Under FINRA rules, industry parties must pay arbitration awards within 30 days or risk suspension by FINRA. FINRA rules specifically contain expedited suspension procedures that address a brokerage firm’s or broker’s failure to pay FINRA arbitration awards. FINRA can suspend or cancel the registration of a broker or brokerage firm if that party does not comply with an arbitration award or settlement related to an arbitration or mediation.
Hanley Law is dedicated to prosecuting cases on behalf of investors through FINRA arbitration. If you have lost money as a result of the misconduct of your broker or brokerage firm you may be able to recover your financial losses. Contact us today for a free initial consultation.