In part 1 of this post, we talked about the role of the Financial Industry Regulatory Authority (FINRA) as a forum where investors can arbitrate claims of negligence, improper investment or fraud against their brokers or brokerage firms for problematic investments that have resulted in financial harm. As we explained, the investor-claimant may seek to recover from the broker-respondent monetary losses plus interest and potentially nonmonetary relief through the FINRA arbitration process.
By the numbers
According to FINRA, in about 69% of arbitrated cases, the parties settle their disputes through negotiation or mediation before the process concludes, while about 18% proceed to a final award. The investors withdraw about 9% of their FINRA claims, with the remainder closing for other reasons such as bankruptcy of a party.
What does FINRA arbitration look like?
FINRA has many procedures that are similar or the same as those seen in a courtroom, but they tend to be less formal. Rules that the U.S. Securities and Exchange Commission (SEC) approved govern FINRA arbitrations.
Basics aspects of the process:
- The investor has six years from the time of financial injury to initiate arbitration by filing a claim that lays out the facts of the dispute and the remedies the claimant requests.
- The respondent broker or brokerage firm files an answer to the claim that includes their defenses.
- Either party may bring related counterclaims, crossclaims or related claims against third parties.
- The parties select the arbitrator or arbitrators to decide the case.
- The arbitrators hold a telephone prehearing conference with the parties.
- The parties conduct discovery, which is the legal process whereby the parties exchange documents and information from other sources relevant to the case.
- At the hearing before the arbitrators, the parties present their arguments, examine witnesses and submit documentary evidence. In cases about complex investments or transactions, a party may use an expert witness who can clarify the issues. Arbitrators may also question witnesses.
- Arbitrators will issue a written decision within thirty days of the record closing, including any relief awarded, including allocation of fees and costs. The arbitrator does not have to include their reasoning for the decision and award, but if the parties both want the reasoning included in the decision, they must request it at least 20 days prior to the first hearing.
Consider FINRA arbitration carefully
Advantages of FINRA arbitration can include:
- The process may be faster and less expensive than a lawsuit.
- Arbitration is usually more private than a court proceeding.
It is also important to weigh the potential downsides of arbitration. Specifically, options for review of an arbitration award in court are narrow, so the arbitration decision is usually the final one without opportunity for appeal.
Impact of COVID-19
We should note that as of this writing on Oct. 7, the FINRA website states that it has postponed all face-to-face arbitration proceedings until Dec. 4, 2020. An allowable exception is that if the arbitrators and parties agree to an in-person hearing based on “their own assessment of public health conditions,” the proceedings may be in person if everyone involved follows state and local pandemic orders.
Another option is remote proceedings. The arbitrators may order that proceedings be held via telephone or Zoom or the parties can agree to proceed that way.