Investors sometimes get into disputes with their broker-dealers over how their money has been invested. Your broker may have gone against your wishes, for example, by trading against your established investment plan. Or, your broker may have recommended an investment that wasn’t appropriate for you and which then underperformed on its promise.
When an investor believes that a broker or dealer breached their contract or another legal duty, a dispute arises. However, it is routine in the securities industry for investment contracts to contain mandatory arbitration clauses. This means that the investor and the broker-dealer are required to resolve any disputes through arbitration.
That may concern you, if you’re unfamiliar with arbitration or if you worry that an arbitrator might be more sympathetic to the broker-dealer’s point of view. Is arbitration an effective way to resolve securities disputes?
It has its pros and cons, but the system is set up to be fair. Arbitration of securities complaints is generally done through the Financial Industry Regulatory Authority (FINRA). FINRA is a non-governmental regulator for the securities industry and has the authority to sanction broker-dealers and brokerage firms who violate securities regulations.
4 benefits of arbitration over a court case
Arbitration is a form of alternative dispute resolution – alternative to courtroom litigation. The parties select one or more neutral third-party arbitrators to rule on their dispute. The arbitrator or panel of arbitrators have the power to determine whether wrongdoing occurred and order sanctions and/or compensation. Here are four benefits over litigation:
It’s quicker and cheaper. Although there are fees for arbitration, they are usually significantly lower than the costs of litigating a dispute. And, since arbitrators are private parties, not judges, they can be much more flexible about scheduling. Moreover, the process of arbitration tends to take less time than a trial might because the process is simpler.
It’s final. FINRA arbitration is binding, which means it is generally not subject to appeal.
Discovery is streamlined. The process of discovery is where the parties obtain evidence from the other side. This occurs in arbitration, but the process is easier and less time-consuming.
FINRA arbitrators are neutral and follow a code of ethics. Unless you agree otherwise in writing, your FINRA arbitrator will not be a member of the securities industry.
You still get a lawyer in arbitration
Although the arbitration process is less formal than courtroom litigation, it is still an adversarial process where each side presents evidence and arguments. Therefore, you will have an attorney to represent you.
FINRA arbitration is the standard way to resolve securities law disputes between broker-dealers and their customers. Be sure to work with an attorney who is experienced in the process.