Securities Arbitration

Arbitration is a process of resolving disputes between two parties. It is an alternative to traditional lawsuits. Instead of a judge or jury, the dispute is resolved by one or three impartial panels of arbitrators selected by the parties.

The Award rendered by these arbitrators is final and binding.

Arbitration Clauses

Securities arbitration has become the most often-used method of resolving disputes in the securities industry. Brokerage firms usually include arbitration clauses in agreements signed with new clients. This mandates their clients to use arbitration forums like FINRA-DR to resolve any dispute.

All documents and proceedings of arbitration are confidential, unlike court suits that are publicly accessible.

However, whenever there is an award, FINRA posts it in its Arbitration Awards Online Database, which is publicly available. All parties are obliged to abide by the award but can also challenge it in court within the statutory time period.

Common Security Arbitration Cases

FINRA’s Dispute Resolution Statistics reveal fifteen common reasons customers drag their brokerage firm to the arbitration panel. They include:

• Breach of Fiduciary Duty
• Negligence
• Breach of contract
• Failure to supervise
• Misrepresentation
• Suitability
• Omission of Facts
• Fraud
• Violation of Blue Sky Laws
• Breach of Regulation
• Manipulation
• Elder Abuse
• Unauthorized Trading
• Error-charges
• Churning

Arbitration Process

Three types of arbitration forums are available for securities-related disputes: FINRA Dispute Resolution (FINRA-DA), the American Arbitration Association, and JAMS. FINRA-DR is the most used, probably because it is the least expensive.

Statement of Claim

The first step in starting an arbitration is filing a statement of claim with the arbitration forum of your choice. A filing fee is charged based on the amount in dispute.

Submission Agreement

The parties involved are required to individually sign a Uniform Submission Agreement, which confirms their approval for the dispute to be resolved by the arbitrators.

Meanwhile, the refusal of a party to sign the agreement does not necessarily prevent the arbitrators from proceeding with the arbitration. Such action may even antagonize the arbitrators against the unwilling party.

Answers and Counter-Claims to Allegations

The arbitrators will request the accused to respond to the allegations. The response does not have a definite format and can be a narrative.

Most arbitration will not accept terse words stating an outright denial, such as “I didn’t do it.” The respondent needs to back up their claims with an explanation of why.

Hearing Location

After receiving and reviewing the response and counter-claims from the parties, the arbitration forum will notify them of a location for the hearing.

FINRA’s procedural guidelines typically favor customers’ locations. This means the hearing location will be closer to the customer’s location.

Fortunately for broker-dealers, FINRA is now incorporating the use of video conferencing tools like Zoom for hearings, saving them the cost of flying witnesses and attorneys to the hearing location.

Arbitrator Selection

The size of a claim determines the process of arbitration and the number of arbitrators assigned. A single arbitrator can decide claims up to $50,000 in one of three ways: a regular hearing where evidence is presented in person; a phone hearing that incorporates many aspects of a standard arbitration hearing; or a “paper” hearing where an arbitrator makes a decision based solely on the documents submitted.

A single arbitrator will also decide claims above $50,000 but lesser than or equal to $100,000 unless both parties agree in writing to a three-arbitrator panel.

For claims over $100,0000 or an unspecified amount, the hearing is in-person and decided by a panel of three arbitrators unless both parties agree to a single arbitrator.

Hearing

Arbitrations hearing can last for four consecutive days. The date is scheduled after considering the availabilities of the arbitrators, parties, attorneys, and witnesses. It is communicated months in advance.

Award

Arbitrators base their judgment not solely on evidence but also on insignificant and emotional points. They pronounce their verdict using common sense – a legal and practical sense combination.

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 is typically issued 30 days from the day the record is closed.

An Award from a FINRA arbitration forum will contain the following information:

• Names of the parties;
• Names of the parties’ representatives, if any;
• An acknowledgment by the arbitrators that they have each read the pleadings and other materials filed by the parties;
• A summary of the issues, including the type(s) 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;
• Name(s) of the arbitrator(s);
• Dates the claim was filed and the award rendered;
• The number and dates of hearing session(s);
• Location of the hearings; and
• Arbitrator signatures.

Although the Award is final, it can be appealed if there is evidence of malpractice established against the arbitrators. Such a case will be heard by a state or federal court.

Why You Should Hire a Lawyer for Securities Arbitration

FINRA recommends investors should consider hiring an attorney to represent them during the arbitration proceedings to provide direction and advice.

Another reason to consider hiring an attorney is that you will be dealing with your brokerage firm’s attorney during the arbitration. They are typically more knowledgeable in the field than you. But hiring an attorney level the playing ground.

An attorney with experience handling securities litigations will help you determine the best forums for your claim and also help you decide the best way to recover your investment losses. 

Get in touch with an experienced securities attorney at S.A. Law Group today for a free consultation, or call us at (202)444-4222.