The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to help educate investors about the arbitration and mediation processes involving a customer dispute with a broker-dealer.
The Financial Industry Regulatory Authority (“FINRA”) provides the main forum for resolving securities-related disputes between customers and broker-dealers. Arbitration and mediation are two distinct ways to resolve disputes. You can find a wealth of information on arbitration – including governing rules, steps for initiating an arbitration proceeding, and any applicable forms – at FINRA’s Arbitration and Mediation homepage.
Arbitration, a form of alternative dispute resolution, is a process to resolve disputes outside the court system. In arbitration, the parties agree to have their dispute heard by a panel of one or more arbitrators and agree to be bound by the panel’s decision.
Disputes in the securities industry are typically handled through arbitration rather than through a lawsuit in court. This is because most account opening agreements between broker-dealers and their customers contain terms requiring customers to arbitrate any disputes with their broker-dealers. If no agreement to arbitrate exists, a broker-dealer may not compel its customer to arbitrate.
Arbitration
The Code of Arbitration Procedure allows a customer to compel a broker-dealer or registered representative to arbitrate a dispute at the customer’s request.
Arbitration is Different from a Lawsuit in Court
Arbitration, like a lawsuit in court (litigation), offers a final means of resolving a dispute. However, it is different from litigation in significant ways. For instance:
- Arbitration may be cheaper and quicker than litigating a dispute in court. There are fees associated with arbitration, described on FINRA’s website at Potential Fees in Arbitration Cases.
- Instead of a judge or jury, the parties select a neutral arbitrator or panel of arbitrators to decide if wrongdoing occurred and, if so, how to compensate the wronged party for it.
- As in litigation, an arbitration decision is binding on the parties. Unlike in litigation, arbitration decisions can only be appealed on limited grounds. Thus, arbitration decisions are rarely overturned.
- FINRA arbitrators must follow FINRA’s Code of Arbitration Procedure and Code of Ethics. Arbitrators are not required to follow state or federal rules of evidence and are not bound by legal precedent.
- In contrast to litigation, arbitrators generally do not provide a written decision that explains their rationale, unless the parties agree to receive a written decision before the first hearing.
- Parties may obtain documents from each other in arbitration, but the discovery process is more streamlined than in litigation.
Simplified Arbitration in the FINRA Forum
In the FINRA forum, claims of $50,000 or less are subject to rules governing simplified arbitrations. For simplified arbitrations, customers may choose one of three ways to present their case to an arbitrator:
- No Hearing
If no hearing is requested, a single arbitrator will decide the case based on the parties’ pleadings and other written submissions.
- Special Proceeding
A Special Proceeding provides an abbreviated telephonic hearing that incorporates many aspects of a regular arbitration hearing (discussed below). However, Special Proceedings differ from regular hearings in the following ways:
• An arbitrator will hear the case by telephone conference call unless all parties agree to another method of appearance;
• Claimants collectively and respondents collectively each have two hours to present their cases and one-half hour for rebuttal and closing statements;
• The hearing will be completed in one day with no more than two hearing sessions;
• The parties may not question an opposing party’s witnesses; and
• The parties may not call an opposing party as a witness.
For more detailed information about Special Proceedings, please see FINRA’s Regulatory Notice 18-21.
- Regular Hearing
The parties and arbitrator will appear at an in-person hearing and follow the regular provisions of FINRA’s Code of Arbitration Procedure.
Arbitrator Selection in the FINRA Forum
Under FINRA rules, for a claim of $50,000 or less, the arbitration panel will consist of one arbitrator. For a claim between $50,000 and $100,000, the arbitration panel will consist of one arbitrator, unless both parties agree in writing to a three-arbitrator panel. For a claim over $100,000, or if a party requests unspecified or non-monetary damages, the panel will consist of three arbitrators, unless both parties agree to a single arbitrator.
Single arbitrator panels consist of one “public” arbitrator, unless the parties agree in writing to use a “non-public” arbitrator. Generally, a public arbitrator is an arbitrator who is not affiliated with the securities industry, either through employment in the securities industry, or the professional services performed on behalf of the securities industry. In contrast, a non-public arbitrator is affiliated in some way with the securities industry.
The parties will select their arbitrator(s) by ranking, in order of preference, the arbitrators from a list (or lists) randomly generated from FINRA’s roster of arbitrators by a computer algorithm, FINRA’s Neutral List Selection System (NLSS). In selecting a three-arbitrator panel, the NLSS provides the parties with three lists: a list of public arbitrators, a list of non-public arbitrators, and a list of public arbitrators eligible to serve as the chairperson of the panel. The parties can either strike or rank in order of preference the arbitrators in each list.
If either party strikes all of the arbitrators on the non-public list, all three arbitrators will be selected from the public arbitrator and chairperson lists, resulting in an all-public arbitrator panel. Otherwise, the panel will be composed of two public arbitrators and one non-public arbitrator. If the parties fail to provide their arbitrator rankings within the requisite time period, they will be viewed as having no arbitrator preference, and the panel will be composed of two public arbitrators and one non-public arbitrator. Additional details regarding the rules for panel selection are available in FINRA’s Arbitrator Appointment Frequently Asked Questions or FINRA’s How Parties Select Arbitrators.
Arbitration Process and Award
During a process called “discovery,” the parties exchange documents and gather information in preparation for an evidentiary hearing. At the hearing, the parties and arbitrators meet in person to present evidence, arguments, and witness testimony in support of their cases. The parties may settle their dispute at any time – even after the evidentiary hearing begins.
Broker-dealers cannot use confidentiality provisions to prohibit or restrict an individual from communicating with, or responding to, an inquiry from the Commission, FINRA, or other federal or state regulatory authority regarding a possible securities law violation. If broker-dealers use confidentiality provisions in settlement agreements, discovery stipulations in arbitration proceedings, or any other documents to prohibit or restrict a customer or any other person from communicating with, or responding to, an inquiry from the Commission, FINRA, or other federal or state regulatory authority regarding a possible securities law violation, FINRA may charge them with violating FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade). More information on the restrictions regarding confidentiality provisions in settlement agreements and the discovery process is available in FINRA’s Regulatory Notice 14-40.
If the parties do not reach a settlement, the arbitrators will issue a decision called an “award” – usually within 30 days of the hearing’s conclusion. A majority of a three-arbitrator panel must sign off on any award. The panel generally will not provide the parties with a written explanation of the award unless both parties jointly request a written explanation at least 20 days before the arbitration hearing begins. The written explanation need not include citations to legal authority or any breakdown of the final damage calculation.
An arbitration award is final, binding on both parties, and cannot be appealed. A party may, however, file a motion to vacate or overturn an award in limited circumstances – for example, where a party can demonstrate that an arbitrator was biased. As a result, arbitration decisions are rarely overturned. However, if a party wants to challenge the panel’s decision, under the Federal Arbitration Act, the party generally must do so within three months. For additional information about challenging the panel’s decision please read our publication “Arbitration, Challenging a Decision, SEC Role.”
FINRA Dispute Resolution
Numerous exchanges have agreed to use FINRA’s dispute resolution forum to resolve disputes arising between customers and members of their respective exchanges. If you have a securities-related dispute with a broker-dealer that is a member of one of the following exchanges, that broker-dealer may be required to arbitrate disputes in FINRA’s forum, upon your request:
- Cboe BATS EDGA Exchange, Inc., Cboe BATS EDGX Exchange, Inc., Cboe BATS BZX Exchange, Inc., Cboe BATS BYX Exchange, Inc., Cboe C2 Exchange, Inc., and Cboe Exchange, Inc.
- BOX Options Exchange, LLC
- IEX Group
- MIAX Options Exchange (MIAX)
- Municipal Securities Rulemaking Board (MSRB) (a self-regulatory organization for municipal securities registrants)
- NASDAQ, BX, PHLX, Nasdaq ISE, LLC; Nasdaq GEMX, LLC, and Nasdaq MRX, LLC
- New York Stock Exchange, NYSE American, LLC, NYSE Chicago, NYSE National and Arca
- Members Exchange (MEMX)
FINRA Fees
A customer filing a claim in the FINRA arbitration forum must pay an initial filing fee, which is calculated based on the amount in dispute. This fee ranges from $50 to $2,300. However, the Director of Arbitration may defer payment for all or part of the filing fee based on a showing of financial hardship.
Hearing session fees are also assessed for each hearing session. These fees are calculated based on the amount in dispute as well as the number of arbitrators at the hearing. The arbitrators will determine each party’s respective portion of fees for each hearing session.
In addition to the foregoing, the parties may be responsible for other fees, such as adjournment fees, discovery motion fees, contested subpoena fees, explained decision fees, and administrative costs. More information on arbitration fees is avaiable on FINRA’s Arbitration Fees homepage.
How to File an Arbitration Claim in the FINRA Forum
You can find information on the steps for initiating an arbitration proceeding and any applicable forms at FINRA’s Arbitration and Mediation homepage. You can also obtain information about how to file an arbitration claim by contacting FINRA staff at one of the following FINRA Dispute Resolution regional office locations:
Northeast Region:
FINRA Dispute Resolution
One Liberty Plaza
165 Broadway, 27th Floor
New York, NY 10006
(212) 858-4200
Western Region:
FINRA Dispute Resolution
300 S. Grand Avenue
Suite 1700
Los Angeles, CA 90071
(213) 613-2680
Southeast Region:
FINRA Dispute Resolution
Boca Center Tower 1
5200 Town Center Circle
Boca Raton, FL 33486
(561) 416-0277
Midwest Region:
FINRA Dispute Resolution
55 West Monroe Street, Suite 2600
Chicago, IL 60603-1002
(312) 899-4440
How Long Do You Have to File a Claim in the FINRA Forum?
You must act promptly or you may lose your right to seek a remedy or recover funds. Generally, the rules governing arbitration allow a claim to be filed within six years of the occurrence or event giving rise to the cause of action. However, time restrictions, called “statutes of limitations,” may be shorter than six years. That is, the firm or person against whom you filed a claim may defend it by arguing that a statute of limitations that is shorter than six years precludes bringing your claim. To determine whether any statute of limitations may apply to your case, and to discuss your rights and remedies, we suggest that you contact an attorney.
What Happens if an Award or Settlement is Not Paid?
Your broker-dealer or registered representative must pay a monetary award within 30 days of receipt, unless either has a defense to non-payment. FINRA may institute expedited proceedings to suspend or cancel FINRA membership of any broker-dealer or suspend or bar any registered representative who fails to pay an arbitration award from associating with a FINRA member. Unless a broker-dealer or registered representative has a valid defense to non-payment, the threat of suspension, cancellation, or bar directed at firms and individuals who are still doing business can be an effective tool to compel payment of an award or settlement. FINRA can institute expedited proceedings against a registered representative who is no longer associated with a FINRA member for a period of two years after the registered representative ceased to be associated with a member.
If a broker-dealer or registered representative fails to pay an arbitration award, the customer may take the award to court and have it converted to a judgment. The customer may then attempt to collect on the judgment using the court’s collection procedures. A list of broker-dealers and registered representatives with unpaid arbitration awards is available on FINRA’s website.
Caution. If your broker-dealer or registered representative goes out of business or declares bankruptcy, you may not be able to collect on an award if an arbitration panel rules in your favor, or on a settlement if you reach an agreement with your broker-dealer or registered representative through mediation (discussed below), or through direct negotiation. For more information on unpaid awards, please review FINRA’s Discussion Paper, “FINRA Perspectives on Customer Recovery.”
Check Out Your Broker-Dealer and Registered Representative. You should investigate the disciplinary history of your broker-dealer or registered representative before (and occasionally after) you invest. For tips on how to do this, please read our Investor Bulletin “How to Select an Investment Professional” on Investor.gov.
How Do You Find a Lawyer Specializing in Securities Disputes?
If you need help finding a lawyer who specializes in securities disputes, read our publication entitled “Arbitration, How to Find a Lawyer Specializing in Securities” or FINRA’s publication entitled “How to Find an Attorney.”
What if You Cannot Hire a Lawyer?
FINRA’s Code of Arbitration Procedure does not require customers to be represented by lawyers in an arbitration. Customers may represent themselves, or, in certain circumstances, may be represented by non-lawyers. However, because broker-dealers and their registered representatives typically retain legal counsel in FINRA arbitrations, it is advisable for customers to similarly seek the assistance of an attorney in preparing their case.
Certain law schools in the District of Columbia, Florida, Illinois, Nevada, New Jersey, New York, and Pennsylvania provide some investors with legal representation through arbitration/mediation clinics. These clinics may be able to help investors who have smaller claims and who are unable to hire a lawyer. You can read more about these clinics in the SEC’s Fast Answers regarding Arbitration/Mediation Clinics.
Mediation
Mediation, another form of alternative dispute resolution, is a voluntary, non-binding process that allows parties to work with a neutral mediator to try to quickly resolve differences. To start the mediation process, the parties must consent to mediate by written agreement, such as the FINRA Mediation Submission Agreement, and to be bound by a specific procedural code, such as the FINRA Code of Mediation Procedure. The mediator may either be selected by the parties or by the Director of Mediation for FINRA.
During the mediation, the mediator acts as a neutral facilitator between the parties during separate and/or joint sessions. The mediator has no authority to determine issues, make decisions or otherwise resolve a dispute. The mediation process is private and confidential. Both the parties and the mediator are prohibited from disclosing and using any information obtained or disclosed during the mediation as evidence in any other arbitration or lawsuit.
Mediation may result in a settlement that is mutually agreeable to all parties in the dispute, avoiding the need to arbitrate all or any part of the disputed issues. Parties who are unable to resolve a dispute through mediation may still submit their dispute to arbitration. However, absent an agreement between the parties, mediation will not generally stay or delay a pending arbitration.
Additional Resources
FINRA’s Arbitration and Mediation homepage has more information about mediation.
For additional investor educational information, see the SEC’s website for individual investors, Investor.gov.
Call OIEA at 1-800-732-0330, ask a question using this online form, or email us at Help@SEC.gov.
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Source: SEC
