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When a dispute occurs between a customer and a securities broker, financial advisor, or other professional, it is highly likely that the parties will go to arbitration or mediation through the largest regulator of securities firms, FINRA— the Financial Industry Regulatory Authority. Many financial agreements include a clause that requires the parties bring any disputes to arbitration and forego the right to a jury trial. Both investors and industry professionals can learn to mitigate risks and plan for optimal resolutions by understanding key factors of the FINRA arbitration process.
Arbitration is fundamentally different from a trial by jury. An arbitral award is final. There may be very limited avenues for a party to appeal an award to a court, but these are very uncommon. In most cases, the parties will have a final resolution a few weeks after a hearing. But more often than not, the parties settle before a hearing takes place.
For all of the procedures below, see the FINRA Rules set out in the Code of Arbitration Procedure for Customer Disputes, available at www.finra.org.
Statements of Claim and Answer
The FINRA arbitration process begins when a claimant brings a Statement of Claim. Like a complaint in traditional litigation, the Statement of Claim lists the investor’s allegations and contains a statement of the legal basis for these claims. The Claimant must file a Submission Agreement with the Statement of Claim.
The Respondent—usually the industry professional—responds with an Answer within 45 days after receipt of the Statement of Claim. The Respondent must also file a Submission Agreement. Motions to dismiss a claim before the hearing are discouraged and may be made only in limited circumstances: (1) if the non-moving party previously released the claims in dispute by a signed settlement agreement and/or written release; or (2) if the moving party was not associated with accounts, securities, or conduct at issue. Unlike litigation, a Respondent may not file a motion to dismiss before the answer is filed. (FINRA Rule 12504.)
Often, the Statement of Claim and Answer may be the only written documents a Panel reviews before the hearing. The parties may submit pre-hearing briefs, but these are not required. For this reason, the parties should make every effort to have the themes of their case presented effectively in their Statement of Claim or Answer.
Selection of Arbitration Panel
After all parties have filed their appearances in the case, the FINRA Case Administrator will send the parties a neutral list of potential arbitrators. The parties will be able to “strike” potential arbitrators from the list and rate the remaining arbitrators. Parties do not have to disclose their choices to opposing counsel. The FINRA Case Administrator will then appoint the panel from these lists. Cases with potential damages of $50,000 or less will have one arbitrator; cases with a claim of more than $50,000 - $100,000 will also have one arbitrator, unless the parties agree to having panel of three arbitrators; cases of more than $100,000 or unspecified or non-monetary claims will have a panel of three arbitrators. (FINRA Rule 12401.)
Initial Prehearing Conference
The parties and the panel will then conduct an initial pretrial conference, usually by telephone, in which the arbitration schedule will be set. This process follows a script—there is very little that can vary in terms of the type of discovery allowed or the general timeline for particular deadlines. The hearing will be set for a time agreeable to all parties and the Panel. Most arbitrations take a little over a year to complete from the time a claim is filed, but some more complex cases might have a longer timeframe. At the pretrial hearing, parties should be prepared to describe their schedule for the foreseeable future. (FINRA Rule 12500.)
The parties must exchange documents and respond to a required Document Production List within 60 days after the date that the answer is due. Parties may ask for additional information and documents as well, but these are generally limited to identifications of individuals, entities, and time periods related to the dispute. Standard interrogatories are generally not permitted. (FINRA Rules 12506-12507.)
Third-party discovery is also difficult to take in a FINRA arbitration. A party seeking third-party discovery must make a motion to the Panel for a subpoena. The Panel also has the authority, upon a motion of a party, to order without a subpoena the appearance of any employee or associated member of FINRA, or the production of documents in the possession or control of such persons. (FINRA Rules 12512-12513.)
Unlike litigation, depositions in a FINRA arbitration are strongly discouraged and very rare. Depositions may only occur to preserve the testimony of an ill or dying witness; to accommodate an essential witness who is unable to travel a long distance for a hearing; to expedite large or complex cases; or if the panel determines that extraordinary circumstances exist. This means that the parties must rely on documents to prepare their cases for hearing. Most often, the first testimony in a FINRA arbitration occurs at the hearing. (FINRA Rule 12510.)
Prehearing Exchange of Documents and Witness Lists: The “Twenty-day Exchange”
At least 20 days before the scheduled hearing date, all parties must serve copies of all documents that they intend to use at the hearing that have not already been produced. Included in this exchange are any expert analyses or documents that a party intends to use at the hearing. Parties must also exchange witness lists at this time. (FINRA Rule 12514.)
Generally, the Claimant presents its case first, followed by the Respondent’s defense. Each party may call witnesses and some witness may appear telephonically, if agreed to by the parties or ordered by the Panel.
One major difference between litigation and a FINRA arbitration is that the Panel is not required to follow state or federal rules of evidence. The Panel decides what evidence to admit. (FINRA Rule 12604.)
The Panel will typically issue an award in writing a few weeks after the hearing, but is encouraged to do so within 30 days of the hearing. The award must contain an underlying rationale, but the Panel need not explain their decision unless the parties jointly make such a request at the 20-day exchange. All awards are public and must be paid within 30 days of receipt. Upon receipt of the award, the parties must also pay any fees and assessments for the arbitration. (FINRA Rules 12900-12905.)
Industry professionals have a strong incentive to settle—up to a limit. FINRA requires industry professionals to report any award—even for a small amount. But if a case is settled, FINRA does not require disclosure of a settlement below $15,000 paid by broker or financial advisor, or below $25,000 paid by a securities firm. For this reason, many cases settle just below these thresholds. FINRA does not require industry professionals to report the reimbursement of forum fees, so an investor may seek to recover these costs above the threshold amounts of $15,000 and $25,000. (FINRA Rule 4530.)
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