Many investors are surprised to learn that any claim or dispute they have with their financial institution may be required to go to arbitration. This is typically a product of a contract that was signed at the beginning of the business relationship, and in cases with a broker-dealer, the arbitration forum is typically with the Financial Industry Regulatory Authority (FINRA).
Although it may be unfamiliar to many investors, a FINRA arbitration, American Arbitration Association (AAA) arbitration or any arbitration forum for that matter can offer a number of potential advantages over court litigation.
While some may still prefer court litigation, and it may remain an option in some matters, most disputes with broker-dealer firms are resolved through FINRA arbitration. Although different from a bench (judge) trial or jury trial in court, FINRA arbitration enables investor/claimants to file their claims in a neutral forum, where there is:
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- Procedural flexibility and efficiency
- An ability to participate in selecting the arbitrators
- Lower costs
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- Flexibility regarding the admission of evidence
- A scope of confidentiality
- Typically a faster and more efficient process overall, and a level of finality
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Typically the location of the arbitration will be near where the claimant resides at the time the claim is filed. Although FINRA processes the claim, and administers the case, arbitrators (once appointed in the case) typically control the process.
The appointment of arbitrators in a FINRA arbitration involves a ranking process after both sides are presented with proposed lists of prospective arbitrators. Although this ranking and selection process may seem simple enough, a lot may depend on the unique aspects of an individual case in deciding how to rank certain arbitrators based on their professional backgrounds, experience, award history, expertise, the nature of securities industry issues in dispute, or potential legal issues or technical issues unique to each case.
The arbitration process is generally confidential from start to finish, unlike a court case where the docket entries and the process are open to the public. Clients may prefer confidentiality in cases where their personal financial details are involved. Similarly, firms may prefer confidentiality as well where the allegations include embarrassing mistakes, trade secrets, or simply to avoid a public dispute that could lead to distrust or an erosion of confidence in the firm if it were made public.
Different arbitration forums have different rules. Typically the rules are fairly basic in order to afford the parties some flexibility. They are geared toward moving the process forward in a fair and efficient manner for both sides. Some of the rules are technical. Some provide a basic set of deadlines for the typical discovery process that is likely to apply in almost every case.
Discovery in arbitration is often different compared to discovery in state or federal court litigation. In litigation, the requests of documents, information, and taking depositions, along with filing various discovery motions, can take months and sometimes a year or more. In arbitration, it can take several months, but it is generally limited and more streamlined to document production issues and one or two discovery motions in most cases.
An investor in an arbitration case is not likely going to be required to sit for a deposition. Most of the discovery requests, responses, and motion practice will all be handled by the lawyer representing the claimant in the arbitration. As far as rulings on any discovery or other motions, they are typically decided by the chairperson of the arbitration panel that is appointed, or the full panel (depending on the nature of the motion, the applicable rules, and/or an agreement between the parties).
Arbitrators are less likely to strictly adhere to technical rules of procedure or evidence, and more likely to allow for liberal introduction of evidence including hearsay. The typical ruling by arbitrators on these issues is that they will allow the parties to proceed to make their presentation, but they will only take the evidence ?for what it is worth.? Thus they acknowledge that hearsay or other evidence may not be as reliable as other proof that could otherwise be submitted.
Arbitration is generally less expensive than court litigation. The streamlined discovery process, and more limited nature of motion practice are typically areas that result in less delay and expense.
Whether parties opt for arbitration (regardless of the forum) or court litigation (state or federal), a majority of cases settle. That often involves a structured settlement conference known as mediation. In the event the dispute is not settled at mediation, the parties in arbitration go to trial or a ?final hearing.?
In court litigation, the decision by the judge or jury in the lower court is not typically the final result. One or both parties typically may file an appeal. Although there are some limited opportunities for one or both parties to challenge an arbitration award after a final hearing, the outcome is generally considered final. The award can be enforced by a court of competent jurisdiction if the losing party does not fully comply with the terms.
If you are an investor who suffered losses and you are considering filing a claim or dispute with your stockbroker or financial advisor or his/her firm related to the handling of your investment portfolio please contact the Investment Loss Recovery Group for a no-cost consultation and review.