Investing can be thrilling, but what happens when disputes arise with your brokerage firm or broker-dealer? Securities arbitration is an efficient way to resolve such issues, serving as an alternative to going to court.
Haselkorn & Thibaut specialize in fighting for investors. Our team of experienced FINRA arbitration lawyers has over 50 years of experience. Call us today for a free consultation.
This article will guide you through the basics of securities arbitration and how it works in practice. Ready for some peace of mind? Keep reading!
Key Takeaways
Table of Contents
- Securities arbitration is a specialized form of dispute resolution that aims to settle disagreements between investors and their brokers or brokerage firms outside of the court system.
- It is governed by the Financial Industry Regulatory Authority (FINRA) and offers a faster, less expensive, and less complicated alternative to traditional litigation.
- The process involves filing an arbitration, presenting evidence at a formal hearing, and receiving a binding decision from a neutral third-party arbitrator(s).
- While there are debates about its fairness, arbitration provides advantages such as efficiency, expertise of arbitrators, cost-effectiveness, and specific rules set by FINRA.
What is Securities Arbitration?
Securities arbitration is a process of resolving disputes between investors, individual brokers, stock brokers themselves, and their brokers or brokerage firms through a neutral third party outside of the court system.
Definition of securities arbitration
Securities arbitration is a specialized form of dispute resolution designed to settle disagreements between investors and their brokers or brokerage firms. Governed by the Financial Industry Regulatory Authority (FINRA), investment arbitration hinges on the decision of a neutral third party after reviewing evidence presented during a formal arbitration hearing.
Although it mimics certain aspects of a court proceeding, this method is typically quicker, less expensive, and less complicated than litigation. Fundamentally, securities arbitration provides an alternative pathway for resolving disputes outside traditional courtroom settings.
How it differs from traditional arbitration
While sharing many similarities with traditional arbitration, securities arbitration carries distinct characteristics influenced by the intricate nature of securities transactions.
Unlike standard arbitration, where any civil dispute can be addressed and resolved, securities arbitration is specifically tailored to resolve disagreements between investors representing customers and their individual brokers or brokerage firms.
Governed by the Financial Industry Regulatory Authority (FINRA), it adheres to specific rules and procedures ensuring specialized handling of securities complaints in these cases. The maximum claim amount in arbitration differs, too–it’s set under the code of arbitration procedure.
Above all, its streamlined process makes it faster, less costly, and more complex than litigation which sets this form apart from customary alternative dispute resolution methods.
The Process of Securities Arbitration
The entire process of arbitration involves pre-dispute arbitration clauses, filing an an arbitration claim, and going through the whole arbitration hearing process.
Pre-dispute arbitration clauses
Pre-dispute arbitration clauses are standard parts of most agreements between investors and their brokers or brokerage firms. These clauses stipulate that any potential disputes related to securities transactions for example, will be tackled through an arbitration panel rather than the traditional court system.
This agreement is generally signed at the onset of a business relationship before any actual dispute arises. Its benefits largely revolve around efficiency; securities arbitration tends to be faster, cheaper, and less complex than litigation as governed by rules and procedures like those from Financial Industry Regulatory Authority (FINRA).
However, an investor should be aware that signing such a clause essentially waives their right to take the dispute to court later on. It’s crucial to understand this while entering into a contract involving pre-dispute arbitration clauses.
Filing an arbitration in the securities industry
To file an arbitration claim in securities disputes, here are the steps you need to follow:
- Prepare the necessary documents: Gather all relevant documents and evidence to support your claim, including account statements, contracts, and correspondence.
- Determine the correct forum: Identify whether your dispute falls under FINRA’s jurisdiction or another arbitration provider. If it falls under FINRA, you will need to initiate a case through their Dispute Resolution Services.
- Submit a Statement of Claim: Prepare a written statement outlining your claims and the relief you seek. This document should include a clear and concise description of your case’s facts, legal theories, and damages.
- Pay the required fees: There are filing fees associated with initiating an arbitration. Check the current fee schedule and make sure to submit payment along with your Statement of Claim.
- Serve the opposing party: Once your claim is filed, you must serve the opposing party with a copy of your Statement of Claim according to the rules specified by the arbitration provider.
- Respond to counterclaims or motions: If the opposing party files a counterclaim or any other motion in response to your claim, you can respond within a specified timeframe.
- Select arbitrators: Depending on the arbitration provider’s rules, you may have input into selecting one or more arbitrators who will hear your case. You may be able to choose from a list provided by the arbitration provider or agree on a mutually acceptable arbitrator with the opposing party.
- Attend pre-hearing conferences: The arbitrator(s) may schedule pre-hearing conferences to discuss procedural matters and set deadlines for submitting additional documents or evidence.
- Prepare for hearings: Prior to the hearing date, gather all necessary evidence, identify witnesses if applicable, and consult with experts or legal counsel if desired.
- Present your case at the hearing: During the scheduled hearing, present your arguments and evidence to support your claims. Be prepared to respond to any cross-examination or questioning by the opposing party.
Inside the arbitration process
- The arbitration process begins with filing a legal pleading, setting forth the factual and legal grounds of the dispute.
- The parties involved in the arbitration will typically submit documents and evidence to support their claims and defenses.
- Both parties have the opportunity to present their arguments and evidence during a hearing, which is similar to a trial but less formal.
- The arbitrator(s), neutral third persons, will listen to both sides and decide based on the evidence presented.
- The decision reached during the arbitration is called an award, which is binding on both parties.
- Unlike in court proceedings, there is no right to appeal an arbitration award unless there was misconduct or fraud by one of the parties involved.
- After the arbitration process is complete, the award can be enforced through legal means if necessary.
Is Securities Arbitration Fair?
There is an ongoing debate over the fairness of securities arbitration.
Debate over fairness
There is an ongoing debate over the fairness of securities arbitration. Critics argue that it often favors brokerage firms and hedge funds and disadvantages investors. They claim that arbitrators may be biased toward the securities industry and have financial incentives to rule in favor of the broker firms.
Additionally, there are concerns about the lack of transparency regarding attorney fees and the limited discovery process in investment arbitration.
On the other hand, proponents of securities arbitration argue that it provides a more efficient and cost-effective way to resolve disputes compared to litigation. They highlight the expertise and legal experience of arbitrators who are knowledgeable about securities law and can make informed decisions.
There is also an argument that arbitration allows for quicker resolution, avoiding lengthy court battles.
Limitations and advantages of securities arbitration
Securities arbitration, like any form of dispute resolution, has its own set of benefits and drawbacks. These are based on factors such as cost, time, legal representation, and the expertise of arbitrators.
Securities arbitration is usually faster than courtroom litigation, helping to resolve disputes in a shorter timeframe. Arbitration decisions are typically binding and final, leaving little room for appeal even if the investor is not satisfied with the outcome. Thanks to specific rules and procedures that govern it, the securities arbitration process is generally less complex than litigation.
Pre-dispute arbitration clauses can limit the investor’s options for legal recourse in the event of a dispute. Arbitration is usually cheaper than going to court. This is particularly important for small investors who may not have the financial means to cover extensive legal fees. The process may be less formal than court proceedings, which might lead to some procedural irregularities. The arbitrators in arbitration are often experts in the field, thus providing a more informed decision-making process. The lack of transparency and public record in arbitration proceedings can be a concern, as it makes it difficult for others to learn from past cases.
Investors should consider these advantages and limitations before deciding whether to commit to securities arbitration or seek other means of dispute resolution.
Securities Arbitration Claims Against Brokerage Firms & Financial Advisors
Securities arbitration claims typically involve disputes between investors and their brokers or brokerage firms. These claims can arise from various issues, such customer complaints such as whistleblower claims such as fraud, misrepresentation claim, negligence, breach of fiduciary duty, unauthorized trading, and unsuitable investments.
Typical claims in securities arbitration
- Breach of fiduciary duty
- Misrepresentation or fraud
- Failure to supervise
- Unauthorized trading
- Churning (excessive trading)
- Unsuitability of investments
- Negligence or failure to provide useful advice
- Failure to disclose material information
- Breach of contract
- Violation of securities laws
Securities arbitration basics
Securities arbitration is a common way to resolve disputes between investors and their brokers or brokerage firms. It is a formal alternative to going to court, offering a faster, cheaper, and less complex process than litigation.
In arbitration, the two parties agree to present their cases before a neutral third-party arbitrator(s) who decides after a hearing. The process is similar to a court proceeding, with the filing of legal pleadings setting forth the facts and legal grounds for the dispute.
Arbitration is governed by specific rules and procedures set out by the Financial Industry Regulatory Authority (FINRA), ensuring fairness and consistency in resolving these types of disputes.
The Role of FINRA in Securities Arbitration
FINRA, or the Financial Industry Regulatory Authority, plays a crucial role in arbitration by overseeing and regulating the process.
Overview of FINRA Dispute Resolution Services
The Financial Industry Regulatory Authority (FINRA) is an organization that oversees and regulates securities firms and brokers in the United States. As part of its role, FINRA also provides a dispute resolution service for investors and brokerage firms called FINRA Dispute Resolution Services.
This service offers a way to resolve disputes through arbitration. Arbitration through FINRA arbitration can be a more efficient and cost-effective option compared to traditional litigation, which can often be lengthy and costly.
It provides a streamlined process and arbitration forum for resolving conflicts between investors and their brokers and broker-dealers, ensuring fairness in the resolution of investor claims of investment fraud and securities-related disputes.
FINRA arbitration rules and regulations
The Financial Industry Regulatory Authority (FINRA) plays a crucial role in arbitration and regulatory investigations. FINRA is the self-regulatory organization that oversees and regulates brokerage firms, broker dealers and their registered representatives.
When it comes to arbitration, FINRA has established specific rules and regulations that govern the process. These rules ensure a fair and efficient resolution of disputes between investors and their brokers or brokerage firms.
For example, FINRA sets guidelines on who can serve as arbitrators, how claims should be filed three arbitrators, and what documents need to be submitted during the arbitration process. By following these rules and regulations, both parties involved in a securities dispute can have confidence in the integrity of the arbitration process.
Conclusion
In conclusion, arbitration is a valuable alternative to traditional litigation for resolving disputes between investors and brokers. While there may be ongoing debates about its fairness, it offers advantages such as speed and cost-effectiveness.
With the guidance of FINRA and its specific rules, arbitration provides a formal process for finding a resolution in the world of finance.
FAQs
1. What is securities arbitration?
Securities industry arbitration is a process used to resolve disputes between investors and their brokers or brokerage firms. It involves the submission of the dispute to a neutral third party, known as an arbitrator, who will make a binding decision on the matter.
2. How does arbitration differ from litigation?
Arbitration differs from litigation in that it provides a more streamlined and cost-effective alternative for resolving investment disputes. It typically takes less time than going through the court system and allows parties to avoid some of the formalities and complexities associated with traditional lawsuits.
3. Who can participate in arbitration?
Investors who have signed agreements with their brokers or brokerage firms that include mandatory arbitration clauses are generally required to pursue arbitration instead of litigation. However, even if there is no such agreement, both parties to the arbitration proceeding or law firm may choose to voluntarily participate in arbitration as an alternative method of resolving their dispute.
4. How can I initiate a arbitration case?
To initiate a securities industry arbitration case, you typically need to submit your claim to a self-regulatory organization (SRO) such as FINRA (Financial Industry Regulatory Authority). The SRO will provide you with information on how to proceed and help facilitate the resolution process of customer claims and securities arbitrations.
