Understanding how FINRA arbitration works is crucial, especially if you find yourself involved in such a dispute. This form of arbitration is a specific type of dispute resolution process designed for resolving conflicts between investors and brokerage firms, as well as among financial professionals themselves.
At Scott Hirsch Law Group, PLLC, we often assist clients with questions related to securities litigation, and arbitration proceedings, particularly when it comes to FINRA (Financial Industry Regulatory Authority) arbitration.
In this article, we’ll explain the fundamentals of FINRA arbitration, how the process unfolds under Florida law, and what you can expect if you’re involved in a FINRA arbitration.
FINRA Arbitration
FINRA arbitration is a form of alternative dispute resolution (ADR) governed by arbitration law, specifically designed to resolve disputes in the financial services industry.
It applies to cases between investors, brokerage firms, and registered representatives in the securities industry. The process is meant to offer a more streamlined and private alternative to traditional litigation, and it’s often chosen by individuals and firms for its efficiency and confidentiality.
FINRA arbitration is distinct from other forms of arbitration in that it operates under rules established by FINRA, which is a self-regulatory organization that oversees brokerage firms and their registered representatives.
As part of this role, FINRA provides a neutral forum for resolving disputes and has specific procedures that govern the arbitration process.
The Scope of FINRA Arbitration
FINRA arbitration is designed to address a wide range of issues that arise within the securities industry, such as disputes involving the following:
Securities transactions
Investment products
Customer service issues
These disputes can involve everything from allegations of fraud or misrepresentation to breach of fiduciary duty or violations of industry regulations.
Arbitration law dictates that both the financial industry professionals and investors must adhere to the rules set by FINRA, and they cannot circumvent the process through traditional court actions.
For example, in Florida, as well as other states, when a dispute is subject to FINRA arbitration, it’s generally not permitted to take the matter to a court of law unless under exceptional circumstances.
Initiating the FINRA Arbitration Process
The first step in initiating FINRA arbitration is to file a Statement of Claim with FINRA. This document outlines the dispute, the parties involved, and the legal basis for the claim.
FINRA Rules and arbitration laws in general, dictate that the claim must be filed within a specified time frame, which can vary depending on the type of dispute and the applicable statute of limitations.
Once the Statement of Claim is filed, the respondent—usually the brokerage firm or financial advisor—will have the opportunity to respond. This is typically done through an Answer, where the respondent outlines their defense against the claims presented.
At this point, both parties may engage in a process known as discovery, which is designed to exchange relevant information that will be used during the arbitration hearing.
This is generally a more limited process than what is seen in traditional litigation, but it still provides a way for both sides to gather necessary documents, evidence, and witness statements to support their case.
Arbitrators in FINRA Arbitration
One of the key features of FINRA arbitration is the role of the arbitrators. Unlike a judge in a traditional court proceeding, an arbitrator is not a government official but is typically a professional with experience in the securities industry or in arbitration law.
Arbitrators are selected from a list of FINRA-registered professionals, and parties involved in the dispute are allowed to choose their arbitrators through a process known as "striking" and "ranking." Depending on the nature of the case, either one or a panel of three arbitrators may be selected.
In Florida, as well as across the United States, arbitrators are required to be neutral, meaning they must not have any conflicts of interest in the matter at hand.
Their responsibility is to review the evidence, listen to the arguments, and issue a ruling based on the facts presented. Their decision is generally binding, meaning it cannot be appealed except under very limited circumstances.
The FINRA Arbitration Hearing
The hearing itself is a critical part of the FINRA arbitration process. It’s where both parties present their cases to the panel of arbitrators.
While the hearing is less formal than a courtroom trial, it still follows a structured procedure. Each party has the opportunity to present evidence, call witnesses, and make opening and closing statements.
As with traditional litigation, each side has the chance to argue their case, and both parties may question witnesses. However, arbitration rules typically places stricter limits on how much time is allowed for each party to present their case. This is one of the factors that contributes to the speed and efficiency of FINRA arbitration.
Although the process is less formal than a court trial, it’s still binding, and the arbitrators are required to issue an award based on the facts and evidence presented. The proceedings are confidential, which means that the public will not have access to the details of the case, unlike court cases where records are public.
How the Arbitrators Decide
After the hearing concludes, the arbitrators will deliberate and issue a decision. In some cases, the arbitrators may reach a decision immediately after the hearing, while in others, it may take several weeks.
Arbitration law dictates that the arbitrators must issue a written award that explains their decision, including how they arrived at their conclusion.
In Florida, as well as elsewhere, the decision is legally binding. This means that once the arbitrators issue their award, both parties must abide by it. However, the ability to challenge the arbitration decision is extremely limited.
Generally, the only grounds for appealing an arbitration award in Florida are if there was evidence of misconduct, bias, or fraud on the part of the arbitrators or if the arbitration process itself was flawed in some way.
The Advantages of FINRA Arbitration
FINRA arbitration offers several advantages for resolving disputes in the securities industry. One of the primary benefits is that it’s typically faster than litigation. Court cases can take months or even years to reach a resolution, while arbitration usually takes far less time.
Additionally, arbitration is generally more affordable than going to court. The costs associated with a court trial, such as attorney fees, court fees, and expert witness costs, can be significant. By contrast, arbitration tends to be more streamlined, which reduces the overall cost of the process.
Another significant advantage of FINRA arbitration is confidentiality. Unlike court cases, which are part of the public record, arbitration hearings are private. This is often preferred by financial institutions and investors who want to avoid public exposure of sensitive information related to their business or investment practices.
Lastly, arbitration is more flexible than traditional litigation. The parties involved in the arbitration process have some degree of control over the proceedings, including the ability to choose the arbitrators and establish certain procedural rules, which can make the process more tailored to their needs.
The Disadvantages of FINRA Arbitration
Despite its many advantages, FINRA arbitration is not without its drawbacks. One of the main criticisms of the process is that it can be biased in favor of the financial institutions.
While the arbitrators are meant to be neutral, some critics argue that the financial industry’s influence over the arbitrators’ selection process may lead to decisions that favor the institutions.
Additionally, the inability to appeal an arbitration award is a significant disadvantage for many parties. In traditional litigation, if you disagree with the decision, you have the option to file an appeal.
In arbitration, however, the scope for appealing a decision is extremely limited, which means that the ruling is often final, regardless of whether or not it’s perceived as fair.
Reach Out for the Next Steps
At Scott Hirsch Law Group, PLLC, we believe that understanding how FINRA arbitration works is vital for anyone involved in a dispute related to the financial industry. We’re proud to help investors in South Florida, and nationwide. Call today.
