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Arbitration Procedure

Central Valley mediation attorneys explain FINRA arbitration

Most securities transactions contain a mandatory arbitration clause, meaning that the dispute does not go to court but is heard before an arbitration panel in a mini-trial. Nearly all broker representation disputes are heard by the Financial Industry Regulatory Authority (FINRA), which was founded in the New Deal era as the National Association of Securities Dealers. FINRA is the largest arbitration body in the United States and most securities traders are members. It has offices in Washington, D.C. and New York and hearing venues in 71 cities, including San Francisco, Los Angeles and San Diego.

The arbitration procedure

Filing the claim: The statement of claim launches the arbitration process, essentially like a complaint in a civil or criminal lawsuit. It may be filed by mail or online. Filing requirements state the following:

  • The party who files the statement of claim is the claimant and the other party is the respondent. The filing fee varies, but it is usually around $1,200; part of the fee may be refundable.
  • The statement of claim must contain factual details, the type of relief requested, the names of all parties involved and a submission agreement that states the claimant is willing to use arbitration and agrees to be bound by the arbiter's decision.

Answering the claim: After the filing requirements are met, FINRA serves the respondent identified in the statement of claim. If FINRA finds that any of the filing requirements are not met, it notifies the claimant so that any deficiencies can be addressed before the respondent is served.

The respondent then files a written answer, which includes the relevant facts and available defenses to the claimant's statement of claim. The answer and copies of the signed submission agreement must be filed with FINRA within 45 days of receiving the statement of claim.

Selection of arbitrators: FINRA generates a random list of arbitrators from its rosters and sends it to all parties along with arbitrator disclosure reports (background information). After reviewing the list, the parties strike any arbitrator they don't want on their panels and rank the remaining choices. FINRA appoints the arbitrators accordingly.

The number of arbitrators needed depends on the amount and type of relief requested in the statement of claim, as follows:

  • For claims less than $50,000, one arbitrator is appointed by FINRA and the claim is subject to simplified arbitration.
  • For claims between $50,000 and $100,000, FINRA appoints one arbitrator, unless the parties agree in writing to three arbitrators.
  • For claims of more than $100,000 or for unspecified or non-monetary claims, FINRA appoints three arbitrators.

Pre-hearing conference: FINRA schedules an initial pre-hearing conference after the panel is appointed. The purpose of this first meeting is to set the schedule of the case and involves setting evidentiary hearing dates, establishing discovery deadlines, setting briefing and motion deadlines, determining whether mediation is desirable and addressing other preliminary matters. The panel may call additional pre-hearing conferences as needed to resolve issues and disputes.

Discovery: To expedite the arbitration process, FINRA codes require that all parties work together in the voluntary exchange of documents and information. The Codes of Arbitration Procedure govern the discovery process, including making discovery requests, responding to such requests, objecting to discovery requests and arbitrator authority to issue sanctions for discovery abuses and subpoena third parties (persons or entities who are not claimants or respondents).

Hearing: Both the claimant and the respondent present arguments, witnesses and evidence in support of their respective cases before the panel of arbitrators. The hearing, which is decided by FINRA, is generally held in a conference room at a regional FINRA office or in an office building or hotel arranged by FINRA in the city where the hearing will take place. FINRA digitally records all hearings, and the digital recording becomes the official record of the proceeding, even if the recording is transcribed.

Decisions and awards: After the hearing concludes, the arbitrators consider the facts of the case and decide if the claimant is entitled to anything. This written decision is called an award and is issued within 30 business days of the record's closing. In a three-arbitrator panel, an award is based on a majority vote - a unanimous decision is not needed. Generally, securities cases are referred to as binding arbitration, meaning that the award is final and can only be appealed in limited circumstances.

Contact a Fresno County law firm that offers cost-effective arbitration solutions

At Law Office of Jeffrey B. Pape, P.C., our attorneys have assisted hundreds of clients in stock arbitration proceedings and recovered millions of dollars in losses for our clients. Contact us today at 800-797-5677 or online to schedule your free, confidential consultation.