I receive phone calls throughout the year from attorneys who have taken on their first FINRA case and they frequently are unaware how the FINRA Dispute Resolution process differs from other venues. I thought it would be helpful to provide a quick overview for new participants and a refresher for those more experienced securities attorneys on how the FINRA Arbitration and Mediation process works.
For those not familiar with the Financial Industry Regulatory Authority, more commonly known as FINRA, and formerly known as NASD, the regulatory mission of the organization is to protect investors and strengthen market integrity through vigorous and cost-effective self-regulation alternatives. FINRA is not part of the U.S. Government, but rather an independent, non-profit organization authorized by Congress to protect America's investors by making certain the securities industry operates fairly and honestly.
As an alternative for heading to civil court to resolve securities-related disputes, FINRA has established programs to uphold the integrity of the securities industry, as well as to solve disputes in an expedient and effective manner.
FINRA believes that that self-regulation is the most effective means of infusing a balance of industry and non-industry expertise into the regulatory process. Maintaining public confidence in the financial markets is a critical part of the regulatory function. As part of FINRA's regulatory mission, FINRA must stand ready to discipline member firms and their associated persons by imposing sanctions when necessary and appropriate to protect investors, other member firms and associated persons, and to promote the public interest.
Dispute resolution procedures between clients and member firms and individuals are set forth by FINRA Rule 12000: Code of Arbitration Procedure for Customer Disputes. The set of protocol provided for in Rule 12000 establish requirements for both claimants and respondents. In FINRA arbitration, cases are heard and resolved by a panel composed of one or three arbitrators. The decision reached by the panel is referred to as an award, and is binding on both parties. Although optional for client - member disputes, arbitration is mandatory in disputes involving industry members, or disputes solely between firms or registered securities professionals.
Any party involved in an unresolved dispute can initiate FINRA arbitration proceedings by filing a Statement of Claim with the FINRA director of arbitration. In the statement of claim, the party filing the claim ("claimant") must describe the controversy in dispute, attach any currently available supporting documentation, and disclose the remedial action being sought, which is an estimate of a dollar amount of damages. However, it is important to note that there is a six year statute of limitations for filing a claim for FINRA arbitration. After the initial filing, the director of arbitration will deliver a copy of the claim to the opposing party in the claim ("respondent"). After receiving the statement of claim, the respondent has 45 calendar days to respond to the claim.
In their response, the respondent must cite specific defenses to statements made in the initial statement of claim and disclose any counterclaim against the defendant. To ensure compliance with the claim-response proceedings, FINRA states that any respondent who fails to respond to any statement of claim may be prevented from presenting any contrary evidence or make any counterarguments at the arbitration hearing.
After receiving the respondent's response statement, the claimant has 10 calendar days to provide each party a written reply. After the reply has been issued, the initial period of discovery has come to a close. In the time period leading up to the arbitration hearing, secondary and subsequent discovery requests for information may be made by either party.
Following the initial and subsequent discovery periods, an arbitration hearing is conducted, involving the claimant, respondent, and a FINRA arbitrator or panel of arbitrators. In general, the when a hearing is conducted in an arbitration case, it may take up to 16 months for an award to be determined. In FINRA arbitration, the composition of the arbitration panel is dependent on the size of the dispute. For disputes involving $100,000 or less, the panel is made up of one arbitrator, unless the parties agree in writing to three arbitrators. Additionally, for disputes involving less than $50,000, an option is available known as "Simplified Arbitration". Simplified Arbitration involves a single arbitrator and a binding decision issued within 30 days, however, a hearing is not conducted and a decision is reached only after the arbitrator's review of all discovery material. For disputes involving more than $100,000, the director of arbitration will appoint a panel of three arbitrators, unless both parties consent, in writing, to one.
FINRA arbitrators are classified as being "public" or "non-public". From a high level, the main characteristic of a non-public arbitrator is that person being associated with the securities industry within the past five years. To the contrary, a public arbitrator is an individual who is not associated or engaged in the securities industry. Before an arbitration hearing, FINRA provides all parties involved in a claim a list of 10 chair-qualified public arbitrators, 10 public arbitrators, and 10 nonpublic arbitrators. From this list, each party may request four arbitrators to serve on the arbitration panel at the arbitration hearing. From this list of selected arbitrators, the FINRA director of arbitration will select either one or three arbitrators, always with a panel chairperson presiding over the hearing. The chairperson must always be a licensed attorney, versed in FINRA rules, and who has served on at least three arbitrations.
Bob Lawson is the President and Chief Compliance Officer of Barrington Capital Management, Inc. He is a Securities Litigation Consultant/Expert Witness, FINRA and NFA Dispute Resolution Arbitrator, Certified Fraud Examiner, Accredited Investment Fiduciary and a Qualified Neutral under Minnesota Rule 114 of Standard of Practices.
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