What is Securities Arbitration?

When a dispute arises between an investor and a financial advisor, how is that dispute resolved?  If the financial advisor is registered with FINRA (Financial Industry Regulatory Authority), the investor is entitled to have the dispute resolved through an arbitration process administered by FINRA.  The investor’s entitlement to use the FINRA arbitration process is one of the conditions of the financial advisor’s registration with FINRA.  Not only is the investor entitled to use the FINRA arbitration process, the investor may be required to use the FINRA arbitration process.  The investor may be required to use this process if the investor signed a contract containing an arbitration clause.  Most firms that investors rely upon for investment advice include mandatory arbitration clauses in their contracts.  The major firms include Morgan Stanley, UBS, Raymond James, Merrill Lynch, Ameriprise, and LPL.  Assuming that the investor signed a contract containing a mandatory arbitration clause, the investor will be required to submit any dispute to the FINRA arbitration process.

A FINRA arbitration is similar to a trial in a courtroom.  However, instead of having a judge and a jury, the investment dispute will be resolved by one or three arbitrators, depending upon the size of the dispute.  So who are the arbitrators?  There are few specific prerequisites for becoming an arbitrator.  One does not need to be an attorney, or even a college graduate.  A business background is not required.  There have been numerous three person panels where none of the arbitrators have any legal background.  More often than not, however, there will be at least one attorney on each panel.  Because FINRA arbitrators are not especially well paid, and the process is time consuming, a high percentage of arbitrators are retired.

The FINRA arbitration will take place at the FINRA facility located closest to the investor’s residence at the time that the investment at issue was made.  Florida hearing locations include Miami, Boca Raton, Tampa, Orlando and Jacksonville.  New York hearing locations include Manhattan, Albany, Syracuse and Buffalo.  In Nebraska the single hearing location is Omaha.

There are other differences between the court process and the arbitration process.  The FINRA arbitration process generally does not permit the taking of depositions.  In other words, neither the investor nor the financial advisor can be forced to testify before a court reporter in advance of the final arbitration.  There are advantages and disadvantages to both sides where depositions are not permitted.  Some commentators like it to “trial by ambush.”  Unlike judges and juries, FINRA arbitrators are not required to follow traditional rules of evidence.  Non-traditional evidence, such as affidavits and polygraph reports, are frequently offered as evidence.  Again, there are advantages and disadvantages to both sides from this particular feature.  Unequivocally, the expenses of a FINRA arbitration are significantly less than the expenses of litigating in court.  Because of this unique benefit of arbitration, it is easier for investors with smaller cases to find lawyers who are able to economically handle their cases.  For more information regarding the securities arbitration process, please contact me directly.