What is FINRA arbitration?

FINRA arbitration is a method of resolving disputes between investors and brokerage firms or financial advisors outside the court system. It involves a neutral third party, an arbitrator, who reviews the case and makes a binding decision.

Why choose arbitration over litigation?

Arbitration is typically faster, less formal, and more cost-effective than litigation. It also provides a final resolution to disputes, with limited grounds for appeal. Most relationships with financial advisors are formalized by entering into a contract which contains a dispute resolution clause. Nationally, most dispute resolution clauses provide for FINRA arbitration.

Who can file a FINRA arbitration claim?

Investors, brokerage firms, and financial advisors can file a FINRA arbitration claim if they have a dispute related to securities or investment activities. FINRA arbitration is normally the forum for disputes among registered persons, brokerage firms and the public customer clients of the firms.

How do I start the FINRA arbitration process?

To start the arbitration process, Bakhtiari & Harrison will file a Statement of Claim with FINRA, detailing the nature of the dispute, the parties involved, and the relief sought.

What is a Statement of Claim?

A Statement of Claim is a written document submitted by the claimant outlining the facts of the dispute, legal claims, and the desired outcome.

What happens after filing the Statement of Claim?

After filing, the respondent has 45 days to answer the Statement of Claim. The answer must address the claims and may include counterclaims or other relief sought.

What fees are involved in FINRA arbitration?

Fees include filing fees, hearing session fees, and possibly member surcharges or process fees, depending on the specifics of the case.

Can I represent myself in FINRA arbitration?

Yes, you can represent yourself, but many choose to hire an attorney with experience in securities arbitration due to the complexity of the process. Investors and industry professionals who choose to represent themselves do so at a substantial disadvantage, Wall Street firms typically retain experienced professional counsel to represent their interests.

How are arbitrators selected?

Arbitrators are selected through the Neutral List Selection System (NLSS), which provides a list of potential arbitrators. Both parties rank and strike names to agree on a panel.

What qualifications do FINRA arbitrators have?

FINRA arbitrators include attorneys, accountants, financial professionals, and public members who have undergone training and meet FINRA’s qualification standards.

How long does the arbitration process take?

The process typically takes 12-18 months from filing to the final award, but this can vary based on case complexity and scheduling. Preference may be given to investors that are seriously ill or elderly.

What is a prehearing conference?

A prehearing conference is a meeting between the parties and the arbitrators to discuss procedural issues, set a schedule, and address preliminary matters including final FINRA arbitration hearing dates.

What is discovery in arbitration?

Discovery is the exchange of documents and information between the parties to prepare for the hearing. It is more limited than in litigation.

What happens during the arbitration hearing?

During the hearing, both sides present evidence, call witnesses, and make arguments. The arbitrators then deliberate and render a decision.

Is the arbitration hearing open to the public?

No, arbitration hearings are private and confidential. Only the parties, their representatives, and the arbitrators may attend.

Can I settle my case before the hearing?

Yes, parties can settle at any time before the arbitrators render a decision, often through negotiation or mediation.

What is mediation in the context of FINRA arbitration?

Mediation is a voluntary process where a neutral mediator helps the parties negotiate a settlement. It is separate from arbitration and non-binding.

What happens if I lose in arbitration?

If you lose, the arbitrator’s decision is final and binding. There are limited grounds for challenging the award in court.

Can I appeal an arbitration decision?

Generally, you cannot appeal an arbitration decision. However, you can seek to vacate the award on very narrow grounds, such as arbitrator misconduct.

What types of disputes are resolved through FINRA arbitration?

Disputes include claims of fraud, breach of fiduciary duty, negligence, breach of contract, and other issues related to securities and investments.

How are damages determined in arbitration?

Damages are determined based on the evidence presented, including financial records, expert testimony, and the specifics of the case.

Can arbitrators award attorney’s fees?

Arbitrators can award attorney’s fees if provided for by law, contract, or if both parties request it.

How do I enforce an arbitration award?

An arbitration award can be enforced in court through a confirmation process, making it a judgment that can be collected.

What is expungement in FINRA arbitration?

Expungement is the process of removing information from a broker’s record on the Central Registration Depository (CRD) system. It is only granted under specific conditions.

What are the grounds for vacating an arbitration award?

Grounds for vacating an award include arbitrator bias, fraud, corruption, or misconduct, as well as exceeding their powers.

Are arbitration awards public?

Yes, arbitration awards are published on FINRA’s website, providing transparency and access to past decisions.

What is the role of the Office of Dispute Resolution?

The Office of Dispute Resolution administers arbitration and mediation cases, ensuring that the process runs smoothly and efficiently.

What is a Simplified Arbitration?

Simplified Arbitration is for cases involving claims of $50,000 or less, allowing for a quicker and less expensive resolution without a hearing.

Can I request an expedited hearing?

Yes, in certain circumstances, such as elderly or seriously ill parties, you can request an expedited hearing.

What is the role of an arbitrator?

An arbitrator acts as a neutral decision-maker, reviewing evidence, hearing testimony, and issuing a binding decision on the dispute.

How do I prepare for an arbitration hearing?

Preparation involves gathering evidence, preparing witnesses, and developing a clear case strategy to present to the arbitrators.

What types of evidence are admissible in arbitration?

Evidence can include documents, emails, financial records, expert reports, and witness testimony, subject to the arbitrators’ discretion.

Can I request documents from the other party?

Yes, through the discovery process, you can request relevant documents and information from the other party to support your case.

How does FINRA handle conflicts of interest with arbitrators?

FINRA requires arbitrators to disclose any potential conflicts of interest, and parties can object to arbitrators they believe are biased.

What happens if a party does not comply with discovery?

If a party does not comply, the other party can file a motion to compel, asking the arbitrators to order compliance and possibly impose sanctions.

What is a motion in arbitration?

A motion is a formal request for the arbitrators to make a ruling on a specific issue, such as compelling discovery or dismissing a claim.

Can I request interim relief in arbitration?

Yes, you can request interim relief, such as temporary restraining orders or injunctions, to preserve the status quo pending the final decision.

How are hearing locations determined?

Hearing locations are typically determined by the location of the claimant unless both parties agree to a different venue.

What is a telephonic or virtual hearing?

Telephonic or virtual hearings are conducted via phone or video conference, allowing parties to participate remotely.

How are arbitration awards paid?

Awards are typically paid by the losing party within 30 days of the decision, unless otherwise specified by the arbitrators.

What if the losing party does not pay the award?

If the losing party does not pay, you can seek enforcement through the courts, turning the award into a legally enforceable judgment.

Are there any limits on the types of claims I can bring in arbitration?

FINRA arbitration covers a broad range of claims related to securities, but there are some statutory and regulatory limits on certain types of claims.

Can I bring a class action in FINRA arbitration?

No, class actions are not permitted in FINRA arbitration. However, you can join other claimants in a single arbitration if the claims are similar.

What is the role of expert witnesses in arbitration?

Expert witnesses can provide specialized knowledge and opinions to help explain complex financial issues to the arbitrators.

How are hearing dates scheduled?

Hearing dates are scheduled based on availability of the parties and arbitrators, with consideration for the complexity of the case.

Can I request a different arbitrator if I believe one is biased?

Yes, you can challenge an arbitrator if you believe they have a conflict of interest or bias that affects their impartiality.

What is a “chairperson” in a FINRA arbitration panel?

The chairperson is the lead arbitrator who manages the procedural aspects of the case and ensures the hearing runs smoothly.

How does FINRA ensure fairness in arbitration?

FINRA has rules and procedures in place to ensure a fair and impartial process, including arbitrator training and disclosure requirements.

How do I learn more about the FINRA arbitration process?

For more information, you can visit FINRA’s website, contact their Office of Dispute Resolution, or consult with experienced attorneys like those at Bakhtiari & Harrison.

How can Bakhtiari & Harrison help with FINRA arbitration?

Bakhtiari & Harrison can assist with filing claims, responding, selecting arbitrators, discovery, hearings, and ensuring the best possible outcome through skilled representation and strategic advice.

Understanding FINRA’s Know Your Customer Rule

The financial industry is heavily regulated to ensure transparency, prevent fraud, and protect investors. One of the fundamental regulations in this regard is the “Know Your Customer” (KYC) Rule, officially known as FINRA Rule 2090. This rule mandates that financial firms and registered representatives obtain essential information about their customers before executing transactions. Understanding this rule is crucial for financial professionals, compliance officers, and investors alike.

In this article, we will explore the purpose, requirements, implications, and best practices related to FINRA Rule 2090 to ensure compliance and enhance customer trust.

Table of Contents

What is FINRA Rule 2090?

The Financial Industry Regulatory Authority (FINRA) implemented Rule 2090, “Know Your Customer,” to ensure that financial firms and brokers conduct business ethically and in the best interest of their clients. The rule requires financial professionals to use reasonable diligence to obtain and maintain essential customer information.

This information includes the customer’s:

Financial background
Investment experience
Risk tolerance
Investment objectives
Liquidity needs
Time horizon

By gathering and verifying this information, financial firms can ensure that they provide appropriate investment recommendations, align products with customer goals, and mitigate potential risks.

Key Components of the “Know Your Customer” Rule

The KYC rule is built around three major principles: customer identification, risk assessment, and ongoing monitoring.

1. Customer Identification

The first step in complying with Rule 2090 is identifying and verifying the customer. Financial professionals must use due diligence to gather personal and financial information, such as:

Full name and contact information
Social Security Number (SSN) or Tax Identification Number (TIN)
Employment status and source of income
Investment objectives and strategies
Risk tolerance and time horizon
Past investment experience

2. Customer Risk Assessment

Once customer information is gathered, firms must assess risk factors based on the customer’s financial situation. This helps determine whether an investment product is suitable for the customer. Risk factors include:

Age and financial stability
Investment experience and knowledge
Tolerance for market volatility
Liquidity needs
Legal and tax implications

By understanding these factors, financial advisors can tailor recommendations that align with the customer’s needs and risk appetite.

3. Ongoing Monitoring & Updates

KYC is not a one-time process. FINRA Rule 2090 requires that firms continuously monitor customer accounts to ensure that investment strategies remain suitable. Financial advisors must periodically update customer records to account for:

Changes in financial status
Modifications to investment goals
Market conditions affecting investment decisions

Firms should also have a systematic approach to updating customer information and re-evaluating risk profiles as circumstances change.

The Purpose of Rule 2090

The primary purpose of Rule 2090 is to ensure that brokers and firms act in the best interest of their clients. By enforcing this rule, FINRA aims to:

Prevent Fraud and Financial Crimes: By requiring customer verification, firms can detect and prevent identity theft, money laundering, and fraudulent activities.
Enhance Investor Protection: Brokers can recommend suitable investments based on a deep understanding of their customers’ needs and financial status.
Promote Ethical Business Practices: Compliance with the rule fosters transparency, trust, and ethical decision-making in the financial industry.
Ensure Market Integrity: Reducing fraudulent transactions helps maintain the stability and integrity of financial markets.

Who Must Comply with Rule 2090?

All FINRA-registered brokerage firms and their associated persons (brokers and financial advisors) must comply with Rule 2090. This applies to individuals and firms that:

Open and manage customer investment accounts
Execute securities transactions
Provide financial advice and recommendations
Conduct portfolio management activities

Failure to comply with this rule can result in severe penalties, including fines, suspension, and potential revocation of licenses.

Consequences of Non-Compliance

Non-compliance with Rule 2090 can have serious consequences for financial firms and professionals, including:

1. Regulatory Penalties

FINRA has the authority to impose fines, suspensions, and even expulsion from the financial industry for violating KYC requirements.

2. Legal Actions & Lawsuits

Customers who receive unsuitable investment recommendations due to inadequate KYC diligence can file lawsuits, leading to financial and reputational damage.

3. Reputational Risk

Failure to comply with KYC regulations can result in a loss of customer trust and negative publicity, significantly impacting business operations.

4. AML Violations

KYC plays a crucial role in anti-money laundering (AML) compliance. Firms that fail to conduct proper Know Your Customer procedures may face violations under AML laws such as the Bank Secrecy Act (BSA) and USA PATRIOT Act.

Best Practices for Ensuring Compliance with Rule 2090

To effectively comply with Rule 2090, firms should implement robust policies, procedures, and technologies that support the KYC framework. Below are some best practices:

1. Establish Comprehensive KYC Policies

Firms should develop a structured Know Your Customer policy that outlines:

Procedures for gathering and verifying customer information
Risk assessment methodologies
Guidelines for periodic updates and reviews

2. Leverage Technology for Automation

Using AI-driven compliance tools and automated identity verification can streamline the Know Your Customer process and improve accuracy.

3. Provide Ongoing Training

Regular compliance training for brokers and advisors ensures that they understand regulatory updates and ethical considerations.

4. Maintain Accurate and Up-to-Date Records

Firms must ensure that customer records are regularly updated to reflect any changes in financial circumstances or investment preferences.

5. Conduct Internal Audits and Reviews

Periodic internal audits help identify weaknesses in the Know Your Customer process and ensure continuous improvement in compliance practices.

6. Enhance Customer Communication

Regular engagement with customers fosters trust and transparency, making it easier to update information and provide relevant investment guidance.

The “Know Your Customer” (KYC) Rule 2090 is a cornerstone of financial compliance, ensuring that financial professionals act in the best interest of their clients. By implementing robust Know Your Customer (KYC) procedures, leveraging technology, and conducting ongoing monitoring, firms can maintain compliance and strengthen client relationships.

Failure to comply with this rule can result in regulatory penalties, lawsuits, and reputational damage. Therefore, firms must prioritize Kknow Your Customer (KYC) compliance to protect their clients and uphold the integrity of the financial industry.

Understanding and adhering to FINRA Know Your Customer Rule 2090 is not just about compliance—it is about building long-term trust, ethical investing, and sustainable financial success.

The Importance of Selection of Experienced Counsel

The retention of an attorney and law firm is an important decision made with great care. Please review our web site and examine our Experience and Credentials. The choice of counsel may be the single most important decision a litigant makes either before or after a dispute arises. Also read more about The Importance of Selection of Counsel.