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 Rule 2110 – Standards of Commercial Honor and Principles of Trade

The financial industry relies on ethical standards and regulatory guidelines to maintain integrity, protect investors, and foster fair market practices. FINRA Rule 2110, known as the Standards of Commercial Honor and Principles of Trade, establishes the fundamental expectation that broker-dealers and their associated persons must conduct business with high ethical standards. This rule serves as the foundation for ensuring fairness, honesty, and professional conduct within the securities industry.

This article explores the purpose, requirements, implications, and best practices related to FINRA Rule 2110, helping firms and individuals adhere to the highest ethical standards in financial transactions.

Table of Contents

What is FINRA Rule 2110?

FINRA Rule 2110 requires that all financial professionals associated with FINRA members adhere to just and equitable principles of trade. This rule establishes a broad ethical framework that governs business conduct, ensuring that brokers and financial firms act in the best interests of their clients and the financial markets.

Key responsibilities under Rule 2110 include:

Conducting business with honesty and fairness
Ensuring that customer transactions are executed in good faith
Avoiding deceptive, manipulative, or fraudulent practices
Acting in a manner that maintains public confidence in the financial system

Unlike specific regulatory rules that address technical compliance, Rule 2110 applies a broader ethical standard that can be interpreted based on the facts and circumstances of each case.

Key Components of Rule 2110

Rule 2110 serves as a guiding principle for ethical business conduct and requires firms to maintain high professional standards across various aspects of their operations.

1. Ethical Business Conduct

Financial professionals must maintain ethical conduct in all customer dealings, ensuring that they act with integrity and fairness. Firms should have policies that reinforce honesty in advertising, client interactions, and trade execution.

2. Prohibition of Fraudulent Practices

Rule 2110 prohibits any deceptive or misleading actions that could harm investors or disrupt the integrity of financial markets. This includes false statements, misrepresentations, and market manipulation.

3. Fair Dealing with Customers

Firms and their representatives must treat customers fairly, ensuring that financial products and services are offered based on their suitability for each client’s needs and investment objectives. Any potential conflicts of interest should be disclosed.

4. Accountability in Trade Execution

Brokers and firms must execute customer trades in a manner that prioritizes client interests. Practices such as front-running, excessive trading, or delaying transactions for personal gain are strictly prohibited.

5. Compliance with Industry Standards

While Rule 2110 is broad in scope, it aligns with other FINRA regulations that require compliance with securities laws and best practices. Firms must implement training and supervisory systems to uphold ethical standards.

Purpose of Rule 2110

The primary objective of FINRA Rule 2110 is to promote ethical business practices and protect market integrity. Specifically, the rule aims to:

Prevent unethical and dishonest conduct within the securities industry.
Maintain investor confidence by ensuring fair treatment of clients.
Reduce the risk of fraudulent or misleading activities that could harm financial markets.
Ensure that firms and brokers operate in good faith and in the best interests of their clients.
Provide a broad ethical standard to address misconduct that may not be explicitly covered under other FINRA rules.

Who Must Comply with Rule 2110?

All FINRA-registered broker-dealers and their associated persons are required to comply with Rule 2110. This includes:

Registered representatives
Compliance officers
Supervisors and managers
Financial advisors and brokerage firms

Failure to comply with Rule 2110 can result in regulatory enforcement actions, fines, and potential expulsion from the industry.

Consequences of Non-Compliance

Non-compliance with FINRA Rule 2110 can lead to significant regulatory and legal consequences, including:

1. Disciplinary Actions

FINRA may impose fines, suspensions, or bans on individuals and firms that violate the ethical standards outlined in FINRA Rule 2110.

2. Reputational Damage

Firms and individuals found guilty of unethical conduct may suffer reputational harm, leading to loss of client trust and reduced business opportunities.

3. Legal Liabilities

Customers affected by unethical practices may pursue legal action, leading to costly settlements and legal fees.

4. Heightened Regulatory Scrutiny

Firms with a history of misconduct may face increased FINRA scrutiny, leading to more frequent audits and compliance reviews.

Best Practices for Compliance with Rule 2110

To ensure compliance with FINRA Rule 2110, firms should adopt best practices that promote ethical conduct and uphold just and equitable trade principles.

1. Establish a Strong Compliance Program

Firms should implement comprehensive compliance programs that include internal policies and procedures to reinforce ethical standards. Regular training sessions should be conducted to educate employees on ethical practices.

2. Monitor and Supervise Business Conduct

Supervisors and compliance officers should actively monitor employee conduct and customer interactions to detect potential violations. Firms should have mechanisms to report and address unethical behavior.

3. Promote Transparency and Disclosure

Firms must ensure clear and transparent communication with clients, particularly when disclosing potential conflicts of interest, fees, and investment risks.

4. Implement a Code of Ethics

Developing and enforcing a code of ethics can provide employees with clear expectations regarding ethical conduct and customer treatment.

5. Encourage a Culture of Integrity

Leadership should promote a culture where ethical decision-making is valued over short-term financial gains. Employees should feel empowered to report unethical behavior without fear of retaliation.

6. Conduct Regular Audits and Risk Assessments

Periodic audits and risk assessments help firms identify areas where ethical standards may be at risk and implement corrective measures.

FINRA Rule 2110 plays a critical role in establishing high ethical standards and ensuring fair business practices in the financial industry. By adhering to this rule, firms and financial professionals can maintain investor trust, protect market integrity, and avoid regulatory penalties.

Failure to comply with FINRA Rule 2110 can result in severe consequences, including legal liabilities, reputational damage, and increased regulatory scrutiny. Therefore, firms should prioritize ethical business practices by implementing strong compliance programs, fostering a culture of integrity, and continuously monitoring their operations.

Understanding and following FINRA Rule 2110 is essential for building long-term success in the financial industry while maintaining the highest standards of honesty, fairness, and professionalism. For questions, contact Bakhtiari & Harrison.