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.

Subprime Investments

Recent turmoil in the credit markets has begun to expose the lack of disclosure and in some cases misleading sales presentations made by brokerage firms to their customer regarding the sale of Mortgage Backed Securities (MBS) or Asset Backed Securities (ABS).

In June 2007, Orange County based Brookstreet Securities was wiped out and forced to close its doors after its clearing firm National Financial reduced values in Collateralized Mortgage Obligations (CMOs) which caused accounts on margin to suffer markdowns and significant losses in customer accounts.

The lack of transparency in MBS, ABS and CMO securities has created a confidence crisis. Mortgage rating agencies including, Moody’s, S&P and Fitch have recently moved to cut credit ratings exposing certain problems with MBS and ABS investments. On October 3, 2007 Fitch cut the credit ratings of $18.4 billion of bonds backed by subprime mortgages issued last year, citing an increased risk of default after an “unprecedented” slump in home prices.

The downgrades of the 1,003 bond classes represent 11 percent of the entire $173 billion of securities from 2006 that were rated by Fitch, the company said today in a statement. Fitch reduced ratings on $6.6 billion of bonds backed by second-lien subprime mortgages.

Fitch, a unit of Paris-based Fimalac SA, began a review in July of every transaction containing mortgages to borrowers with poor credit after investors criticized ratings companies for failing to act quickly enough as home-loan delinquencies rose.

Defaults reached record highs and some securities dropped by more than 50 cents on the dollar. Fitch is the first of the three largest credit-rating services to review all securities with debt arranged last year.

U.S. senators in Washington last week faulted credit ratings companies for grading subprime-mortgage securities too highly. The U.S. Securities and Exchange Commission said it is probing whether the firms were “unduly” pressured by Wall Street and a shareholder filed suit in New York accusing Moody’s of not revealing it gave out inflated ratings.

Moody’s Investors Service has downgraded or placed on review 496 bonds backed by first mortgages issued last year, or 3 percent of the total, including $5.3 billion of bonds backed by subprime loans.

Moody’s said last month it expects to downgrade more subprime-mortgage securities, and will assume its ratings for many such bonds issued since July 2005 are too high in assessing new collateralized debt obligations. CDOs package pools of mortgage securities and slice them into pieces with varying degrees of risk, from AAA to unrated portions.

Through Sept. 21, Standard & Poor’s had cut ratings on 433 of the securities issued last year and backed by subprime loans, or 9.1 percent of the total.

Fitch said it was “most concerned” about second-lien loans, which rank behind the first-mortgages in terms of payment.

Subprime Money Market Funds

Columbia Management, a unit of Bank of America Corp., has closed its Strategic Cash Portfolio amid losses on asset-backed securities. According to the Wall Street Journal, the fund is currently valued at $12 billion, down from $40 billion just months ago. Bank of America closed this fund just weeks after announcing that it had set aside $600,000,000 to cover potential losses on its money market funds and an institutional cash management fund.

The Strategic Cash Portfolio, considered an enhanced money fund, was offered exclusively to high net worth individuals and institutional investors with at least $25 million or more. The enhanced fund was sold as an alternative to money-market funds, considered among the safest of all investments.

Investors, largely concerned with the crumbling subprime market, began pulling money out of the fund beginning in August 2007. Withdrawal requests continued until the fund was no longer able to sustain itself. Upon its closing, the fund’s share price was reported to be 99.4 cents on the dollar.

According to Bank of America, investors are left with two options. The largest investors will be redeemed “in kind”-given their share of the underlying securities in lieu of a cash payment. Smaller investors will be able to cash out at the 99.4 cents on the dollar current share price.

The Strategic Cash Portfolio is not the only enhanced money fund experiencing pressure from the continuing subprime crisis. Another enhanced money fund, the GEAM Trust Enhanced Cash Fund, managed by GE Asset Management, saw similar losses just a month ago due to investor concerns over the investments held by the fund. Investors in the GEAM fund were able redeem their position at 96 cents on the dollar.

Similarly, SEI, Wachovia/Evergreen Investments, Credit Suisse Asset Management, U.S. Bancorp/FAF Advisors, and Legg Mason separately announced that each had set aside funds or purchased losing investments from their funds to support their money market funds. Most have reported that such actions were necessitated by poor performing investments in special investment vehicles (“SIVs”).