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.

2024’s Ultimate Guide: Outside Business Activities – FINRA Rules 3270 and 2010

Financial advisors, compliance officers, and small business owners need to understand the intricacies of FINRA Rules 3270 and 2010 to navigate and manage outside business activities (OBAs) effectively. This guide provides a comprehensive overview of these rules, their implications, and the best practices for compliance.

Overview of Outside Business Activities

Definition of Outside Business Activities

Outside Business Activities (OBAs) refer to any business activities a registered representative participates in outside their primary employment with a member firm. These activities include part-time jobs, consulting work, directorships, and more.

Purpose of FINRA Rules 3270 and 2010

The primary purpose of FINRA Rules 3270 and 2010 is to prevent conflicts of interest, ensure fair dealings, and uphold high standards of business conduct in the financial industry. These rules require disclosure and approval of OBAs to protect the integrity of the securities industry.

Difference Between Outside Business Activities and Private Securities Transactions

While OBAs encompass a broad range of activities, private securities transactions are a specific subset that involves the buying or selling securities outside the regular course of employment with a member firm. Both require disclosure and approval but are regulated under different rules.

FINRA Rule 3270

Scope of Rule 3270

FINRA Rule 3270 regulates the outside business activities of registered representatives. It mandates that all OBAs be disclosed to the employing member firm before participation.

Approval Requirements for Outside Business Activities

Before engaging in any OBA, registered representatives must submit a written notice to their member firm. The firm must then evaluate the activity and provide written approval or impose conditions or prohibitions based on the potential conflict of interest.

Disclosure Requirements for Outside Business Activities

Registered representatives are required to disclose all OBAs, including details about the nature of the activity, the expected duration, and any compensation received. This disclosure helps firms assess the risk and manage potential conflicts.

Restrictions on Outside Business Activities

Firms may impose restrictions on OBAs to mitigate conflicts of interest and ensure that the representative’s duties to the firm and its clients are not compromised.

FINRA Rule 2010

Scope of Rule 2010

FINRA Rule 2010 mandates that all members and associated persons conduct business with high standards of commercial honor and just and equitable principles of trade.

General Principle of Fair Dealing

The rule emphasizes fair dealing in all business activities, ensuring that financial professionals act in the best interests of their clients.

Prohibition of Unethical Business Practices

Rule 2010 prohibits any unethical business practices that could harm clients or the integrity of the securities industry.

Requirement to Observe High Standards of Commercial Honor and Just and Equitable Principles of Trade

All business dealings must be conducted with honesty and integrity, reflecting the high standards expected in the securities industry.

Considerations for Registered Representatives

Disclosure and Approval Process for Outside Business Activities

Registered representatives must follow a stringent disclosure and approval process for all OBAs to ensure compliance with FINRA Rules 3270 and 2010. This process involves submitting detailed written notices to their firms and obtaining the necessary approvals.

Potential Conflicts of Interest

OBAs can potentially conflict with the duties of a registered representative to their primary firm and clients. Proper disclosure and firm oversight help mitigate these conflicts.

Supervision by Member Firms

Member firms are responsible for supervising the OBAs of their registered representatives. This includes reviewing disclosures, imposing conditions, and ensuring that activities do not interfere with the representative’s duties.

Consequences for Non-Compliance with FINRA Rules 3270 and 2010

Failure to comply with FINRA Rules 3270 and 2010 can result in severe sanctions, including fines, suspensions, and even expulsion from the industry. The severity of the sanctions depends on various factors, such as the nature and duration of the OBA, the involvement of firm customers, and any resulting harm.

Examples of Outside Business Activities

Part-time Employment

Registered representatives may take on part-time jobs outside their primary employment. These must be disclosed and approved by their firm.

Consulting Work

Engaging in consulting work is considered an OBA and requires disclosure and firm approval.

Serving on a Board of Directors

Serving as a director of another organization is an OBA that must be disclosed to the primary firm.

Running a Side Business

Any entrepreneurial activities or side businesses must be reported and approved as OBAs.

Volunteer Work

Even unpaid volunteer activities that might conflict with a representative’s duties require disclosure.

Principal Considerations in Determining Sanctions

Adequacy of the Firm’s Review System
- Firms must have robust systems to review and monitor OBAs, including imposing conditions or prohibitions when necessary.
Customer Involvement
- Whether the OBA involved firm customers can influence the severity of sanctions.
Injury to Other Parties
- The extent and nature of any harm caused by the OBA are critical factors in determining sanctions.
Duration, Customers, and Sales Volume
- The length of the OBA, the number of customers involved, and the dollar volume of sales are considered when imposing sanctions.
Misleading or Concealing Activities
- Misleading the firm about OBAs or concealing them can result in harsher penalties.

Sanctions

Small Firm Monetary Sanction

Fine: $5,000 to $77,000

Midsize or Large Firm Monetary Sanction

Fine: $10,000 to $200,000

Suspension, Expulsion, or Other Sanctions

Firms may face suspension from relevant business lines for 10 business days to one month, with required revisions to supervisory procedures.
In cases with aggravating factors, suspensions can last from one to six months.

Key Questions Answered

What is an Outside Business Activity (OBA)?
- An OBA is any business activity outside the primary employment with a member firm.
How does FINRA Rule 3270 define an OBA?
- FINRA Rule 3270 requires all OBAs to be disclosed and approved by the employing member firm.
Are all OBAs prohibited under FINRA rules?
- No, but they must be disclosed and approved by the firm.
How does an individual disclose an OBA to their firm?
- By submitting a detailed written notice to the firm.
Can an OBA be approved by the firm?
- Yes, the firm can approve or impose conditions on the OBA.
What are the consequences for not disclosing an OBA?
- Failure to disclose can lead to fines, suspensions, or expulsion.
Can an OBA conflict with an individual’s duties to their firm?
- Yes, potential conflicts must be managed through proper disclosure and firm oversight.
Are there any restrictions on the type of activities that can be considered an OBA?
- Yes, firms can impose restrictions based on potential conflicts and other factors.
Can an individual receive compensation for an OBA?
- Yes, but compensation must be disclosed and approved.
What is the difference between an OBA and a private securities transaction?
- OBAs are broader and include various activities, while private securities transactions specifically involve buying or selling securities outside the regular course of employment.
Are there any exceptions to the disclosure and approval requirements for OBAs?
- Generally, all OBAs must be disclosed and approved, but specifics can vary based on the activity and firm policies.
How often do individuals need to update their firm about their OBAs?
- Updates should be made as soon as there are changes or new OBAs.
Can an OBA be conducted through a separate entity?
- Yes, but it must still be disclosed and approved by the firm.
What is the role of a firm’s compliance department in regard to OBAs?
- The compliance department reviews disclosures, approves activities, and monitors compliance.
Are there any specific guidelines for OBAs related to social media or online activities?
- Yes, online activities must also be disclosed and approved as OBAs.

Bakhtiari & Harrison – Experienced Attorneys

Navigating the complexities of FINRA rules and avoiding disciplinary actions can be challenging. This is where Bakhtiari & Harrison come in. As experienced FINRA regulatory defense lawyers, they specialize in helping stockbrokers and financial firms manage compliance issues and defend against disciplinary actions.

With a deep understanding of FINRA rules and a proven track record of success, Bakhtiari & Harrison can provide the guidance and representation you need to protect your career and reputation. Whether you are facing an investigation or looking to strengthen your compliance program, their expert legal services are invaluable.