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.

Comprehensive Guide to Understanding and Combating Churning in Investment Accounts

At Bakhtiari & Harrison, we turn the tables on unethical trading practices. If you’ve been affected by churning or suspect your investments might be at risk, hiring our experienced team ensures that you have staunch advocates fighting to protect and recover your assets. This guide delves into the definition of churning, its impact on investors, legal implications, protective measures, and specific formulas used to identify this practice.

What is Churning?

Churning occurs when a broker engages in excessive trading of securities in a client’s account primarily to generate commissions, which can erode the value of the investment portfolio through unnecessary fees and is illegal under securities law.

How Does Churning Happen?

Churning can take place in accounts where brokers exert significant influence or where clients may be less vigilant. It often remains undetected due to its resemblance to normal trading activity but can be identified through meticulous monitoring and understanding of account activity.

Protecting Yourself Against Churning

Investors can guard against churning by:

Regularly reviewing account statements for unusual activity.
Understanding the broker’s fee structure.
Establishing clear and direct communication regarding investment goals.

Legal and Regulatory Framework

Churning violates multiple regulatory standards, including FINRA Rules 2020, 2111, 2010, and the SEC’s Regulation Best Interest (Reg BI). These regulations mandate brokers to prioritize clients’ interests, making churning not only unethical but also illegal.

Penalties for Churning

Sanctions for churning include fines, suspension, or permanent bans, dependent on the firm’s size and the severity of the misconduct:

Small firms may face fines ranging from $5,000 to $310,000.
Midsize or large firms can see fines starting at $50,000 with no cap, reflecting the gravity of such violations.

Churning Case Studies from Bakhtiari & Harrison

The Case of Retired Schoolteacher:

A retired schoolteacher noticed her retirement savings dwindling due to frequent trades made by her broker. After retaining Bakhtiari & Harrison, we demonstrated that the turnover rate in her portfolio was excessively high with no reasonable strategy. The firm successfully recovered significant losses.

The Entrepreneur’s Portfolio:

An entrepreneur with a diversified portfolio became a victim of in-and-out trading that benefited only the broker through substantial commission fees. Our legal team used detailed trading records to prove churning, resulting in a full recovery of the client’s investment losses plus interest.

Settlement for a Widow:

A widow, unfamiliar with investment management, trusted a broker who churned her late husband’s investment accounts. Bakhtiari & Harrison intervened, recovering not only the depleted assets but also securing additional compensation including punitive damages, against the brokerage firm.

Detecting Churning: Key Formulas

To determine if an account has been churned, investors and regulators use several metrics:

Annualized Turnover Ratio

Formula: Total purchases made in a year divided by the average monthly account value.
Interpretation: A ratio of 4 to 6 or higher typically indicates churning, though lower ratios may also suggest excessive trading depending on the account’s investment profile.

Cost-Equity Ratio

Formula: Total annual trading costs divided by the average account balance over the same period.
Use: This ratio helps measure the viability of an account’s trading strategy by showing the percentage of the portfolio that must be gained to break even on costs.

In-and-Out Trading

Identification: Frequent buying and selling of the same securities, which can suggest attempts to generate commissions through “wash” transactions.

Why Hiring Bakhtiari & Harrison in Churning Cases is Crucial

Bakhtiari & Harrison have extensive experience in handling churning cases, offering expert legal representation to recover losses and address broker misconduct. We analyze detailed trading records, broker-client communications, and alignment of transactions with client objectives.

Ryan Bakhtiari, a highly esteemed attorney, has an exceptional background that includes serving as President of PIABA (Public Investors Arbitration Bar Association) and chairing the FINRA NAMC (National Adjudicatory Council) Committee. His extensive experience in securities law and deep understanding of FINRA’s regulatory framework make him uniquely qualified to handle complex investigations and ensure your rights are effectively protected.

David Harrison brings a wealth of litigation experience to the table. His career includes time at the District Attorney’s Office, where he developed his litigation skills, and as in-house counsel at Morgan Stanley Dean Witter, where he represented the firm and its stockbrokers. David also held a Series Seven license from his time at Shearson Lehman Brothers, further enhancing his understanding of the financial industry and its regulatory demands.

Questions & Answers on Churning

What constitutes churning in financial accounts?

Churning involves unnecessary frequent trading by a broker primarily for generating commissions. This practice is harmful as it prioritizes broker earnings over client interests.

How can investors detect churning in their accounts?

Investors should look for high annualized turnover ratios, significant in-and-out trading, or a high cost-equity ratio, as these can be indicators of churning.

What steps should be taken if churning is suspected?

Review transaction histories, question your broker about the trading strategy, and consult with experienced lawyers. Firms like Bakhtiari & Harrison can provide crucial advice and representation.

What are the financial impacts of churning?

Churning can lead to diminished returns due to unnecessary commissions and fees, disrupting long-term investment strategies and financial goals.

Can churning occur in any investment account?

Yes, churning can happen in any brokerage-managed account, particularly where the broker has significant control or discretion.

What are common penalties for brokers found guilty of churning?

Penalties can range from fines to suspension or expulsion from the brokerage industry, depending on the severity of the offense.

How does Bakhtiari & Harrison approach suspected churning cases?

We conduct thorough investigations of trading activities, evaluate broker-client interactions, and assess whether transactions align with client objectives to formulate a robust legal strategy.

How can investors prevent churning?

Maintain active oversight of your investment accounts, understand your broker’s compensation structure, and ensure all trading activities align with your stated investment objectives.

Is recovery possible for losses due to churning?

Yes, investors can often recover losses through legal actions or arbitration, especially with the assistance of experienced securities litigation attorneys.

Understanding churning and its indicators is crucial for maintaining the health of your investments. If you suspect churning or observe high turnover and cost-equity ratios in your accounts, seeking professional guidance is imperative.

Bakhtiari & Harrison is an AV-rated, battle-tested law firm focused on the worldwide representation of clients in complex arbitration, litigation, and related legal services in securities industry matters.

The firm’s partners have extensive experience in securities, employment and regulatory matters. Our focus is on delivering strategic and creative client-centric solutions.

We represent high net-worth individuals, institutions, and hedge funds in securities arbitration and litigation claims before FINRA (Financial Industry Regulatory Authority), AAA (American Arbitration Association), other arbitration providers, and state and federal courts.

The firm represents financial services professionals, registered investment advisors and broker-dealers in employment matters, industry disputes and regulatory investigations. For further assistance or to discuss potential churning in your accounts, please contact Bakhtiari & Harrison. We are dedicated to protecting your investment interests and achieving your financial objectives.