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.

When a Stockbroker Borrows Money From You? Here’s What You Need to Know

A stockbroker borrows money from you, then they refuse to repay the loan. You may feel betrayed, frustrated, and unsure of what steps to take next. Unfortunately, this scenario is more common than you might think, and the good news is that there are protections for investors like you. The Financial Industry Regulatory Authority (FINRA) has strict rules that govern the borrowing and lending activities of stockbrokers to prevent this kind of abuse.

Stockbroker Borrows Money: What Is FINRA, and How Does It Protect Investors

Understanding the applicable FINRA rules, particularly Rules 3240 and 2010, is crucial if you find yourself in this situation. At Bakhtiari & Harrison, we concentrate on helping investors recover their losses from unscrupulous brokers. If a stockbroker borrows money from you and fails to repay it, contact us today for a consultation to explore your legal options.

FINRA is a self-regulatory organization overseeing brokerage firms and their registered representatives. One of its primary objectives is to protect investors from fraud and misconduct. To accomplish this, FINRA enforces rules that dictate ethical standards and behavior for brokers and brokerage firms. Two essential rules that come into play when a stockbroker borrows money from a customer are FINRA Rule 3240 and FINRA Rule 2010.

FINRA Rule 3240: Governing Borrowing and Lending Arrangements

FINRA Rule 3240 specifically addresses situations where a broker borrows money from or lends money to a customer. The rule is clear: brokers are generally prohibited from borrowing money from their clients, except in limited circumstances. The rule sets forth specific guidelines to ensure that any borrowing arrangements are transparent and do not create conflicts of interest. When a stockbroker borrows money it is a very serious issue for FINRA and the firm’s compliance department.

According to Rule 3240, borrowing money from a customer is only allowed if:

The customer is an immediate family member of the broker.
The customer is a financial institution engaged in the business of lending money.
The loan is based on a personal or business relationship that exists outside of the broker-customer relationship.
The loan is based on a business relationship independent of the broker-customer relationship.

Even if one of these exceptions applies, when a stockbroker borrows money they must still follow the firm’s procedures and disclose the borrowing arrangement to the firm for approval. If your stockbroker borrowed money from you without adhering to these guidelines, they may have violated FINRA rules, opening the door for potential sanctions.

FINRA Rule 2010: Ethical Standards for Brokers

While Rule 3240 deals specifically with borrowing and lending, Rule 2010 establishes a broader ethical standard. Rule 2010 states that brokers must “observe high standards of commercial honor and just and equitable principles of trade.”

This rule means that brokers must act with integrity and fairness in their professional dealings. A broker who borrows money from a client and fails to repay it violates this ethical standard. Failure to repay a loan, especially when concealed from the employer, can result in serious penalties under FINRA’s disciplinary system.

Sanctions for Violating FINRA Rules: How Misconduct Is Penalized

FINRA takes violations of Rules 3240 and 2010 seriously, and brokers who break these rules may face severe sanctions. To determine the appropriate penalty, FINRA considers various factors outlined in its Sanction Guidelines.

Here are some key considerations:

1. The Purpose of the Loan

FINRA will look at why the broker borrowed money. When a stockbroker borrows money, was the loan for personal reasons or something that could create a conflict of interest? A loan taken for dubious reasons is likely to attract harsher penalties.

2. The Number of Loans at Issue

If a broker borrowed money from just one client, this may be viewed less severely than if they borrowed from multiple clients. Multiple loans suggest a pattern of misconduct, which can lead to stricter sanctions.

3. The Number of Customers Involved

Similarly, the number of customers involved in the borrowing arrangement is considered. If the broker borrowed money from multiple clients, this indicates widespread misconduct and raises serious red flags about the broker’s ethics and intent.

4. Loan Documentation

Was the loan agreement documented through a formal, written contract? Or was it an informal, verbal arrangement? When a stockbroker borrows money, proper documentation matters. A formal loan agreement demonstrates transparency, while the absence of documentation suggests that the broker intended to conceal the arrangement.

5. Loan Terms: Dollar Amount, Duration, Interest Rate, and Repayment Schedule

The terms of the loan, such as the amount borrowed, the duration, and the repayment schedule, play a significant role in determining sanctions. Were the terms reasonable? Did the broker attempt to repay the loan? FINRA will scrutinize whether the loan terms were fair and if the broker followed through with repayment.

6. Loan Repayment

FINRA will examine whether the broker has repaid, or attempted to repay, the loan. Brokers who make a good-faith effort to repay the money may receive more lenient sanctions than those who ignore their obligation entirely.

7. The Customer’s Financial Condition and Sophistication

FINRA considers the age, financial condition, and financial sophistication of the customer involved in the loan. Brokers who exploit vulnerable clients, such as elderly investors or those with limited financial knowledge, may face more severe penalties.

8. Misrepresentations to the Customer

Did the broker lie to the customer about the purpose or terms of the loan? Misrepresentations or deceptive practices will almost always result in harsher sanctions.

9. Concealing the Loan from the Employer

If the broker failed to inform their employer about the loan or actively concealed it, this constitutes an additional violation. FINRA firms must be informed about borrowing arrangements, and concealing such activity is seen as particularly egregious misconduct.

FINRA Sanctions: Fines and Suspensions when a Stockbroker Borrows Money

Based on the above considerations, FINRA may impose various sanctions on brokers who violate these rules. When a stockbroker borrows money sanctions may include monetary fines, suspensions, or even permanent bans from the industry. The typical range for fines is between $2,500 and $50,000, depending on the severity of the violation.

In terms of suspension, brokers may be suspended for anywhere from 10 business days to three months. If there are aggravating factors, such as a stockbroker borrows money from multiple clients or deliberately misleading customers, the suspension can extend up to two years or result in a permanent bar from the securities industry.

When A Stockbroker Borrows Money? Protecting Your Rights as an Investor

As an investor, you have the right to expect that your broker will act with integrity and in your best interests. Borrowing money from clients not only breaches this trust but also creates potential conflicts of interest that could jeopardize your investments.

If you find yourself in a situation where your stockbroker borrows money from you and refuses to repay it, you have options. You may be entitled to file a claim against the broker through FINRA’s arbitration process, where you can seek compensation for your losses.

At Bakhtiari & Harrison, we are dedicated to helping investors recover losses caused by unethical broker behavior. If your broker borrows money from you and never repaid it, you don’t have to go through this alone. Contact us today to discuss your case and learn how we can help you navigate the legal process and protect your financial future.

Stockbrokers are entrusted with managing your investments ethically and responsibly. When they abuse that trust by borrowing money from you and failing to repay it, it’s a violation of both FINRA’s rules and their ethical obligations. Understanding FINRA Rules 3240 and 2010 can help you recognize when misconduct occurred and how to hold your broker accountable.

Don’t wait to take action if you’ve been affected by a broker’s misconduct. Reach out to Bakhtiari & Harrison today, and let us help you recover what you’re owed.