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.

Fixed Income Fraud? Nine Key Steps in Our Definitive Guide for Investors

At Bakhtiari & Harrison, we understand the challenges investors face, especially those who have been defrauded by a financial advisor. Fixed income fraud remains a topic that investors should learn more about. Building trust with a financial advisor and making informed decisions are crucial steps toward securing your financial future. That’s why we’re here to guide you through the essentials of fixed income fraud and how to avoid it, empowering you with the knowledge you need to make wise investment choices.

Have You Been A Victim of Fixed Income Fraud?

Fixed income investing involves lending money to an issuer—such as a corporation or government—in exchange for regular interest payments and the return of the principal at maturity. Bonds are the most common fixed income instruments. They are considered less risky than stocks, making them an attractive option for conservative investors or those looking to diversify their portfolios.

Understanding the Primary Market and How Fixed Income Fraud Can Occur

The primary market is where new bonds are issued and sold for the first time. This market plays a vital role in helping issuers raise capital. Understanding how the primary market operates can give you an edge in making timely and beneficial investment decisions.

Bond Issuance

Syndicate Formation: A syndicate is a group of investment banks and brokerage firms that come together to underwrite and distribute a new bond issue. They share the risks and rewards associated with selling the bonds.
Due Diligence: Before issuing bonds, the syndicate conducts due diligence to assess the financial health of the issuer. This involves reviewing financial statements, business plans, and market conditions to ensure that the bond offering is viable and accurately represented to potential investors.
Regulatory Approval: The issuer must file necessary documentation with regulatory bodies like the Securities and Exchange Commission (SEC). This includes detailed information about the bond terms, the issuer’s financial status, and potential risks.
Tombstone Advertisement: Once approved, the syndicate publishes a tombstone ad in financial publications. This ad provides essential details about the bond offering, such as the issuer’s name, bond type, maturity date, and interest rate.
Indications of Interest: Investors express their willingness to purchase the bonds through indications of interest. While not legally binding, these expressions help the syndicate gauge demand and set the final pricing terms.
Pricing and Allocation: Based on the demand, the syndicate sets the bond’s price and interest rate. Bonds are then allocated to investors, often prioritizing institutional investors but also including individual investors.
Closing the Deal: Funds are transferred from investors to the issuer, and the bonds are delivered to the investors, completing the primary market transaction.

Key Terms in Bond Investing

Term Bond: A bond that has a single maturity date when the principal amount is repaid to investors. Term bonds are straightforward, making them easier to manage for those new to bond investing.
Scale: In the context of bond issuance, a scale refers to the list of interest rates and prices for bonds with different maturities in the same offering. It helps investors understand the yield they can expect over various time frames.
Position: This term describes the amount of a particular bond that an investor or dealer holds. A “long position” means you own the bond, while a “short position” indicates you owe the bond.

Discussing Investment Details with Your Broker

Open and transparent communication with your broker is essential for successful investing and the avoidance of fixed income fraud. Here are some critical topics to discuss:

Minimum Yield Requirement

Determine your minimum yield requirement, which is the lowest acceptable return you are willing to receive from your investment. This figure should align with your financial goals and risk tolerance. Communicating this to your broker helps them identify bonds that meet or exceed your expectations.

Selling Bonds Before Maturity

Understand the implications of selling bonds before maturity. While bonds are typically held until they mature, you may need to liquidate your investment early. Selling before maturity can result in a gain or loss, depending on current market conditions and interest rates. Discuss potential exit strategies with your broker to be prepared for any scenario. Fixed income fraud can also be found when a financial adivsor over trades or engages in excessive bond trades.

Minimum Quantities and Quantity Price Breaks

Minimum Quantities: Some bonds require a minimum purchase amount, which could be a barrier for investors with limited capital. Ask your broker about these requirements to ensure the investment fits your budget.
Quantity Price Breaks: In the secondary market, purchasing larger quantities of bonds may qualify you for a quantity price break, reducing the price per bond. Inquire where the firm’s quantity price breaks occur to maximize your investment efficiency.

Steps if Not All Desired Bonds Are Purchased

Sometimes, the market doesn’t have enough supply to meet your demand. If you can’t purchase all the bonds you want:

Partial Fulfillment: Accept a partial allocation and keep the order open for future fulfillment.
Alternative Options: Ask your broker to identify similar bonds that meet your investment criteria.
Adjust Investment Strategy: Re-evaluate your investment plan to accommodate the current market conditions.

Exploring the Secondary Market

The secondary market is where existing bonds are bought and sold among investors. Understanding this market is crucial for managing your bond investments effectively and protecting against fixed income fraud.

Yield-to-Worst (YTW)

Yield-to-Worst is the lowest possible yield you might receive without the issuer defaulting. It considers all potential call dates and scenarios where the issuer might repay the bond before maturity. YTW is a conservative measure, helping you understand the minimum return you can expect.

Lots

Bonds are often traded in lots, which are standardized quantities or groupings of bonds. Knowing the lot size is important because:

Pricing: Larger lots may have different pricing compared to smaller ones due to quantity price breaks.
Liquidity: Smaller lots are generally more liquid, making them easier to buy or sell in the secondary market. Pricing liquidity and lack of price discovery can mask fixed income fraud.

Crossing Bonds: A Closer Look

Crossing bonds occurs when the same investment firm acts as an agent for both the buyer and the seller in a bond transaction, without the firm’s trading desk ever owning the bonds. This practice can benefit investors through:

Reduced Transaction Costs: Eliminates the need for a middleman, potentially lowering fees.
Faster Execution: Speeds up the transaction since both parties are within the same firm.

FINRA Rules on Crossing Bonds

The Financial Industry Regulatory Authority (FINRA) has specific rules to protect investors in these situations:

Best Execution: Firms must ensure that the transaction is executed at the best available price. Fixed income fraudsters can materially markup or markdown the prices of bonds.
Disclosure: Any conflicts of interest must be disclosed to both parties. This is a key problem that gives rise to fixed income fraud. The failure to disclose can occur because of conflicts of interest.
Fair Pricing: Firms are required to provide fair pricing, which is evaluated based on market conditions and comparable transactions.

Protecting Your Investments, Avoiding Fixed Income Fraud

Being proactive is key to safeguarding your financial well-being against fixed income fraud. Educate yourself continuously about investment terms, market conditions, and new regulations. Knowledge is your best defense against potential risks.

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

Ask Questions

Never hesitate to seek clarity from your broker or financial advisor. It’s their responsibility to ensure you understand your investments fully and to guard against fixed income fraud.

Monitor Your Portfolio

Regularly review your investment statements and stay updated on your portfolio’s performance. Early detection of discrepancies of fixed income fraud can prevent significant losses.

Diversify Your Investments

Avoid putting all your eggs in one basket. Diversification reduces risk by spreading your investments across different asset classes and sectors.

Frequently Asked Questions Concerning Fixed Income Fraud

1. What is the difference between the primary and secondary bond markets?

Primary Market: This is where new bonds are issued and sold directly to investors for the first time. It’s like buying a product directly from the manufacturer.
Secondary Market: This is where existing bonds are traded among investors. It’s similar to buying a used product from someone else. Secondary market trades can be sources of fixed income fraud when there is a lack of disclsoure concerning where the bonds are being sourced from.

2. How does yield-to-worst affect my bond investment?

Yield-to-worst calculates the lowest potential yield you might receive without the issuer defaulting. It helps you understand the minimum return you can expect, considering all possible early call or redemption features of the bond.

3. What should I do if my broker can’t purchase all the bonds I want?

Discuss Alternatives: Ask your broker about similar bonds that meet your criteria.
Wait for Availability: Consider waiting if you believe the bond is worth it.
Adjust Your Order: Be flexible with quantities or terms to increase the likelihood of fulfillment.

4. Why are quantity price breaks important in bond investing?

Quantity price breaks can lower the cost per bond when purchasing larger amounts. This can enhance your overall return on investment by reducing initial costs.

5. How does crossing bonds impact me as an investor?

Crossing bonds can offer better pricing and faster transactions. Cross trading can be a source of fixed income fraud because of built in conflicts of interests amongst parties. However, it’s crucial to ensure that the firm adheres to FINRA rules to protect your interests, such as providing best execution and full disclosure.

Fixed income investing offers a path to steady returns and portfolio diversification. By understanding the primary and secondary markets, key investment terms, and the importance of open communication with your broker, you can make informed decisions that align with your financial goals.

At Bakhtiari & Harrison, we’re committed to helping you navigate the complexities of fixed income investing. If you’ve been defrauded or need expert guidance to rebuild your investment strategy, contact us today. Let us help you secure a brighter financial future.