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.

Churning – How Excessive Trading Drains Investor Accounts

Churning is one of the most damaging and deceptive forms of broker misconduct. It occurs when a financial advisor excessively trades in a client’s account for the primary purpose of generating commissions—not improving the client’s financial position. While trading is a natural part of investing, excessive, unnecessary, or unauthorized activity is a violation of securities laws and the rules of the Financial Industry Regulatory Authority, known as FINRA.

For many investors, churning happens quietly over months or years, often disguised as “active management” or a “dynamic strategy.” By the time the investor realizes what has happened, significant losses and unnecessary fees may have already eroded the portfolio. Understanding how churning works—and how to detect it early—is essential for protecting your investments and recovering losses.

What Is Churning?

Churning occurs when a broker engages in excessive trading that benefits the broker more than the client. To prove churning, three factors must generally be shown:

Control: The broker exercised control over the account (either actual or implied).
Excessive Trading: The level of trading activity was excessive given the client’s financial profile and objectives.
Intent to Defraud: The broker traded for the purpose of generating commissions, not for the client’s benefit.

Churning is illegal because it violates the fiduciary duties brokers owe to their clients. It often results in high commissions, reduced investment value, and exposure to unnecessary market risk.

How Brokers Profit From Churning

There are many ways brokers can profit from excessive trading:

Commission-Based Trading: Brokers earn a commission for every buy or sell order. More trades mean more income.
Differential Markups: Brokers may buy securities for a client at one price and sell them at inflated markups.
Internal Incentives: Some firms reward brokers with bonuses or higher payouts for selling certain products or maintaining high trading volumes.

Churning places the broker’s financial incentives in direct conflict with the investor’s best interests.

Warning Signs of Churning

Because churning often hides behind activity that appears normal, investors must pay close attention to specific signs:

1. Frequent Trades Unrelated to Your Strategy
Daily or weekly trading is rarely appropriate for long-term investors. If your broker makes frequent trades without clear purpose, this is a major red flag.

2. Dramatic Increases in Commissions or Fees
Churning often results in unusually high trading costs. Review your account statements for:

Trading commissions
Transaction fees
Margin interest
Hidden costs

3. High Turnover Rate
Turnover rate measures how frequently the securities in your account are replaced in a given year. A high turnover rate suggests excessive activity.

4. High Cost-to-Equity Ratio
This ratio measures how much your account must earn annually just to break even. A high number indicates that your broker’s trading costs are draining your returns.

5. Unauthorized or Unclear Trades
If you see transactions you do not recognize—or if your broker becomes evasive when questioned—churning may be involved.

6. Aggressive “Active Management” Claims
Some brokers use vague language like “active strategy,” “dynamic rebalancing,” or “market timing” to justify excessive trades.

Why Churning Is Especially Dangerous for Retirees

Retirees and conservative investors are particularly vulnerable to churning because they typically seek stability, capital preservation, and predictable income. Excessive trading jeopardizes these goals and exposes them to unnecessary market risk.

Additionally, retirees often rely heavily on their advisors, giving brokers implied control over the account—one of the key factors in proving churning.

How Brokers Gain Control Over an Account

Even if an account is technically non-discretionary (meaning the broker should obtain permission before every trade), a broker may still exercise de facto control. This happens when:

The client always follows the broker’s recommendations
The broker acts quickly before obtaining approval
The broker pressures or manipulates the client into approving trades
The client lacks the sophistication to understand the recommendations

Courts and arbitrators recognize that “control” can exist even without explicit written authority.

How an Investment Fraud Lawyer Proves Churning

Churning claims require careful financial analysis and documentation. An investment fraud lawyer uses several strategies to build the case:

1. Analyze Trading Patterns
The lawyer reviews trading activity to calculate turnover rates, cost-to-equity ratios, and commissions. These metrics help demonstrate that trading was excessive.

2. Establish Broker Control
The attorney gathers evidence showing the broker had actual or implied control over the account. This may include client testimony, communications, or firm records.

3. Identify Conflicts of Interest
Churning often stems from financial incentives. A lawyer examines compensation structures, internal policies, and commission reports to uncover motive.

4. Review Communications
Emails, text messages, and call logs can reveal whether trades were discussed honestly—or concealed intentionally.

5. Evaluate Suitability
Unsuitable high-frequency strategies often accompany churning. Demonstrating unsuitability strengthens the overall claim.

Damages Available in Churning Cases

Investors harmed by churning may recover:

Out-of-pocket losses
Excess commissions and trading fees
Lost appreciation the account would have earned
Margin interest and financing costs
Interest on losses
Attorney fees in certain cases
In severe misconduct cases, punitive damages may also be awarded.

Churning and FINRA Arbitration

Most churning claims are resolved in FINRA arbitration, a specialized forum for resolving disputes between investors and brokerage firms. Arbitration is typically faster than court litigation and allows experienced arbitrators to evaluate the evidence.

A lawyer handles everything from the initial filing to the arbitration hearing, presenting financial analysis, witness testimony, and expert reports to prove excessive trading.

Why Firms Are Also Responsible

Brokerage firms have a duty to supervise their brokers. If a firm ignores red flags—such as high commissions, frequent trades, or client complaints—it may be liable for failure to supervise. In many churning cases, claims are brought against both the broker and the firm, increasing the likelihood of a meaningful recovery.

Protecting Yourself From Churning

Investors can protect themselves by:

Reviewing monthly statements for unusual activity
Asking for explanations of every trade
Requesting a written investment strategy
Avoiding brokers who push active trading without clear rationale
Monitoring fees and commissions
Using FINRA BrokerCheck to review a broker’s history

Clear communication and consistent oversight are your strongest defenses.

The Emotional Toll of Churning

Churning not only causes financial loss—it damages trust. Many investors feel betrayed or embarrassed after discovering they were misled. These feelings are normal. Legal action provides not just financial recovery but also closure and accountability.

Churning is an intentional, harmful practice that drains investor accounts through excessive trading and unnecessary fees. When brokers prioritize commissions over client interests, they violate securities laws and FINRA rules, creating grounds for recovery. If you suspect your broker has engaged in excessive trading, a thorough investigation by an investment fraud lawyer can uncover the truth and help you recover your losses through FINRA arbitration. To discuss your situation or explore your options, contact Bakhtiari & Harrison.