Though taxpayer money has thus far kept embattled financial institution CIT Group, Inc. alive, the government is faced with the reality that it has made a bad investment. The company has finally filed for bankruptcy after unsuccessfully attempting to generate capital from the government, and generating capital from individual investors.
CIT Group Issues
The reality that the government has lost over $2 billion in taxpayer TARP funds though its investment in CIT Group is regrettable. What is increasingly disturbing is the loss that individual investors have taken in this entire debacle. As noted in other articles on this site, CIT had traditionally looked to institutional investors for capital. As their finances become more and more questionable, institutional funds dried up and CIT was forced to look to other venues for much needed capital. That venue was retail investors, and third party broker-dealers are how investors were convinced to invest their funds.
Third party broker-dealers did an exceptional job at convincing individuals, especially those in and reaching retirement, to invest in CIT InterNotes. These notes were marketed as investment grade products, and had a much publicized, “death put,” or “survivor’s option,” feature. This feature, in theory, allows the beneficiary of a recently passed bondholder to sell that bond back to the lender at face value. InCapital, the firm who underwrote CIT InterNotes, even put a feature on its website allowing prospective clients to zoom in on the content of the offering.
The positive characteristics of this investment product were touted to investors by broker-dealers. The possible drawbacks of CIT InterNotes, however, were often left out. This marketing strategy worked and more than $800 million in CIT backed debt was sold to clients.
Even with the capital raised through broker-dealers, CIT was unable to stave off bankruptcy. With this bankruptcy filing, millions in individual investors’ funds are virtually guaranteed as being lost. With such a large loss, many are looking to their brokers and asking, how did this happen?
What Is FINRA Arbitration?
FINRA arbitration is a dispute resolution process used to settle conflicts between investors, brokerage firms, and financial advisors outside of traditional court litigation. The process is administered by the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization responsible for overseeing broker-dealers and maintaining fairness in the U.S. securities industry. Because most brokerage agreements require customers to resolve disputes through arbitration rather than the court system, FINRA arbitration has become the primary method for resolving investor disputes in the United States.
At its core, FINRA arbitration is designed to be faster and less formal than a lawsuit. When an investor believes they have suffered financial losses due to misconduct—such as unsuitable investment recommendations, misrepresentation, excessive trading, or failure to supervise—they can file a claim with FINRA’s dispute resolution forum. Brokerage firms and registered representatives who are members of FINRA are generally required to participate in this process if a customer initiates arbitration.
The FINRA Process
The arbitration process begins when a claimant files a Statement of Claim with FINRA. This document outlines the facts of the dispute, the alleged misconduct, and the damages being requested. After the claim is filed, the respondent—typically the brokerage firm or broker—submits an Answer responding to the allegations. FINRA then appoints a panel of one or three arbitrators depending on the size of the claim. Arbitrators are neutral decision-makers selected from FINRA’s roster and may include individuals with industry experience as well as public arbitrators who have no ties to the securities industry.
Once the arbitration panel is selected, the case proceeds through several stages similar to litigation, including document exchange and pre-hearing conferences. However, arbitration is typically more streamlined than court proceedings. There are fewer procedural hurdles, discovery is more limited, and the process is generally designed to move more quickly than traditional litigation. Eventually, the case proceeds to an evidentiary hearing where both sides present testimony, documents, and arguments to the arbitrators.
At the conclusion of the hearing, the arbitration panel issues a written decision known as an award. This award determines whether the claimant is entitled to damages and, if so, how much compensation should be paid. Arbitration awards are generally final and binding, meaning they cannot easily be appealed. Courts may only overturn an arbitration award under very limited circumstances, such as evidence of fraud or arbitrator misconduct.
The Role of FINRA Arbitration in Dispute Resolution
FINRA arbitration plays a crucial role in the securities industry because it provides investors with a forum to pursue recovery for investment losses caused by broker misconduct. At the same time, brokerage firms benefit from a dispute resolution process that is often faster and less expensive than court litigation. While critics argue that mandatory arbitration clauses limit investors’ ability to pursue claims in court, supporters maintain that arbitration provides an efficient and accessible system for resolving financial disputes.
Ultimately, FINRA arbitration serves as the central mechanism for resolving conflicts between investors and the brokerage industry. By offering a structured yet streamlined process overseen by FINRA, arbitration aims to provide fair outcomes while maintaining confidence in the U.S. financial markets.