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.

Fiduciary Duty of Brokerage Firms and Stockbrokers: Key Legal Precedents

California Supreme Court and Appellate Court Cases

California Supreme Court Cases

Twomey v. Mitchum, Jones & Templeton, Inc. (1968) 262 Cal.App.2d 690Summary: This case established that a stockbroker owes a fiduciary duty to his customers. The court held that a broker, as an agent, owes a fiduciary duty of the utmost good faith and integrity in dealings with the client.
- A broker’s fiduciary duty includes full and fair disclosure of all material facts.
- The duty encompasses managing the client’s account with care and prudence.

California Appellate Court Cases

Duffy v. Cavalier (1989) 215 Cal.App.3d 1517Summary: In this case, the plaintiff alleged that the broker, Cavalier, failed to act in his best interest, constituting a breach of fiduciary duty. The court reaffirmed that stockbrokers owe a fiduciary duty to their customers.
- The broker’s fiduciary duty includes providing accurate information and suitable investment recommendations.
- Breach of fiduciary duty can result in liability for any damages suffered by the customer due to the broker’s actions.
Black v. Shearson, Hammill & Co. (1968) 266 Cal.App.2d 362Summary: This case involved a dispute where the plaintiffs claimed their stockbroker made unauthorized trades and provided misleading information. The court recognized the fiduciary duty of brokers.
- The court held that stockbrokers must act in the best interests of their clients.
- Brokers are responsible for ensuring that any advice given is suitable for the client’s financial situation and goals.
Hobbs v. Bateman Eichler, Hill Richards, Inc. (1985) 164 Cal.App.3d 174Summary: The court ruled that stockbrokers have a fiduciary duty to manage accounts with the care, skill, prudence, and diligence that a prudent person would use.
- This duty includes the obligation to avoid conflicts of interest and to act solely in the best interest of the client.
- The court emphasized the importance of transparency and full disclosure by brokers.
Schwab v. First California Co. (1968) 267 Cal.App.2d 403Summary: The case highlighted that a broker’s fiduciary duty encompasses a responsibility to provide honest and accurate advice tailored to the client’s needs and objectives.
- The court found that brokers must make recommendations based on a thorough understanding of the client’s financial situation and goals.
- A breach of this duty can lead to liability for any resulting client losses.

FINRA and SEC Administrative Opinions

FINRA Opinions

In re Vaughan (2011) FINRA Disciplinary Proceeding No. 2009016763101Summary: In this decision, FINRA found that the broker violated his fiduciary duty by recommending unsuitable investments to his customers without proper consideration of their financial situations.
- Brokers are required to recommend investments that are suitable based on a client’s risk tolerance and financial goals.
- Violations of this fiduciary duty can result in disciplinary actions and fines.
In re Kernweis (2008) FINRA Disciplinary Proceeding No. 2007007728001Summary: This case involved a broker who failed to disclose material information and engaged in fraudulent activities. FINRA held that the broker’s actions constituted a breach of fiduciary duty.
- Brokers must provide full disclosure of all material information to their clients.
- Engaging in fraudulent activities breaches the fiduciary duty owed to clients and can lead to severe penalties.

SEC Opinions

SEC v. Capital Gains Research Bureau, Inc. (1963) 375 U.S. 180Summary: The Supreme Court, in a case brought by the SEC, held that investment advisors owe a fiduciary duty to their clients, which includes full and fair disclosure of all material information.
- Although this case primarily concerns investment advisors, it sets a precedent for fiduciary duties in the financial industry.
- The principle of full and fair disclosure is a cornerstone of fiduciary duty.
In re Goldman Sachs & Co. (2010) SEC Administrative Proceeding File No. 3-13847Summary: The SEC found that Goldman Sachs failed to disclose conflicts of interest and misled investors about the nature of certain investment products, thereby breaching its fiduciary duty.
- Brokerage firms must disclose conflicts of interest and provide accurate information about investment products.
- Failure to do so constitutes a breach of fiduciary duty and can result in SEC enforcement actions.

Explanation of Fiduciary Duty

A fiduciary duty is a legal obligation for one party to act in the best interest of another. In the context of brokerage firms and stockbrokers, this duty includes:

Loyalty: Brokers must prioritize the interests of their clients above their own.
Care: Brokers must manage their clients’ investments with a high degree of care and expertise.
Disclosure: Brokers must fully disclose all relevant information that might affect the client’s investment decisions.
Conflict of Interest: Brokers must avoid conflicts of interest and disclose any potential conflicts to their clients.

These cases and administrative opinions collectively reinforce the principle that brokers and brokerage firms have a fiduciary duty to their clients, encompassing loyalty, care, and full disclosure. Breaches of this duty can lead to legal consequences and liability for any resulting damages.

If you believe your brokerage firm breached its fiduciary duty to you and caused losses, contact Bakhtiari & Harrison.