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.

Understanding FINRA Rule 2111: Suitability and Its Implications

The Financial Industry Regulatory Authority (FINRA) Rule 2111 is a pivotal regulation designed to ensure that financial advisors recommend suitable investments to their clients. This article delves into the intricacies of Rule 2111, analyzing its implications for the securities industry, and providing a comprehensive overview for investors and professionals alike.

Introduction to FINRA Rule 2111

FINRA Rule 2111, also known as the Suitability Rule, mandates that brokers and financial advisors must have a reasonable basis to believe that a recommended transaction or investment strategy involving securities is suitable for the customer. This belief must be based on the information obtained through reasonable diligence to understand the customer’s investment profile.

Key Components of Rule 2111

Customer Investment Profile: This includes factors such as the customer’s age, other investments, financial situation and needs, tax status, investment objectives, experience, investment time horizon, liquidity needs, risk tolerance, and any other information disclosed by the customer.
Reasonable-Basis Suitability: Requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.
Customer-Specific Suitability: Requires a broker to have a reasonable basis to believe that the recommendation is suitable for the particular customer based on that customer’s investment profile.
Quantitative Suitability: Requires a broker with actual or de facto control over a customer account to have a reasonable basis to believe that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.

Detailed Analysis of Rule 2111

Regulatory Examinations

Regulatory examinations are critical to ensure compliance with Rule 2111. FINRA conducts routine examinations to review the operations and practices of brokerage firms and individual brokers. These examinations help identify any deviations from the suitability requirements.

Common Violations and Enforcement Actions

Several common violations fall under the purview of Rule 2111, and FINRA actively pursues enforcement actions against such breaches:

Sales Practice Violations: This includes unsuitable recommendations, failure to conduct proper due diligence, and recommending high-risk investments to conservative investors.
Ponzi Schemes: Although not directly related to suitability, brokers involved in Ponzi schemes often violate Rule 2111 by recommending investments without proper due diligence.
Theft and Unsuitability: Brokers who misappropriate funds or recommend unsuitable investments based on incorrect or incomplete customer profiles.
Churning: Excessive trading to generate commissions, which may not be in the best interest of the customer and violates the quantitative suitability requirement.
Market Manipulation: Engaging in practices that artificially inflate or deflate the price of a security, often leading to unsuitable recommendations.

Notices and Guidance on Rule 2111

FINRA has issued several notices to provide additional guidance on Rule 2111:

Notice 11-02: This notice provides additional guidance on the new suitability rule, emphasizing the importance of understanding and applying the components of the customer’s investment profile.
Notice 11-25: Offers clarifications on reasonable-basis suitability and highlights common pitfalls in compliance.
Notice 12-25: Discusses the application of the suitability rule to complex products and the importance of thorough due diligence.
Notice 12-55: Provides additional context on suitability obligations, especially concerning non-traditional exchange-traded products.
Notice 20-18: Highlights the impact of market volatility on suitability determinations and the need for heightened diligence during such periods.

Case Studies and Enforcement Examples

Case Study 1: Unsuitable Recommendations

In a notable case, a broker was found to have recommended high-risk, speculative investments to an elderly client with a conservative risk tolerance. The broker failed to consider the client’s investment profile, leading to significant financial losses for the client. FINRA’s enforcement action resulted in sanctions against the broker and the brokerage firm for failing to supervise adequately.

Case Study 2: Churning and Quantitative Suitability

A broker engaged in excessive trading within a client’s account to generate higher commissions. Despite the transactions being individually suitable, the overall trading activity was deemed excessive and unsuitable for the client’s investment profile. FINRA imposed penalties on the broker for violating the quantitative suitability requirement of Rule 2111.

Role of Internal Investigations

Internal investigations play a crucial role in identifying and addressing potential suitability violations before they escalate into regulatory enforcement actions. Firms are encouraged to conduct regular reviews of their sales practices, client profiles, and trading activities to ensure compliance with Rule 2111.

Advising Clients on Suitability, Why Bakhtiari & Harrison?

At Bakhtiari & Harrison, we advise clients on the importance of maintaining accurate and comprehensive investment profiles for all their customers. Our expertise in internal investigations helps firms proactively identify and mitigate potential violations, ensuring adherence to FINRA’s suitability standards.

FINRA Rule 2111 is a cornerstone of investor protection within the securities industry. It imposes rigorous suitability requirements on brokers and financial advisors to ensure that all recommendations and investment strategies are in the best interests of their clients. At Bakhtiari & Harrison, we provide or expertise and guidance on navigating the complexities of Rule 2111, from regulatory examinations to enforcement actions.

For more information or legal assistance, please contact us, our seasoned FINRA and SEC regulatory attorneys are here to support you in achieving compliance and protecting your clients’ interests.