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.

Investor Losses in Oil and Gas Structured Products

With the recent drop in oil and gas prices, investors who hold structured products (also known as “structured notes”) tied to that sector may be at risk of significant losses. This may include structured notes tied to the following stocks, among others:

Western Midstream Partners, LP (WES);
Apache Corporation (APA);
Targa Resources Corp. (TRGP);
Continental Resources, Inc.;
Cenovus Energy Inc.;
Occidential Petroleum Corp (OXY);
Marathon Oil Corporation (MRO);
Weatherford International PLC (WFTLF);
Sasol Limited (SSL);
Diamondback Energy, Inc. (FANG);
Parsley Energy Inc.;
Halliburton Company (HAL);
Hess Midstream LP (HESM)

Similarly, investors who hold structured notes tied to oil and gas ETFs may be at risk of significant losses. These ETFs may include, among others:

United States Oil Fund (USO);
United States Brent Oil Fund (BNO);
iPath Series B S&P GSCI Crude Oil Total Return Index (OIL);
ProShares K-1 Free Crude Oil Strategy ETF (OILK);
United States Gasoline Fund (UGA);
Invesco DB Oil Fund (UNG);
ETRACS S&P GSCI Crude Oil Total REturn Index (ETN);
iPath Series B Boomberg Energy Subindex Total Return ETN (JJE)

What are structured products (aka “Structured Notes”)?

Structured notes are marketed as bond-like investments that promise a favorable rate of return. Structured notes are typically tied to a sector of equities, or, in some cases, individual stocks, the underlying performance of which impact the performance of the structured note. Structured notes often have limited upside, meaning their rate of return is capped at a specificed interest rate. Conversely, structured notes can have unlimited downside and can be automatically “called” if the corresponding value of the equities or sector to which it is tied falls by a specified percentage or amount.

How do structured notes work, and how can an investor benefit?

Example: Suppose an investor purchases a structured note tied to basket of oil and gas stocks for $100,000. The note promises an 8% interest rate for one year. The note will continue to pay that 8% interest rate even if the underlying value of the oil and gas securities to which it is tied increases more than 8%. This “caps” the structured note’s return at 8%. Therefore, assuming the underlying value of the oil and gas stocks do not decrease significantly (more on that below), or increase within the course of the one year period, the investor will receive their promised 8% interest rate and their principal (i.e. the initial $100,000 investment) will be returned after one year.

Therefore, on the surface, structured notes appear to operate like a bond in that they seem to offer a favorable yield/interest rate.

What’s the risk associated with structured notes?

But what if the underlying value of the oil and gas stocks to which the structured note was tied decrease significantly? Regularly, a structured note’s promised rate of return will be contingent on the underlying securities to which it is tied not falling a certain amount or percentage.

Suppose the 8% interest that the hypothetical structured note above promised was contingent upon the oil and gas stocks to which it was tied not falling more than 30%. If the oil and gas stocks fall 30% or more, the structured note allows the issuer to automatically “call” the structured note for 50% of the initial investment. Between March 3, 2020 and March 9, 2020, in less than one week, oil and gas stocks fell approximately 31%. Suppose the investor purchased such a structured note on March 1, 2020, as of the date of this post (March 12, 2020) their $100,000 hypothetical investment would have been “called” and the issuer would have returned only $50,000 in cash to the account having not received the benefit of the 8% interest the note promised, and causing the investor to incur a 50% loss in two weeks.

There are numerous variations of structured notes, and the above example is commonly known as an “auto-callable structured note.”

The Bottom Line

Structured notes tied to oil and gas are at risk of significant losses given the dramatic fall in oil and gas prices. If you are an investor that was concentrated in oil and gas related securities, you should consider all legal options. If you wish to discuss your particular situation and the potential for the recovery of your investment losses, or you have information of interest, please contact us for an evaluation of your potential case.