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.

FINRA Attorneys Advice On How to Break Free from a Promissory Note and Transition to a Better Firm | FINRA Attorneys

You’re a successful stockbroker. You’ve built a solid book of business, cultivated strong client relationships, and consistently hit your numbers. Yet, you feel trapped. The firm that once seemed like the perfect fit now feels like a gilded cage. The culture has shifted, the platform is clunky, and the compensation plan that was once attractive now feels restrictive. You see better opportunities on the horizon – a firm that offers more freedom, superior technology, and a more client-centric approach. There’s just one massive hurdle standing in your way: the promissory note you signed when you joined.

Those “golden handcuffs” that felt like a generous bonus now feel like a lead weight, chaining you to a firm that no longer serves your best interests or those of your clients. The thought of leaving triggers a wave of anxiety. How will you repay the outstanding balance? What are the legal ramifications? Will your former firm try to ruin your reputation and your practice?

FINRA attorneys at Bakhtiari & Harrison hear this story all too often. We’ve guided countless financial advisors through this very situation, helping them navigate the complexities of transitioning to a new firm while under the weight of a promissory note. We understand the stress and uncertainty you’re facing, and we’re here to tell you that there is a path forward – a way to break free and build the practice you’ve always envisioned.

Table of Contents

The Broker’s Dilemma: Trapped Between a Rock and a Hard Place

The financial services industry is unique. To attract top talent, brokerage firms often offer substantial upfront payments structured as “forgivable loans” or promissory notes. These deals, frequently presented as a sign-on bonus, are in reality a powerful retention tool. The terms are typically designed to keep you at the firm for a set period, with the loan being forgiven incrementally over several years.

The problem arises when the firm you joined isn’t the firm it is today. Mergers and acquisitions can drastically alter the landscape. Management changes can lead to a shift in priorities, often away from what’s best for you and your clients. The promises made during the recruitment process – about marketing support, technological advancements, and a collaborative environment – may never have materialized.

Now you’re left with a difficult choice: stay at a firm that is hindering your growth and potentially compromising your ability to serve your clients effectively, or make a move and face the daunting prospect of repaying a significant sum of money, all while your former employer may be actively trying to sabotage your transition.

The fear is palpable. You worry about:

The Demand Letter: That dreaded certified mail envelope arrives, demanding immediate repayment of the entire outstanding loan balance.
The Lawsuit: Your former firm initiates a FINRA arbitration proceeding against you, seeking not only the principal but also interest and attorneys’ fees.
The Form U5: A weaponized Form U5, the termination notice filed with FINRA, can contain language that casts you in a negative light, making it difficult to attract clients and even to be hired by your new firm. A dispute over a promissory note is a reportable event that can tarnish your otherwise clean record.
The Temporary Restraining Order (TRO): In a worst-case scenario, your old firm might seek a TRO to prevent you from contacting your clients, effectively kneecapping your ability to transition your business.

These are not unfounded fears. Brokerage firms have teams of lawyers dedicated to clawing back these promissory notes. They count on the fact that the prospect of a protracted legal battle will be enough to keep you in line. But what they don’t want you to know is that you have options. You have leverage. And with the proper guidance, you can navigate this challenging period and emerge stronger on the other side.

Your Guide Through the FINRA Maze – FINRA Attorneys

At Bakhtiari & Harrison, we are not just attorneys; we are advocates for financial advisors. We have a deep understanding of the intricacies of the securities industry and the challenges you face when transitioning between firms. We’ve been in the trenches, defending brokers against the aggressive tactics of large brokerage houses. We know their playbook, and we know how to counter it.

We believe that you shouldn’t have to sacrifice your career aspirations or the well-being of your clients because of a promissory note. Our role is to provide you with a clear, strategic path forward, one that protects your interests, minimizes your risk, and empowers you to make the best decision for your future. We are the FINRA attorneys you need in your corner.

A Proven Plan for a Successful Transition

Navigating a departure from a brokerage firm with a promissory note is not something you should do alone. It requires a carefully crafted strategy and a thorough understanding of your rights and obligations. Here is the step-by-step plan we use to guide our clients through this process:

Step 1: A Deep Dive into Your Agreements

The first step is a comprehensive review of all your relevant documents. This includes your promissory note, your employment agreement, and any other ancillary agreements you may have signed. We will dissect the language of these documents to understand:

The exact terms of the promissory note: What is the forgiveness schedule? What are the triggers for repayment? What are the provisions for interest and attorneys’ fees?
Your employment contract: Are there non-solicitation or non-compete clauses? How do they interact with the Broker Protocol? What are the firm’s stated policies on departing representatives?
The Broker Protocol: Is your current firm a signatory to the Broker Protocol? Is your new firm? This is a critical piece of the puzzle that will determine what client information you can legally take with you. The Protocol allows for a more seamless transition of your book of business, but only if both firms are members.

Understanding the legal landscape is the foundation upon which we will build your transition strategy.

Step 2: Exploring Your Leverage and Potential Defenses

Many brokers mistakenly believe that a promissory note is an ironclad contract that cannot be challenged. This is simply not true. There are a number of potential defenses and counterclaims that can be raised to challenge the enforceability of the note or to offset the amount you owe. These can include:

Fraudulent Inducement: Were you misled during the recruiting process? Were promises made to you about the firm’s platform, support, or compensation that turned out to be false? If you can demonstrate that you would not have joined the firm and signed the note but for these misrepresentations, you may have a strong defense.
Breach of Contract: Did the firm fail to live up to its end of the bargain? This could be anything from a failure to provide promised marketing support to a change in the compensation plan that negatively impacted your earnings.
Constructive Discharge: Did the firm make your working conditions so intolerable that you were forced to resign? This can be a difficult claim to prove, but if successful, it can be a powerful defense against a promissory note claim.
Wrongful Termination: If you were terminated without cause, you may have a claim against the firm that could offset the amount of the promissory note.
Violations of Industry Rules: Did your firm engage in any conduct that violated FINRA or SEC rules? This could create a counterclaim that would give you significant leverage in negotiations.
Unconscionability: In some rare cases, the terms of the promissory note itself may be so one-sided and unfair as to be deemed unconscionable and unenforceable.

By thoroughly investigating the circumstances surrounding your employment, we can identify any potential claims you may have against your former firm. This is not just about defending against their claim; it’s about going on the offensive and leveling the playing field.

Step 3: The Art of Negotiation

The vast majority of promissory note disputes are resolved through negotiation, not in a FINRA arbitration hearing. Armed with a deep understanding of your legal position and any potential counterclaims, we can engage with your former firm from a position of strength. Our goal is to negotiate a settlement that is in your best interest. This could involve:

A Reduction in the Principal: We can often negotiate a significant reduction in the amount of the promissory note you have to repay.
A Waiver of Interest and Fees: We will fight to have any accrued interest and claims for attorneys’ fees waived.
A Structured Repayment Plan: Instead of a lump-sum payment, we can negotiate a manageable repayment plan that fits your financial situation.
Favorable Form U5 Language: This is a critical and often overlooked part of the negotiation. We will work to ensure that the language on your Form U5 is neutral and does not negatively impact your career. The ideal outcome is a “settled” or “business decision” notation, rather than a “default” on a loan.

Your new firm may also be willing to contribute to the settlement as part of your transition package. We can help facilitate these discussions to ensure a smooth and financially viable move.

Step 4: A Clean and Compliant Transition

While we are handling the legal negotiations, you need to focus on what you do best: serving your clients. A successful transition requires careful planning and execution. We will advise you on how to:

Comply with the Broker Protocol (if applicable): If both your old and new firms are Protocol members, we will guide you on exactly what client information you can take, how to resign, and how to begin contacting your clients at your new firm.
Navigate a Non-Protocol Transition: If one or both firms are not part of the Broker Protocol, the transition becomes more complex. We will provide you with a detailed roadmap for resigning and communicating with your clients in a way that minimizes the risk of a lawsuit or a TRO.
Avoid Common Pitfalls: We will counsel you on what not to do, such as sending confidential firm information to your personal email, printing client lists in the weeks leading up to your departure, or making disparaging remarks about your former firm. These are the kinds of mistakes that can give your former employer the ammunition they need to file a successful legal action against you.

A smooth transition is not only essential for retaining your clients but also for demonstrating to your former firm that you are a professional who is taking a thoughtful and compliant approach to your move.

The Two Paths Before You: Freedom or Frustration

You are at a crossroads. The path you choose now will have a profound impact on your career and your future.

Path #1: The Path of Inaction and Fear

On this path, you allow the fear of the promissory note to paralyze you. You remain at a firm that is no longer a good fit, feeling increasingly frustrated and unfulfilled. Your practice stagnates, and your clients may begin to notice your lack of enthusiasm. You may even start to lose clients to advisors at other firms who can offer them better solutions and a higher level of service. The golden handcuffs have become a permanent fixture, and your dream of a better practice remains just that – a dream.

Or, you decide to leave without a plan, hoping for the best. You are blindsided by a demand letter, a lawsuit, and a damaging Form U5. The transition to your new firm is a chaotic and stressful nightmare. You spend countless hours and resources defending yourself in a legal battle that could have been avoided. Your reputation is tarnished, and you lose a significant portion of your book of business in the process.

Path #2: The Path of Proactive and Strategic Action

On this path, you recognize that the promissory note is a hurdle, not a roadblock. You seek out experienced legal counsel who can guide you through the process. You develop a clear and comprehensive plan for your transition. You negotiate with your former firm from a position of strength, armed with a thorough understanding of your legal rights and potential counterclaims.

You successfully transition to your new firm, with the bulk of your clients following you. The promissory note issue is resolved with a manageable settlement, and your Form U5 is clean. You are re-energized and excited about the future. You are at a firm that supports your growth and allows you to provide the best possible service to your clients. You have broken free from the golden handcuffs and are now in control of your own destiny.

Your Future is Calling. Will You Answer?

The decision to leave a brokerage firm is a significant one, and the existence of a promissory note adds a layer of complexity and anxiety. But it does not have to be an insurmountable obstacle. With the right strategy and the right guidance, you can navigate this transition and build the practice you deserve.

Don’t let a promissory note dictate the course of your career. Don’t allow fear and uncertainty to hold you back from a better future. The team at Bakhtiari & Harrison is ready to be your guide. We will provide you with the clarity and confidence you need to make the right move for you and your clients.

The first step is a confidential consultation. Let’s discuss your situation, review your agreements, and outline a path forward. There is no obligation, and the peace of mind that comes from understanding your options is invaluable.

Schedule your confidential consultation with Bakhtiari & Harrison today and take the first step towards breaking free. Your future self, and your clients, will thank you.