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.

Selling Away: Best Practices by Bakhtiari & Harrison

Selling away from a brokerage firm is a critical issue in the securities industry that can have serious implications for both brokers and investors. It involves a broker selling securities that are not approved by their employing firm, often bypassing necessary due diligence and regulatory oversight. This comprehensive guide, developed by Bakhtiari & Harrison, aims to shed light on the intricacies of selling away, the motivations behind it, the legal framework governing it, and the best practices to prevent and address it. By understanding these elements, brokers and investors can navigate the complex landscape of securities transactions more safely and effectively.

What is Selling Away?

Selling away occurs when a broker solicits a client to purchase securities that are not held or offered by their employing brokerage firm. Typically, brokerage firms maintain a list of approved products that have undergone due diligence screenings to ensure they meet regulatory standards and are safe for clients. Selling away bypasses this process, exposing clients to potentially high-risk investments.

Examples of Selling Away:

A broker sells shares in a private startup without the firm’s approval.
An advisor promotes investment in a real estate project not sanctioned by their firm.

Difference Between Selling Away and Selling Outside the Brokerage Firm:

Selling away specifically refers to unauthorized transactions that are outside the firm’s approval, while selling outside the firm can sometimes be sanctioned if the firm is aware but not directly involved.

Why Do People Sell Away from the Brokerage Firm?

Motivations for Selling Away:

Higher Commissions: Brokers might receive larger commissions from selling products outside their firm.
Personal Investments: Brokers may have personal investments in products they promote.
Client Requests: Clients may request investments in specific products not offered by the firm.

Potential Benefits and Drawbacks:

Benefits: Higher earnings and client satisfaction.
Drawbacks: Legal risks, loss of reputation, and financial penalties.

Risks Involved for Both Broker and Client:

For Brokers: Legal action, suspension, or revocation of licenses.
For Clients: Investments in unvetted, high-risk products leading to potential financial losses.

Regulations and Laws Surrounding Selling Away

Securities and Exchange Commission (SEC) Regulations:

The SEC mandates that all securities transactions must be conducted within the regulatory framework to protect investors.

Financial Industry Regulatory Authority (FINRA) Rules:

FINRA Rule 3280 explicitly prohibits brokers from participating in private securities transactions without prior written notice to their firm. Rule 3040 further requires registered persons to obtain firm approval before engaging in any securities transactions outside the firm.

State Laws and Regulations:

Various states have additional regulations that govern securities transactions and protect investors from unauthorized sales activities.

Consequences of Selling Away

Possible Legal Repercussions:

Brokers engaging in selling away can face legal actions, including fines, suspensions, or bans from the industry.

Impact on the Broker’s Career and Reputation:

Selling away can severely damage a broker’s professional reputation and career prospects, leading to a loss of trust and potential clients.

Financial Consequences for Both Broker and Client:

Clients may suffer substantial financial losses, and brokers may face significant penalties, including restitution and fines.

How to Protect Yourself from Selling Away

Questions to Ask Your Broker:

Are all my investments approved by your firm?
How does the firm vet the investment products?

Red Flags to Look Out For:

Unsolicited investment opportunities.
Lack of documentation or transparency about the product.

Steps to Take if You Suspect Selling Away:

Report your concerns to the brokerage firm’s compliance department.
Consult with a securities lawyer for legal advice.

Key Questions Answered

What is Selling Away from the Brokerage Firm?

Selling away involves brokers selling unauthorized securities outside their firm’s purview. This means the broker engages in transactions for investment products that their employing firm does not approve or supervise, thus bypassing critical due diligence and regulatory oversight.

Selling Away from the Brokerage Firm Legal?

No, selling away is illegal and violates FINRA and SEC regulations. These regulatory bodies require all securities transactions to be conducted under the supervision of the broker’s firm to ensure compliance with legal standards and protect investors from potential fraud and high-risk investments.

How Does Selling Away Differ from Traditional Brokerage Transactions?

Traditional brokerage transactions are conducted within the framework of the brokerage firm’s operations, involving products that the firm has vetted and approved. Selling away, on the other hand, involves the broker independently selling products not approved by the firm, bypassing these safeguards and exposing investors to greater risks.

What are the Potential Risks and Consequences of Selling Away?

The risks and consequences of selling away are significant for both brokers and clients. For brokers, engaging in selling away can lead to legal actions, fines, suspensions, or permanent bans from the industry. It can also severely damage their professional reputation. For clients, the risks include investing in unvetted, high-risk products that could lead to substantial financial losses. Additionally, without the firm’s supervision, there is less recourse for clients if the investment fails.

How Do I Know if I Am Being Sold Away from the Brokerage Firm?

Signs that you might be sold away from a brokerage firm include receiving unsolicited investment offers, a lack of transparency or documentation about the investment, and investments that seem unusually complex or risky. If your broker is reluctant to provide clear, written information or if the investment opportunity appears to be outside the firm’s usual offerings, these could be red flags.

Are There Any Laws or Regulations to Protect Investors?

Yes, there are stringent laws and regulations designed to protect investors from the risks of selling away. The SEC and FINRA have established rules that mandate all securities transactions must be approved and supervised by the broker’s firm. These regulations help ensure that all investment products meet specific standards for transparency, risk, and compliance.

Can I Still Make a Profit by Selling Away from the Brokerage Firm?

While it is possible to make a profit from investments sold away from the brokerage firm, it is highly risky and not recommended. The lack of firm oversight means that these investments may not have undergone proper due diligence, increasing the likelihood of fraud or failure. The potential for legal and financial repercussions further diminishes the attractiveness of such opportunities.

What Should I Do if I Suspect I Have Been Sold Away from the Brokerage Firm?

If you suspect you have been sold away from the brokerage firm, it is crucial to act quickly. Report your concerns to the firm’s compliance department immediately. Additionally, consult with a securities lawyer to understand your legal options and to protect your interests. Keeping thorough records of all communications and transactions related to the investment can also be beneficial.

Are There Any Warning Signs That a Broker May Be Engaging in Selling Away?

Yes, several warning signs can indicate that a broker may be engaging in selling away. These include unsolicited investment offers, a lack of clear documentation or transparency about the investment, pressure to invest quickly, and investments that seem outside the norm for the firm. If your broker is unwilling to provide detailed information or avoids involving the firm in the transaction, these are significant red flags.

Selling away from the brokerage firm is a significant issue in the securities industry, posing risks to both brokers and investors. Understanding the definition, motivations, regulations, and consequences of selling away is crucial for making informed investment decisions. By staying vigilant and informed, investors can protect themselves from the dangers of unauthorized securities transactions. Bakhtiari & Harrison are committed to providing the necessary guidance and legal support to help investors and brokers navigate these challenges effectively.