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.

What is Churning?

Churning is a form of unethical and illegal activity in the financial industry where a broker engages in excessive trading in a client’s account primarily to generate commissions, rather than to benefit the client. This deceptive practice can lead to substantial financial losses for investors and is a violation of securities regulations. It’s crucial for investors to understand what churning is, recognize its signs, and know how to take action if they suspect their account is being churned.

Comprehensive Guide to Understanding and Combating Churning in Investment Accounts

Understanding Churning

Churning happens when a broker initiates numerous buy and sell transactions in a client’s account with the sole intent of increasing their commission earnings. This excessive trading activity is typically not in line with the client’s investment goals, such as long-term growth or steady income, and often involves more trading than is necessary for the investor’s financial situation.

Key Characteristics of Churning:

Excessive Trading Volume: The most noticeable sign of churning is a high frequency of trades that are disproportionate to the size and nature of the investor’s portfolio. If trades are happening more frequently than seems reasonable or necessary, it could be a red flag.
Trades Not Aligned with Investment Objectives: Trades that do not match the client’s risk tolerance, financial goals, or investment strategy may indicate churning. For instance, an account intended for conservative investments should not be experiencing high-frequency trading in volatile securities.
High Commission Costs: Churning results in increased commission fees for the client, which can significantly erode the value of the portfolio over time. This is especially concerning when the trading activity provides little to no benefit to the investor’s overall financial situation.
Discretionary Control: Churning is more likely to occur in accounts where the broker has discretionary authority, meaning they can make trades without the client’s prior approval. This level of control can be misused if the broker acts in their own interest instead of the client’s.

How Churning Impacts Investors

Churning can have serious financial consequences for investors. While brokers benefit from the commissions generated, investors often face diminished portfolio value and significant financial setbacks. Here are some of the ways churning can affect investors:

Depletion of Investment Capital: Excessive trading leads to high commission fees that can quickly drain the value of an investor’s portfolio. Even if the trades themselves are not losing money, the frequent commissions can reduce the overall capital available for investment, making it harder to achieve financial goals.
Increased Risk Exposure: Brokers engaging in churning may place investors in securities that are too risky for their financial situation. This can lead to further losses if the market moves unfavorably, putting the investor’s financial security at risk.
Negative Tax Implications: Frequent trading can result in short-term capital gains, which are taxed at a higher rate than long-term gains. This can increase the investor’s tax burden and further reduce their net returns.
Opportunity Cost: While the broker is busy making unnecessary trades, the funds in the account are not being invested in a way that aligns with the investor’s long-term goals. This missed opportunity can mean that the investor loses out on potential growth and gains that could have been achieved with a more appropriate investment strategy.

Identifying Churning

Recognizing the signs of churning can be challenging, especially for those unfamiliar with the nuances of trading and investing. However, there are several indicators that could suggest your account is being churned:

Unexplained or Unusual Trading Activity: If you notice a high volume of trades that you did not authorize or that seem out of line with your investment objectives, it could be a sign of churning.
Excessive Fees and Commissions: Keep an eye on your account statements for unusually high fees and commissions relative to the size of your portfolio. This can indicate that excessive trading is taking place.
Frequent Trading with Little to No Gains: Review your account performance. If there is a high frequency of trades without a corresponding improvement in the portfolio’s value, it may suggest that the trades are being made primarily for the broker’s benefit.
Underperformance Compared to Benchmarks: Compare your account’s performance to relevant benchmarks. If your account consistently underperforms despite a high volume of trades, it could be a red flag for churning.
Lack of Communication from Your Broker: Your broker should keep you informed about their trading strategy and how it aligns with your financial goals. If you find that your broker is making trades without discussing them with you or providing vague explanations, it may be time to investigate further.

What to Do If You Suspect Churning

If you suspect that your account is being churned, it’s important to take immediate action to protect your investments. Here are the steps you should consider:

Review Your Account Statements: Carefully examine your account statements for any unusual trading activity or high fees. Look for trades that seem excessive or out of line with your investment goals.
Contact Your Broker: Ask your broker for an explanation of the trading activity in your account. If their response is unsatisfactory or if they avoid giving a clear answer, this could be a cause for concern.
Keep Detailed Records: Maintain records of all communications with your broker, including emails and notes from phone calls. This documentation can be crucial if you decide to pursue a claim against the brokerage.
Seek a Second Opinion: Consult with another financial professional to review your account activity. They can provide an independent assessment and help determine if your account has been churned.
Consult a Securities Attorney: If you suspect churning, you may have the right to recover your losses. A securities attorney can help you understand your options and guide you through the process of holding the broker or brokerage firm accountable.

If you believe your account has been churned or you have concerns about your investments, it’s essential to take steps to protect your financial well-being. Contact Bakhtiari & Harrison to discuss your situation and explore how we can assist you in addressing potential misconduct and recovering any losses incurred through FINRA arbitration. Your financial security matters, and we are here to support you in safeguarding your investments.