A recent Congressional hearing highlighted the continuing debate about the fairness of requiring investors to take disputes with brokers to arbitration rather than to the courts. Some in Congress want to change the rules.
But in the meantime, brokerage customers who feel they have been wronged also have another option: mediation. Mediation can be quicker and cheaper than arbitration — and investors who enter mediation retain the right to proceed to arbitration if they aren’t satisfied.
“The best part of mediation is you can say ‘Yes’ or ‘No,’ ” says an investors’ attorney.
“You’re never going to get a number as high in mediation as you would if you hit a home run in a hearing,” he adds. But “it takes the uncertainty out of the case.”
Agreeing to Arbitrate
The paperwork you sign to open a brokerage account generally requires you to bring any disputes to the arbitration forum run by the Financial Industry Regulatory Authority, the self-regulatory body that oversees brokerage firms. Finra’s arbitration forum is a court-like system in which large cases are heard by three-person panels that include one industry representative. (Small cases are heard by a single non-industry arbitrator.)
Finra and the securities industry say arbitration is a quick, fair and effective way to resolve disputes. But investors’ advocates and some members of Congress say Finra’s arbitration forum is unfair to investors, partly because of the presence of industry arbitrators. At the very least, they argue, investors should have the option to sue in the court system.
Earlier this year, Sen. Russell Feingold (D.-Wis.) and Rep. Hank Johnson (D-Ga.) introduced a bill to nullify mandatory arbitration agreements in consumer industries.
Investors are “compelled to use an arbitration forum run by the industry’s self-regulator under industry-approved rules,” lawyer and arbitration critic Ted Eppenstein testified at a House hearing on the subject in late October.
The Mediation Option
An investor with a gripe against her broker may, typically with the help of a lawyer, file an arbitration claim against the broker and/or the firm. But at any point in arbitration, either party can suggest mediation without interrupting the arbitration process.
If the parties agree to try it, they choose a mediator — either someone from a Finra-provided list or another mediator they both trust. Selecting a date for a mediation session tends to go much faster than in arbitration, where the parties, three hearing panelists and expert witnesses all must find an acceptable date.
Indeed, mediation is much faster overall: So far this year, it took an average of almost 14 months for an arbitration claim to make its way through the system, Finra reports. Finra mediation cases during that period closed in an average of just over four months.
Before the mediation session, the mediator reviews the parties’ documents, and may contact them to learn more. On mediation day, the parties might tell their sides of the story before splitting into different areas. The mediator typically goes between the sides, assessing the strengths and weaknesses of each side’s case, relaying messages and possibly suggesting settlement ideas.
About 80% of the time, the parties reach an agreement, either that day or after subsequent discussions, says Ken Andrichik, senior vice president and director of mediation and business strategies at Finra. Other cases proceed to arbitration.
Mediators’ rates can run from $50 an hour for a small case to $500 an hour for a large case in a big city, according to Finra. There can be forum charges as well. But if a settlement is reached, you can save some of the legal fees that would add up over an extended arbitration proceeding.
Pros and Cons
Lawyer Steven Caruso, past president of the Public Investors Arbitration Bar Association, a group of attorneys who represent investors, says a potential conflict of interest exists for mediators: “They want to do a fair job, but they’re going to get more business from the brokerage firm than the claimants’ attorneys.” That said, he and other investors’ attorneys say they know mediators that both they and defense lawyers trust.
Although some lawyers worry about tipping their hands in mediation, others say mediation gives them a chance to test their cases before bringing a weak argument to an arbitration panel.
The downside to mediation is that if the parties don’t settle, mediation may just add time and expense to the process.
On the plus side, though, a mediator may be able to bring an investor’s expectations back to earth. Sometimes an investor can’t see that his case doesn’t warrant a huge award.
Perhaps the biggest benefit of mediation is the degree of control the parties have, from picking the mediator to accepting or rejecting a settlement.
“It makes sense for even an adversary to say, ‘Can we solve this in a less adversarial manner and can we keep control of the outcome?’ ” Mr. Andrichik of Finra says.