Investor Bulletin: Broker-Dealer/Customer Arbitration

12/20/2016

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to help educate investors about the arbitration and mediation processes involving a customer dispute with a broker-dealer. 

Introduction

Disputes in the securities industry are typically handled through arbitration rather than through the court system (litigation).  This is because account opening agreements will almost always contain a provision binding the parties to arbitration in the event of a dispute.  The following bulletin is intended to provide investors with basic information about arbitration and mediation as alternative forms of dispute resolution – both generally and with specific regard to the rules of the Financial Industry Regulatory Authority (“FINRA”), which handles almost all securities industry arbitrations and mediations. 

Arbitration is Different from a Lawsuit in Court

Arbitration, like a lawsuit in court (litigation), offers a final means of resolving a dispute.  However, it is different from litigation in significant ways.  For instance: 

  • Instead of a judge or jury, the parties select a neutral arbitrator or panel of arbitrators to decide if wrongdoing occurred and, if so, how to compensate the wronged party for it. 
  • As in litigation, an arbitration decision is binding on the parties.  Unlike in litigation, however, arbitration decisions can only be appealed on limited grounds.  Thus, arbitration decisions are unlikely to be overturned.
  • Arbitrators are not bound by legal precedent, and are not required to follow state or federal rules of evidence.  However, FINRA arbitrators must follow FINRA’s Code of Arbitration Procedure.
  • In contrast to litigation, the documents and evidence submitted in arbitration are not publicly available. 
  • The tools used to gather evidence in arbitration are more limited than in litigation. 
  • Arbitration may be cheaper and quicker than litigating a dispute in court. 

Arbitration Clauses

Most, if not all, account agreements between broker-dealers and their customers have arbitration clauses.  The arbitration clauses usually require customers to arbitrate any disputes with the broker-dealer.  They also usually prevent customers from suing broker-dealers in court.  If no agreement to arbitrate exists, a broker-dealer may not compel its customer to arbitrate.  However, FINRA’s Code of Arbitration Procedure allows a customer to compel a broker-dealer or person associated with a broker-dealer to arbitrate a dispute at the customer’s request. 

Simplified Arbitration in the FINRA Forum  

In the FINRA forum, claims valued at $50,000 or less are subject to rules governing simplified arbitrations.  No hearings are held in simplified arbitrations, unless the customer requests a hearing.  Instead, a single arbitrator will make a decision by reviewing documents and written descriptions of the facts submitted by the parties.  Simplified arbitration is usually a less costly alternative than regular arbitration because the parties do not have to travel to a hearing and appear in person to give testimony or answer questions.

Arbitrator Selection in the FINRA Forum 

Under FINRA rules, if a claim is valued at $50,000 or less, the arbitration panel will consist of one arbitrator.  If a claim is valued between $50,000 and $100,000, the arbitration panel will consist of one arbitrator, unless both parties agree in writing to a three-arbitrator panel.  If a claim is valued over $100,000, or a party requests unspecified or non-monetary damages, the panel will consist of three arbitrators, unless both parties agree to a single arbitrator.

Single arbitrator panels consist of one “public” arbitrator, unless the parties agree in writing to use a non-public arbitrator.  Generally, a “public” arbitrator is an arbitrator who is not affiliated with the securities industry, either through his or her employment in the securities industry, or the professional services that he or she has performed on behalf of the securities industry.  In contrast, a “non-public” arbitrator is affiliated in some way with the securities industry.  The parties will select their arbitrator(s) by ranking, in order of preference, the arbitrators from a list generated by FINRA’s Director of Arbitration. 

In selecting a three-arbitrator panel, the Director of Arbitration will provide the parties with three lists: a list of public arbitrators, a list of non-public arbitrators, and list of public arbitrators eligible to serve as the chairperson of the panel.  The parties can either strike or rank the arbitrators in each list in order of preference.  If either party strikes all of the arbitrators on the non-public list, all three arbitrators will be selected from the public arbitrator and chairperson list, resulting in an all public arbitrator panel.  Otherwise, the panel will be comprised of two public arbitrators and one non-public arbitrator.  If the parties fail to provide their arbitrator rankings within the requisite time period, they will be viewed as having no arbitrator preference, and the panel will be comprised of two public arbitrators and one non-public arbitrator.  Additional details regarding the rules for panel selection are available in FINRA’s Arbitrator Appointment Frequently Asked Questions.

Arbitration Process and Award

During a process called “discovery,” the parties exchange documents and gather information in preparation for an evidentiary hearing.  At the hearing, the parties and arbitrators meet in person to present evidence, arguments, and witness testimony in support of their cases.  The parties may settle their dispute at any time – even after the evidentiary hearing begins. 

Notably, after a claim is settled, broker-dealers cannot use confidentiality provisions in settlement agreements to prohibit or restrict an individual from communicating with the Commission, FINRA, or other securities regulators.  FINRA may charge broker-dealers that use confidentiality provisions in settlement agreements, discovery stipulations in arbitration proceedings, or any other documents that prohibit or restrict a customer or any other person from communicating with the Commission, FINRA, or any federal or state regulatory authority regarding a possible securities law violation with violating FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).  More information on the restrictions regarding confidentiality provisions in settlement agreements is available in FINRA’s Regulatory Notice 14-40.   

If the parties do not reach a settlement, the arbitrators will issue a decision called an “award” – usually within 30 days of the hearing’s conclusion.  A majority of a three-arbitrator panel must sign off on any award.  The panel will not provide the parties with a written explanation of the award unless both parties jointly request a written explanation at least 20 days before the arbitration hearing begins.  The written explanation need not include citations to legal authority or any breakdown of the final damage calculation.

An arbitration award is final, binding on both parties, and appealable only in limited circumstances – for example, where a party can demonstrate that an arbitrator was biased.  As a result, arbitration decisions are unlikely to be overturned.  However, if a party wants to challenge the panel’s decision, under the Federal Arbitration Act, the party must do so within three months or less in a “motion to vacate.”  Additional information about challenging the panel’s decision is contained in the SEC’s Fast Answers section entitled “Arbitration, Challenging a Decision, SEC Role.”

FINRA Dispute Resolution

The majority of arbitration claims involving customers are filed with FINRA’s Office of Dispute Resolution.  In addition, numerous exchanges have agreed to use FINRA’s dispute resolution forum to resolve disputes arising between, among others, customers and members of their respective exchange.  If you have a securities-related dispute with a firm that is a member of one of the following exchanges, that firm may be required to arbitrate disputes through FINRA, upon your request:

  • Bats BZX Exchange, Inc., Bats BYZ Exchange, Inc., Bats EDGA Exchange, Inc. and Bats EDGX Exchange, Inc.
  • BOX Options Exchange, LLC
  • Chicago Board Options Exchange (CBOE) and C2
  • IEX Group
  • International Securities Exchange, LLC (ISE), Gemini and Mercury
  • MIAX Options Exchange (MIAX)
  • Municipal Securities Rulemaking Board (MSRB) (a self-regulatory organization for municipal securities)
  • NASDAQ
  • NASDAQ OMX
  • New York Stock Exchange (NYSE)
  • NYSE Amex
  • NYSE Arca

Applicable FINRA Fees

A customer filing a claim in the FINRA arbitration forum must pay an initial filing fee, which is calculated based on the amount in dispute.  This fee ranges from $225 to $4,000.  However, the Director of Arbitration may defer payment for all or part of the filing fee based on a showing of financial hardship. 

Hearing session fees are also assessed for each hearing session.  They are calculated based on the amount in dispute as well as the number of arbitrators at the hearing.  The arbitrators will determine each party’s respective portion of fees for each hearing session.

In addition to the foregoing, the parties may be responsible for other fees, such as adjournment fees, discovery motion fees, contested subpoena fees, explained decision fees, and administrative costs.

How to File an Arbitration Action in the FINRA Forum 

You can find a wealth of information on arbitration—including governing rules, steps for initiating an arbitration proceeding, and the necessary downloadable forms—at FINRA’s Office of Dispute Resolution website.  You can also obtain information about how to file an arbitration claim by contacting FINRA’s Director of Arbitration at the following locations:

Northeast Region:

FINRA Office of Dispute Resolution

One Liberty Plaza

165 Broadway, 27th Floor

New York, NY 10006

(212) 858-4200

Western Region:

FINRA Office of Dispute Resolution

300 S. Grand Avenue

Suite 1700

Los Angeles, CA 90071

(213) 613-2680

Southeast Region:

FINRA Office of Dispute Resolution

Boca Center Tower 1

5200 Town Center Circle

Boca Raton, FL 33486

(561) 416-0277

Midwest Region:

FINRA Office of Dispute Resolution

55 West Monroe Street, Suite 2600

Chicago, IL 60603-1002

(312) 899-4440

How Long Do You Have to File a Claim in the FINRA Forum?

You must act promptly or you may lose your right to seek a remedy or recover funds.  Generally, the rules governing arbitration allow a claim to be filed within six years of the occurrence or event giving rise to the cause of action.  However, time restrictions, called "statutes of limitations," may be shorter than six years.  That is, the person against whom you filed a claim may defend him- or herself by arguing that a statute of limitations that is shorter than six years precludes bringing your claim.  To determine whether any statute of limitations may apply to your case, and to discuss your rights and remedies, we suggest that you contact an attorney.

Caution. Bear in mind that if your individual broker or brokerage firm goes out of business or declares bankruptcy, you may not be able to collect an award if an arbitration panel rules in your favor or a settlement if you reach an agreement with your broker through mediation (mediation is discussed below) or direct negotiation.

Check Out Your Broker. You should investigate the disciplinary history of your broker or brokerage firm before you invest.  For tips on how to do this, please read our publication entitled “Protect Your Money: Check Out Brokers and Investment Advisers” on the SEC’s website.

How Do You Find a Lawyer Specializing in Securities Disputes?

If you need help finding a lawyer who specializes in securities disputes, read our publication entitled “Arbitration, How to Find a Lawyer Specializing in Securities.”

What If You Cannot Hire a Lawyer?

FINRA’s Code of Arbitration Procedure does not require customers to be represented by lawyers in an arbitration.  Customers may represent themselves, or, in certain circumstances, may be represented by non-lawyers.  However, because broker-dealers and associated persons retain legal counsel in FINRA arbitrations as a general matter of course, it is advisable for customers to similarly seek the assistance of an attorney in preparing their case. 

Certain law schools in California, the District of Columbia, Florida, Georgia, Illinois, Michigan, New Jersey, New York, and Pennsylvania provide some investors with legal representation through arbitration/mediation clinics.  These clinics may be able to help investors who have smaller claims and who are unable to hire a lawyer.  You can read more about these clinics in the SEC’s Fast Answers regarding Arbitration/Mediation, Clinics.

Mediation

Mediation is a voluntary, non-binding process that allows parties to work with a neutral mediator to try to quickly resolve differences.  Prior to the outset of mediation, the parties must consent to mediate by written agreement, such as the FINRA Mediation Submission Agreement, and to be bound by a specific procedural code, such as the FINRA Code of Mediation Procedure.  The mediator may either be selected by the parties or by the Director of Arbitration for FINRA.

During the mediation, the mediator acts as a neutral facilitator between the parties during separate and/or joint sessions.  The mediator has no authority to determine issues, make decisions or otherwise resolve a dispute.  The mediation process is private and confidential.  Both the parties and the mediator are prohibited from disclosing and using any information obtained or disclosed during the mediation as evidence in any other arbitration or lawsuit. 

Mediation may result in a settlement that is mutually agreeable to all parties in the dispute, avoiding the need to arbitrate all or any part of the disputed issues.  Parties unable to resolve a dispute through mediation can still submit their dispute to arbitration.  However, absent an agreement between the parties, mediation will not generally stay or delay a pending arbitration.

The website for FINRA’s Office of Dispute Resolution has more information about mediation. 


The Office of Investor Education and Advocacy has provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

In less time than it takes to read this web page . . .

Exclamation Mark

You can check out the background of an investment professional.  It’s a great first step toward protecting your money.  Learn about an investment professional’s background, registration status, and more.  

iPad with graphs