FINRA operates the largest dispute resolution forum in the securities industry to assist in the resolution of monetary and business disputes between and among investors, brokerage firms and individual brokers. The Financial Industry Regulatory Authority, Inc. (FINRA) is a private corporation that acts as a self-regulatory organization (SRO). FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD) and the member regulation, enforcement and arbitration operations of the New York Stock Exchange. It is a self-regulatory organization, a non-governmental organization that performs financial regulation of member brokerage firms and exchange markets. The independent government agency which acts as the ultimate regulator of the securities industry, including FINRA, is the Securities and Exchange Commission.
About FINRA Arbitration
Rather than having their dispute decided by a judge and jury, participants to arbitration proceedings have their disputes resolved by a panel made up of typically three (3) arbitrators who are knowledgeable in the area of securities laws and regulation. The U.S. Supreme Court decision, Shearson v. MacMahon, 482 U.S. 220 (1987) enforced mandatory binding arbitration clauses in the securities industry.
Duty to Arbitrate
Customers are bound to FINRA arbitration by contract and registered representatives and their firms are contractually bound to arbitrate their disputes by their membership in the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers (“NASD”). Upon applying for membership in the FINRA, the broker-dealer and the stockbroker agreed to be bound by the rules of the FINRA.
Commencing an Arbitration
Arbitrations are commenced by filing a Statement of Claim within the applicable arbitration forum, together with a submission agreement and the required filing fees. The fees with the Financial Industry Regulatory Authority (“FINRA”) can range from $475 to $1,800 depending on the amount in controversy. Prior to filing the Statement of Claim, an initial damage analysis may be performed by a forensic accountant. Depending on the nature of the case, a pre-litigation damage analysis may not be necessary. Furthermore, an expert in the securities or investment field may be retained to testify at the final hearing depending on the complexity of the case and whether the engagement of an expert will likely assist the arbitration Panel in understanding the issues presented and the appropriateness of the damages being sought.
Statement of Claim
The Statement of Claim, may be drafted in either a narrative or pleading form. The Statement of Claim must specify the relevant facts of the dispute, detailing the nature of the dispute, the relevant dates, the transactions in dispute, the investments involved and the amount of damages, and the nature of any other relief being sought.
Statement of Answer
Similar to the Statement of Claim, the Answer may be drafted in either a narrative or in pleadings form. The Answer will specify all of the available defenses that the Respondent relies upon, and the facts relative to those defenses.
After the parties have submitted the Statement of Claim and the Answer, FINRA notifies the parties of the location of the hearing. The hearing location is typically the FINRA location nearest where the investor was a resident at the time the transactions at issue occurred.
All parties are entitled to “discovery”, which is the exchange of documents prior to the final hearings. The discovery phase is the lengthiest phase of the arbitration process as it is the phase of the proceeding in which each side compiles the evidence that will be presented to the Panel of Arbitrators at the final hearings. FINRA has compiled a list of documents that customers and brokerage firms must produce to each other in securities claims involving customer disputes. These documents include, but are not limited to, the Claimant’s tax returns, marketing materials related to the products at issue in the claim, correspondence, resume, notes or calendar entries, and other relevant documents which tend to prove Claimant’s claim.
Securities arbitrations are conducted in the same manner that a court trial is held. Final hearings generally proceed with opening statements, examination of witnesses, evidence introduced by the Claimant and by the Respondent, and closing arguments. It is a formal proceeding and the arbitrators are typically attorneys, retired judges, and industry professionals who are skilled in the handling of evidentiary objections. The outcome of the final hearing is presented to the parties by a written arbitration award which is sent to the parties by FINRA generally a week or more after the close of the hearings.
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