Arbitration with customers

Assume a customer has signed a pre-dispute arbitration agreement and later has a dispute with a member firm or an associated representative. If mediation wasn’t agreed to (or mediation was unsuccessful), arbitration is the only remaining avenue* for resolving the dispute.

*Technically, a customer may request arbitration even if they didn’t sign a pre-dispute arbitration agreement. For example, a customer who hasn’t signed an arbitration agreement may be able to sue in the U.S. court system or submit an arbitration claim. The customer might choose arbitration because they believe it’s a more favorable venue.

Arbitration is a formal dispute-resolution process that resembles a lawsuit. Instead of a judge, FINRA-provided arbitrators hear the arguments and review the facts presented by both sides. Once arbitration begins, neither party can withdraw from the process*, and the arbitrator(s) issue a binding (final) decision that can’t be appealed. The hearing itself is private, but the outcome is made public on FINRA’s website. The rules and procedures for arbitration are contained in FINRA’s Code of Arbitration*.

*Even though a party can’t withdraw from arbitration, the parties can voluntarily settle at any time before the arbitrator panel issues a final decision. For example, if a customer files an arbitration claim against a member firm for $100,000, the customer and firm could settle for $50,000 (or another amount), which ends the arbitration case. If a registered representative is involved in the original claim, the settlement must be reported on the representative’s Form U-4 and disclosed on BrokerCheck.

Arbitrators play a role similar to judges in the U.S. court system. They listen to both sides, review the evidence, and issue a decision that resolves the dispute. Any person with five years of professional experience* and two years of college-level credits can apply to become an arbitrator (and be paid for their services). A person can be temporarily or permanently disqualified from serving as an arbitrator if they have a history of complaints, illegal or unethical conduct, or suspensions/revocations by a regulatory body (e.g., revoked FINRA registration). In addition, the Director of the Office of Dispute Resolution (a senior FINRA employee) may disqualify an arbitrator for “inappropriate behavior” (e.g., hate speech, being unprepared for hearings).

*The five-year work experience requirement to become an arbitrator applies to any line of work, whether inside or outside the securities industry.

Two types of arbitrators exist: non-public and public arbitrators. A non-public arbitrator is a person with any professional experience in the securities industry. This definition also includes attorneys, accountants, and other professionals who represent firms or individuals in the securities industry*. If a person is employed by a firm that provides professional services to the securities industry but does not personally perform those services** (e.g., a paralegal at a securities law firm who doesn’t work on securities-related cases), they also meet the definition. In addition, persons with immediate family members employed at member firms*** are considered non-public arbitrators. Immediate family members include spouses, domestic partners, parents, stepparents, children, stepchildren, a person living in the same household, and financial dependents.

*Attorneys, accountants, and other professionals may be considered public arbitrators if they have not dedicated 20% of their time to these services for a total of 15 or more years AND have not provided these services in the past five years.

**Persons employed by firms providing professional services to the securities industry but do not perform those services themselves may be considered public arbitrators two years after ending their employment with the firm.

***Persons with immediate family members employed at member firms may be considered public arbitrators if the immediate family member ends their association with the member firm OR the person severed their relationship with the family member (so they’re no longer “immediate family”) at least two years ago.

A public arbitrator is any person who does not meet the definition of a non-public arbitrator. In other words, this person has no qualifying ties to, or experience in, the securities industry.

Now that the general idea of arbitration and arbitrators is clear, the next step is to look at the three arbitration methods. The method depends on the amount of the claim (the potential award for damages) at stake:

• Simplified arbitration ($50,000 or less)
• Arbitration claims for $50,001 - $100,000
• Arbitration claims for $100,001+

Simplified arbitration ($50,000 or less)

This form of arbitration uses one public arbitrator appointed by FINRA, unless both parties agree in writing to a different arrangement. No hearing is held unless the customer specifically requests one. If no hearing is requested, both sides submit materials (e.g., documents) and pleadings (arguments) to the arbitrator. The arbitrator reviews the submissions and issues a final decision.

Alternatively, the customer can request a “special proceeding” hearing. In this format:

• Each party gets two hours to present its case by telephone conference with the arbitrator.
• Each party gets an additional 30 minutes for rebuttals and closing statements.
• The arbitrator may ask questions, and the time spent answering does not count against either party’s allotted time.

The arbitrator issues a final decision after the presentations and questions are complete.

Arbitration claims for $50,001 - $100,000

When a claim exceeds $50,000, a hearing always occurs. As in other legal proceedings, the parties must gather and share evidence. The Code of Arbitration states:

“To the fullest extent possible, parties should produce documents and make witnesses available to each other without the use of subpoenas”

Arbitrators still have the authority to issue subpoenas when necessary. This authority is generally used when a party won’t provide material documents voluntarily.

Both parties must exchange the materials they plan to present at least 20 calendar days before the hearing, and these materials must also be filed with FINRA. Documents containing sensitive information (e.g., taxpayer ID numbers, account numbers) must be redacted before submission to FINRA. If a filing is not properly redacted, FINRA treats it as “deficient” and requires the document(s) to be refiled within 30 calendar days.

A single public arbitrator is appointed to oversee and decide the dispute unless both parties agree in writing to use three arbitrators. The claimant presents their case first, and the respondent presents their defense. After the hearing closes, the arbitrator has 30 business days to issue a final decision*. The decision is posted on FINRA’s website.

*Arbitrators are not required to explain the reasoning for their decisions unless both sides request an explanation at least 20 days before the hearing.

Arbitration claims for $100,001+

Claims exceeding $100,000 use three arbitrators unless both parties agree to use one arbitrator. The default three-arbitrator panel is:

• One non-public arbitrator
• One public arbitrator
• One chairperson public arbitrator*

*“Chairperson” refers to FINRA’s roster of highly qualified arbitrators based on knowledge and experience. To qualify, an arbitrator must complete FINRA-administered chairperson training. In addition, the arbitrator must have completed at least three arbitrations (or one, for persons with law degrees only).

Either party may request that the non-public arbitrator be replaced with a public arbitrator, which results in an all-public panel. Once the panel is set, the process follows the same general approach described for $50,001 - $100,000 claims.