Intra-industry arbitration

Intra-industry disputes

We discussed the arbitration process between member firms and customers in the previous chapter. This chapter covers intra-industry disputes, which include:

• Member firm claims against another member firm
• Member firm claims against an associated person
• Associated person claims against another associated person

FINRA’s Code of Arbitration requires most unresolved intra-industry disputes to be handled through arbitration. When a representative signs Form U-4, they are agreeing to the following arbitration-related stipulations (via a pre-dispute arbitration agreement):

• Any disputes with the employing member firm or its customers must be handled through arbitration (unable to file lawsuits)
• Disputes related to harassment or discrimination are not required to be handled through arbitration (unless all parties agree)
• Arbitration awards are final and binding
• Discovery is more limited in arbitration than in court proceedings
• Arbitrators are not required to explain their reasoning for rulings unless explicitly requested at least 20 calendar days before the first hearing date
• The arbitrator panel may include those with ties to the securities industry (non-public arbitrators) or public arbitrators
• Time limits exist for seeking awards (generally six years from the relevant event)

Beyond the information covered above, arbitration between firms and customers and those involving intra-industry disputes is very similar. The structure, proceedings, and rules are generally the same.

Various arbitration rules

We’ve previously discussed the general arbitration process and methods for bringing claims against another party. Now, we’ll cover various rules in FINRA’s Code of Arbitration that are important to know for the exam:

• Statute of limitations
• Motions to dismiss
• Class action claims
• Agreements forbidding arbitration
• The Party Portal
• Offsetting awards
• Non-payment of awards

The following rules apply to all forms of arbitration (customer disputes and intra-industry disputes).

Statute of limitations

A claim for damages through arbitration must be made within six years from the date of the related occurrence or event. Claims made more than six years from the related occurrence or event are disqualified.

Motions to dismiss

A motion to dismiss is a respondent request for the arbitrators to “throw out” (terminate) the arbitration case. While FINRA discourages and seldom grants these motions, the ‘moving party’ typically makes these motions when a claim seems meritless or has already been arbitrated (in a previous case). A motion to dismiss must be made in writing at least 60 days before the scheduled hearing. The ‘non-moving party’ has 45 days to respond to the motion.

The arbitrator panel cannot rule on the motion to dismiss unless:

• The moving party (usually the respondent) paid the claims requested by signed settlement agreement or written release
• The non-moving party (usually the claimant) is not associated with the account(s), security(ies), or circumstance being disputed
• The non-moving party brought the same claim in a previous arbitration that was already adjudicated

A motion to dismiss can only be granted if the decision is unanimous across the arbitrator panel. Additionally, a written explanation for the case dismissal must be provided. If the motion is denied, another dismissal request may not be made.

Class action claims

The term ‘class action’ refers to a lawsuit involving a group of plaintiffs (those filing the lawsuit) represented collectively. For example, 46 state governors banded together and sued the top tobacco companies in 1998, winning a historic $206 billion in damages. The 46 governors (representing their constituents) sued as a group, known as a class action lawsuit.

A person taking part in a class action lawsuit against a member firm or associated person is ineligible to pursue an arbitration claim unless they are removed from the lawsuit. The Code of Arbitration does not allow class actions to occur, so arbitration claims cannot be filed as a group*.

*Some arbitration claims involve multiple parties but are not considered ‘class actions.’ For example, assume a member firm performs an action that negatively impacts a joint account owned by two customers. Those customers can file an arbitration claim together, but it would not be considered a ‘class action.’ However, a class action would occur if the member firm acted against multiple joint accounts owned by unrelated parties, and those parties filed an arbitration claim as a group. Bottom line - related parties (e.g., two persons with a joint account together) may file arbitration claims together, but unrelated parties cannot.

Agreements forbidding arbitration

While customers and representatives who sign pre-dispute arbitration agreements are required to arbitrate damages claims, it cannot go the other way. Meaning, member firms cannot take away the right to pursue arbitration. Agreements that forbid a customer from pursuing claims in arbitration are strictly prohibited.

The Party Portal

As fun as a ‘party portal’ may sound, FINRA’s Party Portal is a web-based system parties use in mediation and arbitration to:

• File claims
• Submit and view case-related documents
• Schedule hearing dates
• View details of upcoming hearings
• View arbitrator information

The Party Portal is required to be used by all parties unless a customer is considered ‘pro se.’ As discussed in the previous chapter, a person (customer, representative, or firm) may have a third party (typically a lawyer) represent them during proceedings. A “pro se” customer, which is a customer without third party representation, may instead submit documents by first-class mail, overnight mail, hand delivery, email, or facsimile (fax). If any of these methods are used, the customer must prove the documents were served (e.g., through certified mail).

Regardless, a “pro se” customer who uses the Party Portal once is forced to continue using the portal for the remainder of the claim.

Offsetting awards

Some arbitration claims result in awards for both sides (the claimant and respondent). If this occurs, the awards offset and the party owing the larger amount pays the net difference. For example, assume an arbitrator panel awards a representative (the claimant) $10,000 for an action performed by a member firm (the respondent). Additionally, the panel awards the member firm $7,000 for a separate action performed by the representative. In this scenario, the member firm would be responsible for paying the net amount - $3,000 - to the representative.

Non-payment of awards

All monetary awards must be paid within 30 calendar days of the ruling. If an award is not paid within 30 days, interest* begins to accrue. Member firms or associated persons that do not make payment of awards on time are subject to registration suspensions or revocations (disallowing business activities).

*The interest rate assessed at the ‘legal rate,’ which a rate determined by state governments. For example, Colorado’s ‘legal rate’ is 8% annually The rate that applies depends on the state where the arbitration was rendered.