Assume a customer has signed a pre-dispute arbitration agreement and they encounter a dispute with a member firm or an associated representative. If mediation was not agreed to or unsuccessful, arbitration is the only remaining avenue* for resolving the dispute.
*Technically, a customer may specifically request arbitration even if they did not sign a pre-dispute arbitration agreement. For example, assume a customer can sue (in the U.S. court system) or submit an arbitration claim because they haven’t signed an arbitration agreement. Arbitration is chosen because they think it’s a more favorable venue.
Arbitration is a formal process similar to a lawsuit. Instead of a judge, FINRA-provided arbitrators listen to the arguments and facts presented by both sides. Neither party can withdraw from this process once started*, and any decision made by the arbitrator(s) is binding (final) and cannot be appealed. Additionally, the results are made public on FINRA’s website, although the hearing itself is private. Protocols and procedures related to arbitration are contained in FINRA’s Code of Arbitration*.
*While arbitration cannot be withdrawn from, the two parties can voluntarily settle before the arbitrator panel renders a final decision. For example, assume a customer initiates an arbitration claim against a member firm for $100,000. The customer and firm could settle for $50,000 (or whatever amount), effectively ending the arbitration case. If a registered representative is involved in the original claim, the settlement must be noted on the representative’s Form U-4 and disclosed on BrokerCheck.
Arbitrators perform a similar role to judges in the U.S. court system. Their role is to listen to both sides of the dispute, inspect the evidence provided, and make a decision to resolve 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 maintain a history of receiving complaints, performing illegal or unethical actions, or suspensions/revocations from any regulatory body (e.g., revoked FINRA registration). Additionally, the Director of the Office of Dispute Resolution (a high-level FINRA employee) may disqualify any person currently serving as an arbitrator for “inappropriate behavior” (e.g., hate speech, unprepared for hearings).
*The five-year work experience requirement to become an arbitrator applies to any line of work, whether inside or outside of 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. The definition also includes attorneys, accountants, and other professionals representing 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 perform those services themselves** (e.g., a paralegal for a securities law firm that doesn’t work on securities-related cases), they also meet the definition. Additionally, 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. Essentially, this is a person with no ties to or experience in the securities industry.
Now that we’ve covered the general concept of arbitration and arbitrators, let’s discuss the three different arbitration methods. Each is determined by the amount of claims (potential awards for damages) at stake:
This form of arbitration involves one public arbitrator appointed by FINRA, unless both parties agree in writing otherwise. No hearing is held unless specifically requested by the customer. If a hearing is not requested, both sides submit materials (e.g., documents) and pleadings (arguments) to the arbitrator. The arbitrator investigates the materials and renders a final decision.
Alternatively, the customer can request a “special proceeding” hearing. Both parties are granted a two-hour period to present their case in a telephone conference with the arbitrator. Additionally, each party is granted an extra 30 minutes for rebuttals and closing statements. The arbitrator can ask questions to either side, but the time needed to answer the questions does not detract from either side’s allotted time. The arbitrator makes a final decision once the presentations and questions are complete.
When arbitration involves claims that exceed $50,000, a hearing always occurs. Part of arbitration, like any legal proceeding, involves the gathering and sharing of 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”
However, arbitrators maintain the authority to issue subpoenas when needed. This authority should only be exercised if a party is unwilling to turn over material documents. Both parties are required to exchange materials that will be presented at least 20 calendar days before the hearing. Additionally, these materials must be filed with FINRA. Any documents containing sensitive information (e.g., taxpayer ID numbers, account numbers) must be redacted before submission to FINRA. If a redaction did not occur, FINRA considers the filing ‘deficient’ and requires document(s) to be refiled within 30 calendar days.
A single public arbitrator is appointed to oversee and rule on the dispute unless both parties agree in writing to switch to three arbitrators. The claimant presents their case, and then the respondent defends themselves. After the hearing is closed, the arbitrator has 30 business days to render a final decision*. The final decision is made available 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.
Three arbitrators are appointed for claims exceeding $100,000 unless both parties agree to switch to one arbitrator. The default composition of the three-arbitrator panel is:
*‘Chairperson’ refers to FINRA’s roster of “top shelf” (high quality) arbitrators because of knowledge and experience. To qualify, an arbitrator must complete FINRA-administered ‘chairperson’ training. Additionally, the person must complete at least three arbitrations (persons with law degrees only must complete one).
Alternatively, either party can request to replace the non-public arbitrator with a public arbitrator, resulting in the entire panel being public arbitrators. Once the arbitrator panel is set, the proceeding works as discussed above (with $50,001 - $100,000 claims).
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