Intra-industry arbitration

Intra-industry disputes

We discussed the arbitration process between member firms and customers in the previous chapter. This chapter focuses on 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 agree to the following arbitration-related terms (through a pre-dispute arbitration agreement):

• Any disputes with the employing member firm or its customers must be handled through arbitration (lawsuits generally aren’t permitted)
• 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 points above, arbitration between firms and customers and arbitration involving intra-industry disputes are very similar. The structure, proceedings, and rules are generally the same.

Various arbitration rules

We’ve already covered the general arbitration process and how claims are brought. Now we’ll focus on specific rules in FINRA’s Code of Arbitration that commonly show up on 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 filed within six years of the related occurrence or event. Claims filed more than six years after the occurrence or event are disqualified.

Motions to dismiss

A motion to dismiss is a request by the respondent asking the arbitrators to terminate (“throw out”) the case. FINRA discourages these motions and rarely grants them. They’re typically filed when the claim appears meritless or has already been arbitrated.

A motion to dismiss must:

• Be made in writing at least 60 days before the scheduled hearing
• Allow the non-moving party 45 days to respond

The arbitrator panel cannot rule on a 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. A written explanation for the dismissal must also be provided. If the motion is denied, another dismissal request may not be made.

Class action claims

A class action is a lawsuit in which a group of plaintiffs (the people bringing the lawsuit) are represented collectively. For example, 46 state governors banded together and sued the top tobacco companies in 1998, winning a historic $206 billion in damages.

Under the Code of Arbitration:

• A person participating 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.
• Class actions are not permitted in FINRA arbitration, so arbitration claims can’t be filed as a group*.

Some arbitration claims involve multiple parties but are not class actions. For example, if a member firm takes an action that harms a joint account owned by two customers, those two customers can file an arbitration claim together, and it’s not a class action. A class action would involve unrelated parties (for example, customers from multiple unrelated joint accounts) attempting to file as a group. Bottom line: related parties (such as joint account owners) may file together, but unrelated parties cannot.

Agreements forbidding arbitration

Pre-dispute arbitration agreements can require customers and representatives to arbitrate certain claims, but the rule doesn’t work in reverse. Member firms can’t take away a customer’s right to pursue arbitration. Agreements that forbid a customer from pursuing claims in arbitration are strictly prohibited.

The Party Portal

FINRA’s Party Portal is a web-based system used 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 must 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 be represented by a third party (typically a lawyer). A “pro se” customer (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).

However, if a pro se customer uses the Party Portal even once, they must continue using it for the remainder of the claim.

Offsetting awards

In some cases, the arbitrators award money to both sides (the claimant and the respondent). When that happens, the awards are 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). The panel also awards the member firm $7,000 for a separate action performed by the representative. The member firm would pay the net amount of $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 isn’t paid within 30 days, interest* begins to accrue. Member firms or associated persons that don’t pay awards on time are subject to registration suspensions or revocations (disallowing business activities).

*The interest rate is assessed at the “legal rate,” which is 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.