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Recovering Investment Losses? Learn What to Expect During the FINRA Arbitration Process

If you have suffered investment losses due to stockbroker fraud, recovering your fraudulent losses will most likely involve filing a claim for FINRA arbitration. The Financial Industry Regulatory Authority (FINRA) shares responsibility with the U.S. Securities and Exchange Commission (SEC) for overseeing brokerage firms and brokers operating in the United States. FINRA provides a forum for aggrieved investors to hold their brokerage firms and brokers accountable in cases of fraud and financial misconduct.

When you open a brokerage account at any firm, you will most likely sign an agreement that includes a pre-dispute arbitration clause. This clause means that you cannot pursue your claim in civil court—it must go through the FINRA arbitration process. This is not necessarily a bad thing. FINRA arbitration is cheaper than filing a civil claim, the discovery process is less onerous, and cases typically settle more quickly than a civil case.

Step #1: Filing a FINRA Arbitration Claim

The FINRA arbitration process begins when you file a fraud claim against your brokerage firm or individual broker (or both). Your “Statement of Claim” must clearly outline the basis for your allegations and state the parties involved.  It must also state the amount you are seeking. When you file your Statement of Claim, you must also submit the filing fee, which is calculated based on the claim amount. FINRA will approve a fee waiver if you can show financial hardship. You must submit your tax returns, pay stubs, or other proof to have your filing fee waived.

Step #2: FINRA Case Number

FINRA will assign your case a case number and provide the parties involved with FINRA staff contact information. At this time, FINRA staff will also review your claim to determine the amount at issue, the nature of the dispute, and the securities involved.

Step #3: Awaiting a Response

Once you file a claim, your brokerage firm and/or individual broker have a response deadline. The response deadline is 45 days from the date of service. This response will come in the form of an “Answer,” which may deny your allegations. “Denials” simply indicate the firm denies their broker engaged in misconduct. You can still recover your losses following a denial.

In addition to denying your allegations, your brokerage firm’s Answer may also assert defenses to your allegations, and it may assert counterclaims (claims against you) or cross-claims (claims against a third party). Just as FINRA staff will review your Statement of Claim, they will also review the Answer to identify any additional parties and determine if your brokerage firm or broker needs to pay any filing fees based on counterclaims or cross-claims.

Step #4: Selection of Arbitrator(s)

The next major step in the FINRA arbitration process is the selection of the arbitrator (or arbitrators) who will hear your case. Claims for $50,000 are heard by a single arbitrator, while claimants for more than $50,000 can decide if they prefer a single arbitrator or a panel of three. A three-person panel usually reviews claims for $100,000 or more.

The attorneys for both sides will receive a list of potential arbitrators from FINRA. Both sides will then submit their respective lists of arbitrator preferences to FINRA. As FINRA explains:

“FINRA provides identical lists of possible arbitrators for the case to both sides of the dispute. A computer generates the names randomly. FINRA also provides a detailed report on each arbitrator’s background—a disclosure report—to both sides . . . [and] a list of cases in which each of the arbitrators has issued a final decision…”

All arbitrators will be designated either “public” or “non-public.” A public arbitrator has no connection to the securities industry, while a non-public arbitrator has a connection. In cases heard by a single arbitrator, the arbitrator will be public. In cases heard by a panel of arbitrators, investors can choose to have either an all-public or a majority-public panel.  

There is more important information provided in each potential arbitrator’s profile. When you review the arbitrators with your securities attorney, you will be able to see which arbitrators have awarded settlements in previous disputes. Securities lawyers often have insights about which arbitrator is more likely to settle in your favor.

Step #5: Pre-hearing Conferences

As your arbitration claim progresses, your attorney will attend a series of prehearing conferences which are typically held over the phone. These conferences can serve various purposes, from scheduling to resolving preliminary issues before the arbitration hearing.

Step #6: Discovery

FINRA arbitration involves a discovery process similar to courtroom litigation, although discovery in FINRA arbitration is fairly limited by comparison. Both parties have the opportunity to request documents and information and, upon receiving the other party’s requests, each party must respond by either complying or asserting a valid objection. FINRA Rule 12604 states that the FINRA panel will decide what evidence to admit.

FINRA has published a “Discovery Guide” that lists the types of documents that should typically be exchanged during the discovery process. It expects all parties to arbitration proceedings to “be familiar and comply with” the Discovery Guide, and parties that fail to comply can face adverse consequences. Having a securities attorney will give you a major advantage when navigating the discovery process.

Step #7: Settlement Negotiations or Mediation

Before the arbitration hearing, parties can decide to settle their dispute through FINRA mediation. Mediation is a faster option than arbitration. Your securities lawyer can advise if mediation is the right choice for you. 

The parties have the option to engage in settlement negotiations throughout the FINRA arbitration process, and many cases get resolved via settlement before going to a hearing. If the parties settle, they will enter into a binding settlement agreement, which will be the end of the process. Arbitrators do not play a role in the settlement negotiation process — they only decide the award amount following the hearing. Settlement negotiations take place separately from arbitration proceedings, and it is up to the parties to decide how, when, and if to settle.

Step #8: Hearing, Decision, and Award

If the parties do not reach a settlement, the case will go to a hearing. Each party’s legal counsel will present evidence and arguments during the hearing. Types of evidence presented in FINRA arbitration hearings can include documentary evidence (i.e., written communications and account statements) and witness testimony. Both fact witnesses and expert witnesses are permitted. Fact witnesses can testify to their personal knowledge of specific events, while expert witnesses may provide testimony regarding how investment products work, market conditions, and other technical matters.

After the hearing, the arbitrator (or arbitrators) will consider the relevant facts and law, render a decision, and issue an award if warranted. Arbitrators typically render their decisions within 30 days. If the arbitrators issue an award, the brokerage firm or broker must pay within 30 days of the decision unless it files a motion to vacate the award.

Contact Kurta Law for a Free and Confidential Consultation

If you suspect that you may be a victim of broker fraud, you can contact us for a free, no-obligation consultation about your legal rights. To find out if you can recover your investment losses through FINRA arbitration, call 877-600-0098 or tell us how we can reach you online now.