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Arbitration Pros and Cons

Nov 2, 2022 Articles

According to FINRA, FINRA arbitration benefits investors. In their “What to Expect” series, FINRA states “It is typically less costly and faster to use arbitration or mediation as a way to settle a dispute than to take a case to court.” FINRA staff facilitates the process of arbitration but does not decide awards. Instead, the complainant and the respondent work together to select a (hopefully) neutral panel of arbitrators. A closer look will reveal that FINRA arbitration is often advantageous, but it may also have some disadvantages, especially for investors who do not have the help of a securities lawyer.

What Are the Benefits of FINRA Arbitration?

Due to the potential time-saving benefits of FINRA arbitration, investors may prefer this route. Even if your customer agreement with your brokerage firm does not include a specific “arbitration agreement” (an agreement requiring that all disputes between a customer and a brokerage firm be resolved in arbitration), you can still require that they resolve your dispute via arbitration.

Our clients often tell us that they do not necessarily want to hold their broker liable for their damages. Our securities attorneys usually use FINRA arbitration to sue the brokerage firm for damages and not the individual broker.

Arbitration Pros and Cons

FINRA describes arbitration as quicker and cheaper than civil litigation. That may be true, but that does not mean that arbitration is an easy process. And while arbitration panels are supposed to be free from bias, many investors have alleged that they were at a disadvantage when taking on a major financial firm.

Does FINRA Arbitration Really Cost Less?

Bringing a claim in FINRA arbitration rather than a court may lower attorneys’ fees because FINRA arbitration is designed to curtail the time attorneys need to spend on cases. Furthermore, our securities lawyers agree in advance to receive a percentage of your award and do not collect unless they win your case.

Is FINRA Arbitration Quicker than a Civil Suit?

The time associated with a FINRA arbitration case is often much less than a civil trial. Civil cases can last two years or more, whereas FINRA arbitration cases often conclude in 16 months. If you cannot travel to a physical location for a hearing, your securities lawyer may request to have your hearing take place via Zoom to prevent any unnecessary travel time and expense.

Costs Associated with FINRA Arbitration

Filing Fees. Investors should note there are some fees associated with FINRA arbitration. For example, the filing fee could cost anywhere from $50 to $2,300, depending on the alleged damages.

Hearing costs. For a panel of one arbitrator, the hearing session costs $50 to $450. Hearing

Are FINRA Arbitrators Really Neutral?

FINRA claims that arbitrators are completely neutral. However, one Harvard study suggests that may not always be the case. Furthermore, individual investors have alleged that the arbitrators who decided their claims were corrupt.

For example, according to a 2022 order from a Georgia court, Wells Fargo and FINRA Dispute Resolution services agreed to remove certain arbitrators from the list of potential arbitrators. The list of arbitrators is supposed to be computer generated and therefore free from bias. Both parties can strike arbitrators from the list and then rank them according to their preferences, but neither party is supposed to be able to manipulate the list of potential arbitrators. A Court of Appeals later reversed this decision, stating, “Even if an agreement exists, the investors have not shown that it impacted this arbitration.”

Arbitrators have alleged that FINRA has demonstrated bias in favor of large firms. In 2011, The Wall Street Journal reported three arbitrators were fired after they awarded Merrill Lynch investors damages. The investors alleged that the firm failed to monitor their accounts, leading to damages of $520,000. After the ruling, FINRA fired the arbitrators. FINRA did not offer an explanation for their terminations beyond “routine reviews of its roster.” One of the arbitrators alleged they were fired expressly because of their ruling against Merrill Lynch. FINRA re-instated the arbitrators after a review of his claims.

Investors should know that FINRA’s budget comes from fees collected from brokerage firms. The large the firm, the bigger their contribution to FINRA’s operations.

Do I Need a FINRA Arbitration Lawyer?

FINRA suggests investors consider hiring an attorney. Brokerage firms always come prepared with their own attorneys, and FINRA cannot provide legal advice to claimants. Without a securities attorney, the chips may be unfairly stacked against investors. In an effort to combat potentially unfair arbitration proceedings, the Public Investors Advocate Bar Association (PIABA) has stated its support for the Investor Justice Act of 2022, which would establish a $5 million grant to provide legal assistance for investors who would not otherwise have the means to hire an attorney.

How Can I Make FINRA Arbitration Work for Me?

Kurta Law securities attorneys have years of experience making the FINRA arbitration process work to the advantage of our clients. We can help you navigate the process as seamlessly as possible and are always available to answer any questions you may have.

Give yourself the best chance possible and speak to one of our securities lawyers today. We offer free case evaluations and only take on cases we feel confident we can win. Contact (877) 600-0098 or info@kurtalawfirm.com.