What is FINRA Arbitration?

FINRA Arbitration and When to Speak with a FINRA Lawyer

As a savvy investor, you probably know what is in every one of your brokerage accounts. You are probably well aware of who your brokers are. You even know who to call if you need to make a quick trade. But how closely did you read the fine print when you signed your investment contract? Whether you realize it or not, you have almost certainly agreed to arbitrate any dispute between you and your broker before the Financial Industry Regulatory Authority (FINRA). A securities attorney can also serve as your FINRA attorney and explain what steps to take next.

The FINRA arbitration process can be challenging. It is governed by the FINRA Code of Arbitration, a complex set of securities industry rules. In securities arbitration, FINRA handles all disputes between brokerage firms and investors, making it the largest dispute resolution forum in the United States. You may need guidance on what actions to take and how to document disputed events during the discovery process. We can also help with navigation of arbitration hearings and the interpretation of disciplinary filings.

Is FINRA Arbitration Required?

Almost every dispute you have with a securities professional will need to go through the FINRA arbitration process. Remember the agreement you signed when you opened your brokerage account? It almost certainly contained a clause stating FINRA arbitration is the exclusive remedy for resolving any disputes with your broker. Be sure to check your paperwork if you think the terms are different.

The FINRA Code of Arbitration permits brokers and clients to opt for arbitration, even when not expressly required. In fact, it might even be to your benefit to take advantage of FINRA arbitration. While it might be tempting to have your day in court, most investors arbitrate their claims against their securities professionals for two reasons: FINRA arbitration is designed to be cheaper and faster than a civil court case.

Confirming Your Claim Falls Within the Statute of Limitations

According to the FINRA Code of Arbitration, you have six years from an incidence of fraud or misconduct to bring your claim. Before beginning the arbitration process, you must confirm your claim still falls within a valid time frame.

If you waited too long to bring your claims to FINRA arbitration, you might still be able to file your claims in a civil court. However, many states have shorter statutes of limitations for contract and fraud claims (usually one to four years).

Drafting and Filing a Statement of Claim

You can start the FINRA arbitration process by filing a Statement of Claim. The Statement of Claim is similar to a complaint in civil court. The Statement of Claim details the facts of the case and the remedies requested, much like in a civil case.

Once you are ready, you will file your Statement of Claim with a Submission Agreement, stating you agree to be bound by the FINRA Code of Arbitration and other FINRA rules. You will submit the whole claim package to FINRA to file and begin the arbitration process. You can file your Statement of Claim online through FINRA’s Online FINRA DR Portal. An experienced FINRA lawyer can help you draft your Statement of Claim and submit your documents.

Receiving an Answer from the Respondent

The stockbroker or brokerage firm you have filed a claim against has to respond to your Statement of Claim within 45 days of being served. Their answer should explain their version of the facts of the dispute and state their defenses. This is also their opportunity to bring counterclaims, crossclaims, or third-party claims, if relevant.

Selecting the Arbitration Panel

Once you receive the answer to your complaint, the parties select an arbitration panel. In cases with claims worth over $100,000, FINRA provides each party with a list of 30 potential arbitrators. You and your FINRA lawyer can strike off certain names based on their background or experience and then rank the remaining candidates. FINRA lawyers can offer invaluable insight when selecting arbitrators. After each side submits their rankings to FINRA, FINRA, not the parties, chooses the final arbitration panel. The size of the panel depends upon the amount at stake in the case. The FINRA Code of Arbitration requires FINRA to choose the highest-ranked arbitrators.

Setting the Pre-Hearing Conference

Once you have an arbitration panel in place, FINRA will set a date for a pre-hearing conference. This is a meeting for the lawyers and arbitrators to discuss any procedural issues and set a date for the arbitration hearing. The hearing date usually takes place about nine months from the date of this pre-hearing conference.

Discovery Guides in the FINRA Arbitration Process

FINRA helps speed along the discovery process. As soon as the Statement of Claim is filed, the parties will receive a FINRA Discovery finnd Document Production Lists. These documents outline the basic procedures in exchanging documents and details what needs to be exchanged.

Document Production Lists

Document production lists specify which documents each side needs to produce. Under the FINRA Code of Arbitration, parties can make additional discovery requests. FINRA arbitration rules require the parties to try and resolve discovery disputes in good faith. However, either party may file a motion to compel the production of documents.

Failure to Participate in Discovery

Discovery is an integral part of the FINRA arbitration process. Failure to comply with legitimate discovery requests threatens the integrity of the process. Accordingly, the arbitration panel has the power to issue sanctions against a party noncompliant with discovery requirements.

What Happens to My Claim Once Discovery Is Complete?

Unlike the discovery process in civil litigation, the arbitration discovery process does not kick off a flurry of motions and legal bills. In fact, depositions and motions are strongly discouraged in FINRA arbitration. Instead, the time is spent analyzing the results of discovery until 20 days before the arbitration hearing.

Exchanging Witness Lists

Before an arbitration hearing, the parties must exchange lists of witnesses they will call and exhibits they plan to use. This is typically done 20 days prior to the hearing.

Preparing for the FINRA Arbitration Hearing

FINRA usually selects neutral locations in which to hold hearings. You can expect your FINRA arbitration to take place close to your home or place of business. Your FINRA lawyer can best prepare you, mentally and emotionally, for how the hearing will go.

Who Decides the Winner in FINRA Arbitration?

The arbitration panel decides the winner after hearing all the evidence and arguments. FINRA arbitration awards are determined solely by the panel of arbitrators. Usually, the arbitrators decide by a majority vote, but the parties can waive that rule. FINRA arbitration awards are issued within 30 days of the hearing. Following this, the losing party typically has 30 days to pay any award, fees, costs, or other monies associated with the award.

Can the Loser File a Lawsuit?

FINRA arbitration decisions are final. Unless a state law says otherwise, you do not have a right to appeal to the courts if you lose or disapprove of the award you received.

How to File a FINRA Arbitration Statement of Claim

No one wants to find themselves in a legal dispute, especially not with their stockbroker. When you invest your hard-earned money, you want to be sure that you are working with someone you trust. The last thing you want is to find out you have been a victim of misrepresentation or fraud. People make investments for the purpose of becoming financially secure now and throughout their retirement years. You didn’t hire a wealth manager or make investments so that you could end up in court or arbitration—spending your money on legal bills instead of your retirement dreams. Nevertheless, in investments, as in all of life, things can go wrong. And if they do, you need to know where to turn and what you can do to rectify the situation. If you think you have been a victim of securities fraud, it is time to consider FINRA arbitration.

Whether you are a new or experienced investor, FINRA arbitration is probably uncharted waters for you. You may not be aware of this unless you read your contracts very closely before you sign them—but nearly every investment contract and brokerage agreement contain an arbitration agreement. What does this mean? It means that almost every dispute you have with a broker is likely to be decided in arbitration. But fear not, this is not necessarily a bad thing! FINRA arbitration can be much faster and less expensive than the slowly grinding wheels of the civil court process. But unless you are intimately familiar with the process, you will need an experienced securities lawyer to guide you through the process. And one of the most important areas where you need to know what you are doing is at the beginning. In other words, you need to know how to get the process started. Our team at Kurta Law has the experience and know-how to walk you through filing a FINRA statement of claim and kicking off the FINRA arbitration process.

A statement of claim will lay out all the facts of your case. You will need to state all of the facts that are important to your claim against your broker, including details, dates, names, and any other relevant information. If you do not state all of the relevant facts, you may not be able to bring them up or add them at a later date. In other words, if you fail to state facts that are relevant to your case, you may waive your right to address them later.

Your FINRA arbitration statement of claim also needs to state what remedies you are requesting. In other words, the court needs to know what you want them to do about the wrongs that were perpetrated against you that caused you harm. Remedies are the means by which you are made whole. For example, if you think that your broker engaged in excessive trading in your account, you could request that the arbitration panel award you reimbursement for any losses due to those excessive trades. The court or arbitration panel does not want to be left guessing, so you will need to be reasonably specific about what remedies you are seeking.

Filing Your Statement of Claim

Filing a FINRA statement of claim entails a few steps on the part of the claimant. There are three main components to filing the FINRA arbitration statement of claim:

We have already discussed the basics of the FINRA statement of claim. However, that is only one component of the process of properly filing your statement of claim. FINRA provides investors with a basic Arbitration Claim Filing Guide to help you navigate as you initiate a FINRA arbitration. However, if you choose to file, it is important to know and understand all the pieces that need to be submitted alongside your FINRA statement of claim. Understanding each component can help you achieve the greatest chance of a successful arbitration outcome.

Understanding the Submission Agreement

You are required to file a Submission Agreement when you file your FINRA statement of claim. The Submission Agreement states that you agree to FINRA’s arbitration rules and FINRA’s jurisdiction over the matter. This is critical and must accompany your FINRA statement of claim form when filing your paperwork to begin a FINRA arbitration. People commonly forget to submit the Submission Agreement when filing their FINRA statement of claim. Forgetting or neglecting to include a Submission Agreement can unnecessarily delay the start of your arbitration process. An experienced attorney can make sure you have all claim package components necessary to properly begin your claim.

Confirming Fees Due

You will also need to pay any applicable filing fees when submitting your FINRA Statement of Claim form and your Submission Agreement. These fees can vary depending upon the nature of your arbitration and the size of your claim. Fees are typically calculated based on the amount of damages claimed (including punitive and treble damages). Fee calculations usually don’t include expenses and interest.

Paying the correct fees when you submit your FINRA statement of claim form is essential. If you fail to pay your fees or submit the wrong amounts, FINRA can reject your statement of claim and refuse to commence your arbitration. You can see why understanding the importance of each component of the statement of claim package is key to your success!

Using the DR Portal

A few years ago, FINRA switched to a proprietary online filing system that they call the DR Portal. This enables parties in arbitration to submit their documents online. The online submission system eliminates costly file-by-mail fees. It also does away with the waiting periods and lag time associated with mailing documents through the postal service. To use the system, you or your lawyer will have to register for a DR Portal account.

Consulting With a FINRA Attorney For Counsel

Speaking with an experienced securities lawyer can be an essential part of initiating a successful arbitration. While arbitration can be a faster and less expensive alternative to the civil court process, it is not necessarily less complex. Having a knowledgeable lawyer in your corner can take a lot of the stress out of the arbitration process. An experienced securities lawyer can also help increase your likelihood of success. At Kurta Law, we only work with investors, never banks or brokers, so we specialize in advocating for folks like you. Our firm has deep expertise in drafting and filing FINRA statements of claim for investors of all stripes.

A FINRA arbitration statement of claim is similar to a very short, simple complaint in a civil case. However, instead of following rigorous rules of pleading and citing statutes and case law, a statement of claim is much more straightforward. While a civil complaint can go on for 20 or more pages in a minor matter, a FINRA statement of claim in a complex matter might run no more than five pages.

Having the assistance of securities counsel can help make your FINRA statement of claim successful. When discussing how the arbitration process works, your lawyer can show you a FINRA statement of claim example. Seeing how statements of claim are drafted may help you understand how to best share the facts of your case with your lawyer. The best FINRA statements of claim tell a logical story and ask for clear remedies that can be achieved through arbitration. Your lawyer is the best person to work with you on putting together the best statement of claim for your case.

How Are FINRA Arbitrators Selected?

Investors who suffer losses as a result of broker misconduct usually go through the Financial Industry Regulatory Authority (FINRA) to recover their money. FINRA helps investors resolve their disputes by providing arbitration and mediation services. An essential part of this process involves choosing the FINRA arbitrators to preside over your dispute.

In most cases, a brokerage firm will use a lawyer during arbitration proceedings. Securities lawyers help their clients choose the best arbitrators for their case. If you don’t hire a FINRA arbitration attorney, you could face a serious disadvantage.

Contact the Kurta Law Firm today to discuss your case. You can reach us by phone at 877-600-0098 or by email at info@kurtalawfirm.com.

What Qualifications Do FINRA Arbitrators Have?

As a general matter, FINRA arbitrators need at least five years of paid business or professional experience and at least two years of college-level credits. Two types of arbitrators can preside over FINRA arbitration proceedings: public arbitrators and non-public arbitrators. FINRA refers to individuals who do not have specialized knowledge of the securities industry as “public” arbitrators. Non-public arbitrators include individuals who have worked in the financial sector. Additionally, non-public arbitrators include people who currently provide or previously provided services to financial industry clients or parties engaged in securities disputes.

Before presiding over any disputes, FINRA arbitrators undergo a Basic Arbitrator Training Program. To proceed with a FINRA arbitrator application, the prospective arbitrator must pass two separate assessments. Arbitrators who pass the Basic Arbitrator Training Program can enroll in advanced arbitrator training.

FINRA conducts a preliminary review of the completed application before forwarding it to the National Arbitration and Mediation Committee (NAMC) for final approval. Once the arbitrator receives final approval and successfully completes the Basic Arbitrator Training Program, FINRA adds them to the arbitrator roster.

When Is FINRA Arbitration the Right Choice for Investors?

Most investment contracts contain an arbitration clause requiring parties to utilize FINRA arbitration to recover their losses. Arbitration operates similarly to a civil trial. However, an arbitration takes significantly less time and money compared with a trial. Depending on the amount of money at issue, arbitration panels are made up of either one arbitrator or a panel of three arbitrators. Unlike a trial, the documents submitted in arbitration are generally confidential. However, FINRA posts the results of arbitration proceedings in its Arbitration Awards Online Database.

According to FINRA arbitration statistics, approximately 69% of arbitration cases between 2012 and 2016 resulted in the parties reaching a settlement agreement.

Additionally, FINRA requires filing a Submission Agreement before initiating the proceedings. The Submission Agreement lists the parties to the arbitration and confirms FINRA as the arbitration administrator. The Submission Agreement also establishes the parties agree to abide by the arbitrators’ decision in the event of a hearing.

The person who files the Statement of Claim to initiate the arbitration proceedings has the responsibility of paying the appropriate fees. Once this is done, FINRA serves the Statement of Claim on the opposing party. You can file a Statement of Claim online or by mail.

FINRA recommends hiring an attorney to help navigate the arbitration process. Remember, brokerage firms typically hire an attorney to represent themselves and their employees. Not having your own attorney can put you on an uneven playing field with your opponent. You don’t have to deal with the arbitration process alone. Contact one of our securities lawyers at the Kurta Law Firm today.

Selecting Arbitrators for Your Case

The FINRA arbitration process gives the parties a say in which arbitrators will preside over your dispute. FINRA utilizes a computer algorithm called the Neutral List Selection System (NLSS) to randomly generate a list of potential arbitrators from FINRA’s arbitrator roster. The number of lists generated and the number of arbitrator names on each list depends on the specific type of case being arbitrated.

To avoid conflicts of interest, FINRA allows these for-cause challenges when appropriate.

FINRA Arbitration Rules: What’s Allowed During Discovery?

If you’ve started the FINRA arbitration process, you probably have a lot of questions about what happens once you file your FINRA statement of claim. Many claimants ask one question: How can I get the information to support my claim? As you or your FINRA arbitration lawyer drafts a pre-hearing brief, you will review what evidence you can provide to support your claims. Usually, you can gather this information through the FINRA discovery process.

Using the FINRA Discovery Guide, an experienced securities lawyer can help you obtain the documents you need to support your claim. At Kurta Law, we specialize in helping victims of securities fraud navigate the often-confusing FINRA arbitration process. We have prepared this brief guide to the FINRA arbitration rules governing the arbitration discovery process. This guide should empower claimants like you as we help you prepare for arbitration.

The FINRA arbitration rules have a special section on pre-hearing procedures and discovery. FINRA Rule 12500 describes the process of making discovery requests in detail. The same rule discusses the procedure for objecting to requests and specifies the consequences for failing to meaningfully participate in the discovery process. While most people consider FINRA arbitration similar to a “mini-trial,” it has some meaningful differences from civil litigation. The discovery process is one of those differences.

How Do FINRA Arbitration Rules Differ from the Rules of Civil Procedure for Discovery?

FINRA arbitration is a faster, often cheaper way to resolve disputes between investors and brokers or brokerage firms. Civil litigation is a long, expensive process often unavailable in the securities industry due to the near-universal use of arbitration clauses. Some key ways FINRA arbitration discovery rules differ from discovery rules outlined in the Rules of Civil Procedure include:

While this may seem like a limited list, in practice, these are big differences. In civil litigation, the idea of obtaining third-party documents without a document subpoena is simply unheard of. These differences help make FINRA arbitration a less expensive and faster choice for claimants and respondents alike.

FINRA arbitration rules also allow parties to file objections to discovery requests if needed.

FINRA Rule 12508 allows a party to produce a written objection to a discovery request and considers unraised discovery objections waived. Therefore, it is important to ensure you raise any discovery objections during the FINRA arbitration discovery period. If you don’t, the arbitration panel may determine you have waived any objection to producing that information. Engaging an experienced securities lawyer to help you handle FINRA arbitration discovery requests and objections properly will give you the best chance of success for your case.

1. Interrogatories

If you have ever been involved in a lawsuit before, you may be familiar with a discovery tool called “interrogatories.” In civil litigation, interrogatories are lists of questions the parties serve on each other. Each side is expected to answer the questions posed by the other side before going to trial. FINRA arbitration rules, however, prohibit the use of this discovery tool. ​FINRA Rule 13506​ states “Standard interrogatories are generally not permitted in arbitration.” If you have questions about handling the limited scope of discovery without the use of interrogatories, our team at Kurta Law is eager to help. We have helped thousands of claimants recover their losses through FINRA arbitration.

2. Document requests

Though it limits the use of interrogatories, ​FINRA Rule 13506 allows the use of document requests in arbitration. This permits the parties to ask each other for any kind of relevant documents. In this regard, FINRA arbitration rules allow document requests similar to the document requests allowed under the Federal Rules of Civil Procedure.

However, in practice, FINRA arbitration is typically done on a faster and less expensive scale than federal court litigation. Document requests outside the FINRA Discovery Guide’s scope are not necessarily cost-effective investments in arbitration.

This means for you as a claimant that if an investment adviser or broker-dealer not party to the arbitration has relevant documents or information, you can obtain the documents needed for proper discovery. However, both the claimant and the respondent can obtain the documents from a third party. There are also some steps under the FINRA arbitration rules you need to follow before obtaining third-party documents. Each impacted party will get a say in the process: the claimant, respondent, and the third party. To help guarantee success in obtaining third-party documents, make sure to start the process of requesting them as early as possible during discovery. Your lawyer will be able to best direct the timing sequence for filing a third-party document request.

In addition, FINRA Rule 13509 explicitly allows motions to compel. A motion to compel is a filing asking a judge (or, in this case, the panel of arbitrators) to force the other side to do something. Typically, a motion to compel is directed at the production of discovery.

For the best chance of success with your motion to compel, make every effort to resolve your discovery dispute informally first. Avoid overbroad discovery requests. Having an experienced securities lawyer with deep expertise in FINRA arbitration at the helm of your case can make a huge difference in the cost, timing, and ultimate effectiveness of your arbitration claim.

What Happens in a FINRA Arbitration Hearing?

If you have been a victim of securities fraud or have been taken advantage of by an unscrupulous broker, you may be considering FINRA arbitration. FINRA arbitration hearings function slightly differently than civil trials. FINRA arbitration can be cheaper and faster than a civil court trial. However, the arbitration process can seem overwhelming unless you are a securities lawyer yourself.

At Kurta Law, we prepare our clients by walking them through the FINRA arbitration hearing. We prepared this brief explanation to help you understand all your options when considering FINRA arbitration. With more than 25 years of experience in arbitrating FINRA claims, we know investors have questions. We have your answers.

Mediation Process

Both parties need to agree to use mediation to resolve their differences, unlike arbitration, where only one party must file a statement of claim to commence the process. To begin mediation, the parties jointly file a Request for Mediation. Together, the parties select a mediator. Once a mediator is selected, the parties learn about the process and schedule a mediation date.

Mediation Result

Unlike a FINRA arbitration hearing, a mediation outcome is not binding. The mediator guides the parties towards a mutually agreed-upon resolution. If the parties end up reaching a solution, they may agree to a binding settlement. On the other hand, they could reach an impasse and either drop the case or take the dispute to another forum—typically FINRA arbitration.

Mediation Benefits

Mediation is relatively quick, cheap, and voluntary. When both parties agree to mediation, the simple act of volunteering to come to the table can change the dynamics of dispute resolution for the better. As previously mentioned, FINRA boasts an 80% success rate so, when considering FINRA arbitration, make sure to consider all their dispute resolution services. An experienced securities lawyer can help you understand the best FINRA dispute resolution process for your case.

Preparing for the FINRA Hearing

About 20 days before your FINRA arbitration hearing, the parties meet (either in person, by phone, or via Zoom) and exchange pre-hearing information. This usually entails disclosing witnesses and whether they will be calling expert witnesses. Each side also provides copies of the exhibits they plan to use during the FINRA arbitration hearing.

Setting of the Hearing

FINRA arbitration hearings are typically held at a neutral location and not a courtroom. In most cases, the panel of arbitrators sits at the head of a conference table or at a table at the front of the room. The claimant and respondent sit facing each other across the table or at tables facing each other. FINRA arbitration hearings are recorded, and consent is required. FINRA records the hearing electronically for the official record. Parties can pay separately for a court reporter to memorialize the hearing in a written transcript if they choose to do so.

Introduction of Evidence

The parties introduce evidence by calling and examining witnesses during the FINRA arbitration hearing. During the examination of witnesses, the parties can introduce their exhibits and testimony. Usually, the claimant’s attorney goes first, calling and examining witnesses. The respondent’s lawyer is not allowed to ask questions until the claimant’s lawyer has finished examining their witness. During what’s known as the “direct examination” by the claimant’s lawyer, counsel for the respondent can make objections to the witness’s testimony.

Then, the respondent’s attorneys may cross-examine the witness. In arbitration, the parties have a less restrictive cross-examination of witnesses than they would in a courtroom. For instance, in a court, you may only ask about facts discussed during a direct examination. During a FINRA arbitration hearing, securities lawyers can ask questions about facts relevant to the dispute even if they were not addressed on direct examination.

Questions by Arbitrators

Arbitration panel members may also question witnesses. Typically, this is done once all the parties’ attorneys have finished their questions. Rarely, arbitrators may interrupt an examination or a witness’s answer to ask a question. Usually, these are clarifying questions regarding testimony or evidence being entered.

Submission of Evidence and Closing Arguments

Prior to closing arguments, sometimes the parties like to present a chart or summary of their evidence. Arbitration panels sometimes allow this and sometimes do not. The parties should know what they can and cannot submit during the FINRA arbitration hearing before the hearing begins.

The parties’ attorneys make closing arguments after all the evidence has been submitted and the witnesses examined. Sometimes, the parties submit arbitration briefs to the panel of FINRA arbitrations. This is not required and is up to the panel’s discretion.

Timeframe for FINRA Arbitration Hearings

FINRA arbitration hearings typically take two to five consecutive days to complete. Scheduling depends upon the complexity of your case. These hearings are scheduled months in advance and can be difficult to reschedule.

A full day during a FINRA arbitration hearing may not actually mean a full day of witness testimony and evidence. Typically, the arbitration panel takes two or three breaks during the hearing day and may only hear four or five hours of witness testimony. Make sure to schedule the correct number of hearing days to accommodate the complexity of your case and the amount of evidence you think you need to present.

Arbitration Awards

The FINRA arbitration rules specify that the arbitration panel must notify the parties of the arbitration award within 30 days of the hearing. The parties need to know that the award merely specifies which party won the arbitration. However, the parties can pay a fee and receive a written opinion explaining the decision. FINRA Rule 12904 states that parties are entitled to an explained decision without a fee if both parties make a joint request during the pre-hearing stage. Monetary awards need to be paid out within 30 days of the award notification.

FINRA Arbitration Awards: What to Do if They Go Unpaid

Many investors utilize the Financial Industry Regulatory Authority (FINRA) arbitration process to resolve disputes against their brokers or brokerage firm. The FINRA arbitration process concludes when the arbitrators issue a decision and hopefully an award. The panel will issue an award within 30 business days from the date the hearing record is closed. Arbitration awards are final and are not subject to review, except in very limited circumstances. While awards must be in writing, FINRA does not require arbitrators to issue opinions or provide explanations for their decision. An arbitration award contains:

The award will also contain any costs or forum fees the panel decided to assess against either party. If the parties jointly request an explained decision within 20 days before the date of the first scheduled hearing, the arbitrators issue a fact-based award stating the general reasons for the arbitrators’ decision.

FINRA Arbitration Award Statistics

Sadly, just because an investor receives an arbitration award does not mean they will ever get paid. FINRA’s arbitration forum does not guarantee payment of awards, so the responsibility of collecting the award falls on the claimant. As the claimant, you can take your arbitration award to court to have a judge convert it into a judgment. Then, you can attempt to collect on the judgment using the judicial process’s collection procedures.

While the customer can enforce their arbitration award through the judicial process, FINRA also utilizes methods to enforce payment of arbitration awards. For example, FINRA levies suspensions against brokerage firms and brokers who do not pay arbitration awards. FINRA highlights most unpaid arbitration awards are against firms or brokers whose FINRA registration was terminated, suspended, canceled, or revoked.

When a brokerage firm or broker fails to pay an arbitration award in a timely manner, FINRA staff notifies the firm or individual in writing that failure to comply within 21 days will result in a suspension. Until the award is paid, FINRA prohibits the member from associating with other FINRA members. However, according to FINRA Rule 9550 Series, FINRA will not suspend a member who can show one of the following circumstances:

According to FINRA’s arbitration award statistics, FINRA suspended 51 members for non-payment of an arbitration award in 2018 and 50 members in 2019.

FINRA provides a complete list of members suspended for non-payment of a customer arbitration award between 2012 and 2019 on its website.

These situations do not occur very often. In most cases, the arbitration award remains in place.

One suggestion involves providing investors with more information about FINRA members who have let an arbitration award go unpaid. The FINRA Board proposed amending Form U4 to elicit information from registered representatives who don’t pay arbitration awards, settlements, or judgments. Form U4 alerts the investor of previous failure to pay, therefore helping investors make informed investment decisions.

Another option presented by FINRA involved creating incentives for the timely payment of awards. They could do this by preventing individuals from switching firms or preventing a firm from using asset transfers or similar transactions to prevent payment of arbitration awards while staying in business.

Other approaches to further address the issue of unpaid FINRA arbitration awards would first require intervention by the SEC or federal government. One potential approach to help ensure firms can pay arbitration awards is to raise firms’ net capital requirements when facing arbitration claims. The SEC sets broker-dealer capital requirements, so this proposal would require amendments to or interpretations of the SEC’s net capital rules to initiate the change.

Currently, brokers and broker-dealers can avoid payment of an arbitration award by filing for bankruptcy. To change this, the Bankruptcy Code needs an update stipulating arbitration awards cannot be discharged in bankruptcy. The amendment would not guarantee payment of the arbitration award. However, it would allow a claimant to enforce their judgment without fearing bankruptcy might extinguish their rights. Because the Bankruptcy Code constitutes federal legislation, Congress would need to pass the amendment.