Finra Arbitration Under the Customer Code

FINRA Dispute Resolution Provides Investors with a Forum to File Complaints Against Brokerage Firms and Financial Advisers.

Investors who have fallen victim to unscrupulous financial advisers or bad practices by the brokerage firms that hire and supervise them, are contractually bound to bring all claims in arbitration through the Financial Industry Regulatory Authority Office of Dispute Resolution. This entity is usually reduced to the acronym FINRA and is a “self-regulatory organization” authorized under the jurisdiction of the Securities and Exchange Commission. FINRA’s stated purpose is investor protection – its sole functions are to make rules, provide guidance, and enforce those rules against brokers and brokerage firms. Since the early 1980s, it has also served as the private forum through which brokerage industry and investor disputes are arbitrated and resolved.

Brokerage clients are usually not aware of this, but when you sign that new account application with a broker in order to invest, buried deep in the fine print is a binding arbitration clause that effectively says, if you have any issues or disputes over the management of your account or actions by your broker, you must submit those claims through binding arbitration with FINRA. Hiring counsel that is experienced in this particular field is critical to your chances of success. Many lawyers are not aware of these binding arbitration provisions and will instead file a case in court. All this will do is result in months being wasted, and probably your money, while a motion to compel arbitration is briefed. Courts for more than thirty years, going back to the Supreme Court decision in Shearson v. McMahon, 482 U.S. 220 (1987), regularly grant those motions and enforce arbitration clauses. There is a strong policy favoring enforcement of arbitration clauses, so fighting one is almost always a waste of time.

Once in FINRA Arbitration, familiarity with the Customer Code – The Rule 12000 Series – is a must. Much like state or federal court, FINRA Arbitration has its own unique and particularized procedural rules. Lawyers who are used to practicing exclusively in a courtroom will be in for a surprise, so hiring experienced FINRA arbitration lawyers is critical. The first step in the FINRA Arbitration process is to file a Statement of Claim. FINRA Rule 12302 provides: “To initiate an arbitration, a claimant must file the following with the Director: (1) a signed and dated Submission Agreement; and (2) a statement of claim specifying the relevant facts and remedies requested. The claimant may include any additional documents supporting the statement of claim.” One of the benefits of FINRA Arbitration is that FINRA handles service of your statement of claim – unlike a court filing, you don’t need to have a sheriff formally serve process. FINRA handles it which simplifies the filing process. An appropriately drafted and skillfully crafted Statement of Claim can be the difference between success and failure and must be handled with precision.

The next step in the FINRA Arbitration process is for the broker and the brokerage firm you are suing to formally appear and file their “answer” to the Statement of Claim. Governed by FINRA Rule 12303, the “Answer” will provide their “side of the story”. The “answer” in FINRA Arbitration is quite different than an answer you’d get in court. There, defendants typically draft general denials and then plead affirmative defenses – you usually don’t get much information from an answer filed in court. To the contrary, most defense firms in FINRA Arbitration will file a pre-hearing brief-type answer citing all sorts of case law and reciting factual details in support of their defenses. The Answer is a key part of an FINRA case and needs to be reviewed and understood by an attorney skilled in handling FINRA arbitration claims.

After the brokerage firm files the answer, the next step in the process is to rank arbitrators. This is where the rubber meets the road for your case and if you do not have an attorney who has tried cases in FINRA arbitration and appeared before these arbitrators, your case could be in peril. FINRA maintains a roster of available arbitrators based on geographic area and experienced FINRA arbitration lawyers maintain a database of these arbitrators, their experiences before them, their award histories, and their backgrounds. FINRA generates a random list of 40 arbitrators – 10 for the Chairperson list; 15 for the public list; and 10 for the industry arbitrator list. If you claim damages in excess of $100,000 in your statement of claim, your case will have three arbitrators. If less than that, there will be one arbitrator. This process is governed by FINRA Rule 12403. The parties will rank and strike the arbitrators on this list and submit them to FINRA which will then combine the rankings and generate the arbitration panel. The importance of a properly ranked list to the success of your case is hard to quantify – these arbitrators are both your judges and jurors and will make critical decisions about your case from motions to dismiss, to discovery rulings, and then evidentiary rulings and final decisions after the hearing.

Now that the Answer has been filed, the “pleadings” stage of the case is done unless the brokerage firm has grounds to move to dismiss the claim on the papers. Another advantage to FINRA arbitration over a court room is the difficulty under the FINRA Rules to dismiss an investor’s case prior to the full arbitration hearing. In court, due to highly technical and particular rules about pleading and how a complaint is drafted, many meritorious cases die in motion practice before discovery even starts. In FINRA Arbitration, motions to dismiss are governed by Rule 12504 and are limited to three rare situations: 1) the claims were previously released; 2) the brokerage firm “was not associated with the accounts, securities, or conduct at issue” (a high bar); or 3) the claims were previously adjudicated or resolved. The other prehearing grounds for dismissal is found in the FINRA Eligibility Rule, under FINRA Rule 12206. This is a time-limit rule, similar to a statute of limitations, and it states that “no claim shall be eligible for arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim.” Essentially if what an investor is complaining about happened more than six years before the claim was filed, then you could run into a dismissal. Once again, hiring an experienced FINRA investor lawyer will be the difference between winning and losing. FINRA practitioners have fought these motions for years, understand the case law interpreting this rule, and success or failure could be based on how the Statement of Claim frames the issues. An experienced FINRA lawyer will know from the outset that “eligibility” will be an issue and will draft the statement of claim in such a way that it survives dismissal based on this rule.

The pleadings are done, arbitrators have been assigned, and the case is scheduled for an arbitration hearing in about nine months. The next step in this process is discovery and is governed by FINRA Rule 12505 through Rule 12513. FINRA does its best to force some cooperation between the parties through the List Items in the Discovery Guide under Rule 12506. This list requires each side to produce certain documents automatically, but experienced FINRA practitioners know two critical things: 1) brokerage firms never produce everything required by the Discovery Guide; 2) supplemental requests for production are required to get the documents you need to win your case. Discovery in FINRA is limited almost exclusively to document exchange by Rule 12507. There are no depositions, absent truly extraordinary circumstances, there are no traditional interrogatories, and requests to admit do not exist. Court room lawyers frequently get into a FINRA arbitration case and ask when they can depose the financial advisor and they are in a massive amount of trouble at that point. If you don’t get the documents you need to win, the value of your case diminishes materially, and you will not get what you deserve.

There is a decent amount of motion practice involved in FINRA discovery. The rules and the Federal Arbitration Act authorize arbitrators to execute witness subpoenas and orders of production under FINRA Rules 12512 and 12513. Motions to compel discovery are fairly common and are governed by FINRA Rule 12509 and the rules also mandate some level of cooperation between the parties prior to engaging in motion practice under Rule 12505. Experienced FINRA lawyers know this landscape well and understand the importance of timing and how to argue in front of FINRA arbitrators about the relevance and discoverability of certain kinds of documents. If your lawyer doesn’t practice in this area, its likely he or she won’t even know the names of the internal compliance reports and documents they need to win your case.

FINRA also provides the parties with the opportunity to mediate their dispute with the brokerage firm prior to the case going to hearing. FINRA maintains a roster of experienced FINRA mediators and that process is pretty successful in getting a case resolved satisfactorily prior to going to the full hearing. FINRA does not order the parties to mediation. Instead, it is voluntary and agreed to by the parties, which is why it works better than mediation ordered by a court of judge as part of a scheduling order. Mediation works best when both parties seek it out.

The last step in the FINRA arbitration process is the prehearing exchange under FINRA Rule 12514 and the arbitration hearing itself. The prehearing exchange is where each party submits their witness list and provides any documents they intend to use at hearing that have not been produced yet in discovery. Usually, the parties will submit prehearing briefs at this point too where each side presents the facts and applies them to the applicable law. Schooled FINRA practitioners excel at writing FINRA-style prehearing briefs and know what arbitrators are looking for. The arbitration hearing itself is where witnesses will testify and attorneys will present evidence and make their arguments on behalf of their clients. The attorney on the other side of your case will undoubtedly be an experienced FINRA arbitration lawyer, so if you don’t have one, you are a few steps behind. Trying a FINRA arbitration is not like trying a case in court in front of a judge or a jury. Many refer to is as trial by ambush – the lack of any testimony from any witnesses prior to this point in the case means no one knows what any witness is going to say. FINRA arbitration lawyers have to be uniquely skilled in trying cases through documents and being able to box witness testimony inside what the documents show. In court, a trial lawyer almost always has the deposition transcripts of every witness in hand to challenge any testimony on the spot that varies from what a witness previously said under oath. Trying a FINRA case is unique and you need the right lawyer for your claims to succeed.

Once the hearing concludes, the arbitrators have thirty days to issue their award. Unless the parties request it, this award will not be “reasoned”. It will be a simple form that states whether the claim is denied, or if not, how much money the arbitrators awarded. These awards are final and absent truly extraordinary circumstances, will not be overturned by a court of law.

The attorneys at M&D Lawyers LLP Offices have tried FINRA arbitration cases on behalf of investors since 1999 from coast to coast. We have represented more than 2,000 individual investors and secured over fifty million dollars in recovery for our clients. We have unparalleled experience with FINRA arbitration and its unique rules and procedures.