Securities Arbitration (Part II)

What type of claims are arbitrated?

Since the vast majority of arbitration claims are filed with the NASD, now known as FINRA, this article will focus on the rules and procedures adopted by FINRA. Almost any type of customer complaint relating to the brokerage account must be submitted to arbitration.

The most common types of misconduct include: unsuitable recommendations, churning (excessive trading) and misrepresentations (failure to disclose important information about the investment). Also, due to recent economic developments, there has been an increase in customer complaints relating to: the mishandling of employee stock options, the excessive use of margin loans to finance stock purchases, and the over-concentration of assets in high-technology stocks. (See Does my broker owe me money?)

How is arbitration started?

Although arbitration procedures differ depending upon which organization is handling the arbitration, as a general rule, the arbitration will commence upon payment of the applicable filing fee and submission of the customer’s “Statement of Claim,” which serves as the "pleadings" or the customer's factual and legal arguments. The broker will file an answer and, if it is alleged that the customer owes the broker money, a counter-claim may even be served.

Who are the arbitrators?

Securities arbitrators are divided into two groups: public arbitrators and industry arbitrators. Industry arbitrators are individuals that have worked in the securities industry. A typical FINRA arbitration panel will have two public arbitrators and one industry arbitrator. Although many arbitrators are attorneys, this is not a requirement.

What happens at the arbitration?

While arbitration is faster and less costly than traditional litigation, there is much less time to prepare for the arbitration. Thus, efficient and aggressive preparation is important. The customer can safely assume that the broker will be represented by an attorney that specializes in securities arbitration.

Since depositions are generally not permitted, there is virtually no opportunity to discover in advance what your broker (and his or her key witnesses) will testify about at the hearing. However, an experienced securities lawyer can usually anticipate what arguments and defenses will be made.

The parties are allowed to serve limited requests for information on each other. Documents and information to support the customer’s claim should be requested from the broker and obtained from other public and private sources. In many cases, it may be beneficial to retain an expert witness to assist in development of the claim and provide expert testimony at the hearing. Customers can expect the broker to request copies of tax returns, financial statements, trading records from other brokerage accounts, and other pertinent information. Sometimes pre-hearing briefs are voluntarily exchanged or submitted at the request of the arbitrators.

A straightforward arbitration hearing usually takes two to three full days, although a complex matter could take much longer. For claims submitted before FINRA that are $50,000 or less, a “simplified arbitration” procedure is available, which allows the customer to avoid appearing at a hearing to give testimony.

The hearing is usually held in a private conference room instead of a public courthouse. Much like a trial, the arbitration will begin with opening arguments from each side. Next, the customer (called the “Claimant”) will be permitted to call the first witness, followed by cross-examination by the broker (called the “Respondent”). The remainder of the hearing is handled much like a trial, except in a less formal atmosphere. After all of the evidence has been presented and closing arguments have been made, the hearing will be concluded. Within a few weeks, the arbitration panel will issue an award. Depending on the complexity of the matter, the entire process can take a year or more to conclude.


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