About the Securities Arbitration Process
Florida securities arbitration Attorney Scott Ilgenfritz helps explain the securities arbitration process.
Arbitration Clauses Are Standard
An arbitration clause is commonly included somewhere within the standard paperwork signed by a client opening a brokerage account. It may be included in a customer agreement or a new account form.
Before July, 2007, arbitration clauses typically required that clients resolve any disputes with their broker or brokerage firms through arbitration before arbitration panels of the National Association of Securities Dealers Dispute Resolution, Inc., or the New York Stock Exchange. In July, 2007, the Securities and Exchange Commission approved the merger of the National Association of Securities Dealers, Inc. (“NASD”), and NYSE Member Regulation.
The newly created regulatory agency is the Financial Industry Regulatory Authority, which uses the acronym “FINRA”. Since July, 2007, arbitration clauses in customer agreements or new account forms generally require that investment claims against brokers or brokerage firms be resolved through arbitration before an arbitration panel of FINRA.
By executing a customer agreement or new account form containing an arbitration clause, a client waives his or her right to file a lawsuit in a state or federal court to resolve any dispute that the client might have with the broker or brokerage firm. On April 16, 2007, before the merger of the NASD and the NYSE Member Regulation, the NASD adopted its new Code of Arbitration Procedure, that Code of Arbitration Procedure became the FINRA Code of Arbitration Procedure, and it applies to all currently filed arbitration proceedings.
The Pros and Cons of the Arbitration Process
ADVANTAGES | DISADVANTAGES |
---|---|
Faster than court proceedings. | Compulsory – the right to file a lawsuit is waived. |
Less expensive than court proceedings. | Three arbitrators preside over the process, rather than a jury of an investor’s peers. |
An ‘Equitable Forum’ – arbitrators seek a ‘fair’ result for all parties, without rigid application of legal doctrine or rules of evidence. | Limited ‘Discovery’ – only document requests and limited written questions are allowed. |
Arbitration is a one shot process. There is no absolute right to appeal an adverse arbitration award. Depending on your satisfaction with the outcome, this may be an advantage or disadvantage. The grounds for appealing an arbitration award are generally limited to improprieties in the arbitration process, such as one arbitrator being partial to one party over another, the arbitration process being tainted by fraud, or other arbitrator misconduct.
Filing a Claim
As securities arbitration attorneys, we will first gather information from a client, including the client’s recounting of the investments giving rise to the claim and the gathering of necessary documents from the client and other sources.
Second, a document called a “statement of claim” is filed with FINRA . The client is the “claimant” and the brokerage firm with which the broker is affiliated and the individual broker, if named in the statement of claim, are the “respondents.” The statement of claim sets forth the facts which provide the basis for the client’s claims, the legal theories or claims asserted by the client against the respondents, and the damages which the client seeks to recover. Each statement of claim is tailored to the facts surrounding the client’s situation. As a Florida securities arbitration lawyer, I prepare all of the paperwork for you.
The most common bases for a statement of claim are:
- Negligence
- Negligent supervision
- Breach of fiduciary duty
- Fraud
- Constructive fraud
- Violations of Chapter 517 of the Florida Statutes (Florida’s ‘Blue Sky’ law).
Third, a uniform submission agreement is filed in which the claimant agrees to be bound by the arbitration award rendered by the panel.
Finally, a filing fee is paid to FINRA, which varies according to the amount of damages the claimant seeks to recover. For claims in excess of $50,000 in damages, the filing fees range from $975 to $2,300.
The Respondents’ Answer
FINRA processes the statement of claim, which typically takes between 7 and 14 days. It is then mailed to the respondents named in the claim. The respondents have 45 days from their receipt of the state of claim to send their written answer to the statement of claim to FINRA and counsel representing the claimant.
Motions to dismiss a statement of claim are occasionally served by respondents, but FINRA has drastically limited the grounds for such motions. If the respondents believe they have a counterclaim against the claimant, the counterclaim is provided along with the respondents’ answer.
The Arbitration Panel
FINRA sends three lists of proposed arbitrators to counsel for each of the parties within thirty days after the answers from the respondents are due. In cases involving claims seeking the recovery of damages in excess of $100,000, arbitration panel will consist of three arbitrators. Until February 1, 2011, each arbitration panel had two arbitrators who had not been affiliated with the securities industry and one arbitrator who had been affiliated with the securities industry. On February 1, 2011, FINRA announced the approval by the SEC of a rule change concerning the composition of arbitration panels. Under the revised rule, investors now have the option to have their arbitration panels consist of three arbitrators, all of whom have been classified by FINRA as public arbitrators. The rule change is a significant improvement of the arbitration process because of the perceived potential bias of securities industry affiliated arbitrators in favor of respondents in arbitration proceedings.
FINRA rules allow us to participate in the selection process as your securities arbitration attorney. We may elect on your behalf to strike certain names from the lists and will rank the remaining arbitrators in order of preference. Striking and ranking of arbitrators is based on our experience as securities arbitration lawyers and involves careful review of available information concerning proposed arbitrators, including disclosure documents on each proposed arbitrator, which set forth each arbitrator’s educational background, employment history, conflict information, and awards history.
Counsel for the respondents engages in a similar process, and FINRA uses the parties’ rankings of the arbitrators to appoint the panel.
The Initial Pre-hearing Conference
After the arbitration panel is appointed, a telephone conference call is scheduled to accept the arbitration panel, agree upon the dates for the hearing, establish discovery and briefing schedules, and discuss any anticipated motions. Only the arbitrators and counsel for the parties participate in the conference call. Clients do not need to be present for this call.
Discovery
Discovery in FINRA arbitration proceedings is limited, and consists mostly of producing documents. Depositions are generally not allowed. According to the FINRA Code of Arbitration Procedure, depositions may be taken only upon the approval of the arbitration panel under limited circumstances, such as to preserve the testimony of an ill or dying witness or make available the testimony of a critical witness who is unable or unwilling to attend the final hearing. However, arbitration panels have allowed the use of depositions in arbitration hearings which were taken without the arbitration panel’s approval, particularly if unusual or emergency circumstances require the taking of the deposition before approval of the arbitration panel could be obtained.
The FINRA “Discovery Guide” prescribes certain documents which the parties are required to produce, unless an appropriate objection is made. Parties may request additional documents from one another and may ask the arbitrators to issue subpoenas for the production of documents by third parties. The only other means of discovery in FINRA arbitrations is the submission of limited written questions to an opposing party for such information as the identification of individuals, entities, or time periods related to the dispute.
Settlement or Mediation May Occur
The parties may engage in settlement negotiations or a mediation before the final hearing is held. Settlement negotiations or mediation may allow the claim to be resolved without having it heard by the arbitration panel and eliminate the uncertainty of the outcome from an arbitration hearing. According to FINRA, approximately 65-70% of all claims filed are resolved by settlement or mediation before a final hearing. In either case, as your securities arbitration lawyer, we will discuss with you the advisability of this process, will assist you throughout the process, and will handle the discussions on your behalf.
Settlement negotiations can occur directly between counsel for the parties to determine whether there is an amount of money that the claimant will accept to resolve his or her claims, which the respondents are willing to pay.
Mediation is a more formal process, which involves the use of a professional mediator to assist the parties in attempting to negotiate a resolution of the dispute.
A settlement agreement is prepared and executed by the parties, if a settlement is reached directly by the parties or with the assistance of the mediator. Such settlement agreements typically require payment of an agreed upon sum by the respondents to the claimant and the release by the claimant of all of his or her claims against the respondents.
The Final Hearing
If the claim is not settled through negotiation or mediation, the final hearing before the panel of arbitrators is usually held in the FINRA hearing location nearest to the claimant’s residence.
Opening statements by counsel describe the anticipated evidence. Then, witnesses testify and are cross-examined and documentary evidence is introduced. The hearing concludes with closing arguments by counsel, in which the evidence is summarized and applicable legal authority is provided to the arbitration panel.
The arbitrators will then meet in private and decide the outcome of the case. Their ruling is submitted to FINRA to be incorporated into a written arbitration award, which all arbitrators sign.
Arbitration awards are not required to set forth any rationale or reasoning of the arbitrators, and typically do not. Rather, the award indicates which party prevailed, and if the claimant prevailed, the amount of the monetary relief awarded to the claimant.
Arbitration Fees
The arbitrators have the discretion to dictate which party will be responsible for paying the arbitrators fees. FINRA charges hearing session fees to compensate the arbitrators. For claims in which the damages sought exceed $100,000, those hearing session fees range from $2,250 per day to $3,150 per day. In their award, the arbitrators may direct that the claimant or the respondent pay all of the hearing session fees or may divide the fees in some fashion between the parties.
You will be happy to know that we handle securities arbitration cases on a contingency basis. There is no legal fee unless a recovery is obtained. Clients are responsible for out-of-pocket costs such as filing fees and expert witness fees, regardless of the outcome of their cases. However, there is no charge for initial client consultations or the initial evaluation of a client’s case.
Have an Experienced Securities Arbitration Lawyer Evaluate Your Claim
If you are uncertain whether your investment losses may have been due to some form of stockbroker misconduct, we can help. Contact me for an evaluation of your potential claim. I will assess the merits of your case and if appropriate, arrange a consultation to discuss your options. There is no charge.