FINRA Arbitration Process and Timeline
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In a perfect world, all of your investments would go as planned, and you could trust those in the securities business to play by the rules. But since we don’t live in a perfect world, investors and industry professionals rely on the guidance and oversight of regulatory organizations like FINRA. This article discusses the FINRA arbitration process and timeline -- one way that FINRA tries to resolve disputes and hold industry professionals accountable.
What Is FINRA?
FINRA, or the Financial Industry Regulatory Authority, is a non-governmental, not-for-profit organization that seeks to protect investors by ensuring that the broker-dealer industry operates fairly and ethically. FINRA is authorized by Congress to write and enforce broker-dealer rules that strengthen investor safeguards and provide mechanisms for resolving disputes and disciplining violators.
What Is FINRA Arbitration?
Arbitration and mediation are two forms of dispute resolution that people often pursue before or instead of full-blown litigation. While mediation involves the parties negotiating a mutually-agreeable solution with the help of a third-party mediator, arbitration uses an impartial intermediary who listens to both sides’ arguments and makes a decision that is binding on the parties. A FINRA arbitration involves a panel of one or three arbitrators selected by the parties. The panel’s final decision is called an “award.”
The FINRA Arbitration Process
FINRA arbitration involves a number of stages and rules that govern the process. From start to finish, the process generally proceeds as follows, though parties may agree to settle their case before arbitration is finalized:
- File a Claim: FINRA arbitration begins when someone files a Statement of Claim. This statement includes the details and facts surrounding the dispute, the parties involved, and the type of relief requested. A claimant can request actual damages, interest, specific performance, and other types of remedies. The claimant must also file a Submission Agreement and pay the applicable filing fees.
- Claim Answer: After the filing requirements are met, FINRA serves the Statement of Claim on the other parties (called respondents). Each respondent then has 45 days to file an answer to the claim which includes the relevant facts and defenses to the claim.
- Arbitrator Selection: Arbitrators are selected by the parties from arbitrator lists randomly generated by a FINRA computer algorithm. Parties can object to a given arbitrator for reasons such as personal bias, financial interest in the subject matter, and other such justifications.
- Prehearing Conferences: At the Initial Prehearing Conference (IPHC), the parties and arbitrators meet (usually by phone) to set the schedule for the case. This includes setting dates for the evidentiary hearing, discovery deadlines, briefing and motion deadlines, and other preliminary issues. Subsequent prehearing conferences may be necessary to resolve related preliminary issues.
- Discovery: Through discovery, the parties request documents and information from each other in order to prepare their case for the arbitration hearing. Parties are required to cooperate with each other and may be sanctioned for failing to do so, but the Code of Arbitration Procedure also includes rules for objecting to discovery requests.
- Hearings: FINRA Arbitration hearings are similar in format to regular trials. They generally include opening statements; presentations of facts, documents, testimony, and rebuttal evidence; motions; closing statements; and post-hearing submissions. During the hearing, claimants try to prove their case, while respondents attempt to establish defenses to those claims. Each side can call witnesses and cross examine the other side’s witnesses.
- Decision and Awards: After the record is closed, the arbitrator considers all the evidence presented and has 30 business days to decide whether the claimant is entitled to any relief. If the panel has three arbitrators, the decision is based on their majority vote. The final decision, or award, will be in writing and will detail the damages awarded, any assessments of costs and fees against the parties, a statement of the issues resolved, and other pertinent information. Under limited circumstances, a party may challenge an arbitration award.
The amount of time it takes to go through the FINRA arbitration process will vary depending on a number of factors including the complexity of the issues, the number and schedule of the parties, and the volume of discovery. However, the average arbitration takes a little over a year to complete.
Don’t Go Through a FINRA Arbitration Alone
Understanding securities law and all of the applicable rules and regulations takes years of practice. While you’re not required to have legal representation during a FINRA arbitration, it’s usually a good idea, especially since the other side will probably have lawyers fighting for their interests. Contact an experienced, local securities attorney who can prepare you and protect your interests throughout the FINRA arbitration process.