Do I Need a Lawyer for FINRA??

Arbitration is an alternative method of resolving disputes outside of court. Instead of going to court, where a judge or jury will decide the outcome, an alternative method - arbitration - occurs before one or more neutral arbitrators who listen to the evidence, determine the facts, and then reach a decision based on the merits of the case. A written decision from an arbitrator is called an award, rather than a judgment as a judge’s decision is known. Arbitration awards are usually final and binding, and it is rare for the courts to overturn them. Hence, preparation for arbitration is important.

The Financial Industry Regulatory Authority, commonly known as FINRA, is a self-regulatory organization for securities brokerage firms and their registered representatives. FINRA is responsible for registering broker-dealers, enforcing rules, and upholding federal securities laws, monitoring the U.S. equity and options markets, and providing a forum for the resolution of disputes between investors and registered firms. If you have a dispute with your stockbroker or brokerage firm, that dispute likely will be resolved in FINRA’s forum.

Most securities-related disputes are resolved through FINRA arbitration. A Supreme Court case from 1987 (McMahon) determined that claims brought under the Securities Exchange Act of 1934 could also be submitted to arbitration. While this case dealt with private fraud claims under the Exchange Act, it determined that federal claims could be compelled to arbitration as long as there is a valid binding agreement.

To become a FINRA arbitrator, only courses provided by FINRA are required. While some arbitrators have additional training from law schools or formal training in the court system, not all have done so. Because arbitrators come from a variety of backgrounds, the arbitrators on your panel may or may not include people trained in the law. The most experienced FINRA arbitrators have encountered certain companies or lawyers several times, which is another factor to bear in mind. Experienced arbitrators may be familiar with the company’s lawyers and their typical arguments. It’s a different story for a first-time investor.

As a private arbitration forum, all filings are confidential. Only a final arbitration award is published on FINRA’s Arbitration Awards Online, which allows users to search and find awards by party, attorney, arbitrator, case number, and date. The FINRA Arbitration Panel is not required to provide an explanation unless the parties request it in advance of the hearing or a request for expungement is made. In practice, you may simply get a result without knowing why your arbitration panel decided the way it did.

However, awards against firms and their reps are disclosed on their FINRA records. You can access this information through BrokerCheck, which also provides a firm or representative’s employment history and disciplinary records. It is a helpful resource for conducting research. Prior to filing a claim, you can look up a broker or brokerage firm on BrokerCheck to see their history of awards and discipline.

Brokerage firms and their advisors must register with FINRA, with few exceptions. When resolving an investor’s dispute, firms and advisors must participate in arbitration even when there is no arbitration agreement in place between the parties. Financial account agreements generally contain arbitration clauses. McMahon was a decision that ratified this process and took away the ability to seek a jury trial. As a practical matter, investors in a securities dispute will almost always end up in FINRA arbitration, rather than a court, and surrender their right to a jury.

It can take well over a year from the initial filing until the arbitration award is issued. The arbitration award is typically issued 30 days after the final hearing. If you need the money soon for your business, you’ll need to plan accordingly for this very lengthy waiting period.

The Cost of FINRA Arbitration

Arbitration is an expensive process, just like pursuing a lawsuit. There are several factors that may contribute to the cost of FINRA arbitration, including but not limited to the size and complexity of a claim, the number of hearings, number of documents that have to be exchanged and submitted, and number of motions that need to be filed. Discovery, or gathering evidence, is usually the most expensive component. FINRA is primarily limited to document requests as a way to obtain discovery, whereas litigation would allow for depositions. One drawback of limited discovery in FINRA is that you may not be able to hear from witnesses until the actual hearing. This can make it difficult to prepare your case, as key testimony may be a surprise on the hearing day.

Both the court system and FINRA charge filing fees. While courts normally charge filing fees for each document, FINRA does not, but FINRA does charge arbitrator honorariums. Arbitration with FINRA is not a free alternative to the court system, rather the fee structure is different.

FINRA arbitration is an equitable forum, meaning that arbitrators have broad discretion to do what they believe is “fair”. In a typical scenario, arbitrators shift forum fees to the losing side. But if there is a contract between the parties, it may determine who is responsible for paying those fees. The amount you end up paying could be as much about the contract terms as it is about who wins.

Hire an Attorney

A firm often presents one or two lawyers in a FINRA arbitration. The firm routinely pays the attorney fees for its employees unless a conflict exists. These lawyers tend to have significant experience and understand the arbitrators. Investors sue these firms quite frequently, so their lawyers are very familiar with FINRA procedures and the applicable law. So, do you need to hire an attorney? Legally, no - you can represent yourself. However, an uninformed, emotional investor may find themselves overwhelmed against counsel for a firm.

To counteract that potential imbalance, it is a good idea to hire an experienced FINRA attorney, whether you are contemplating or actually filing a claim. Basically, you want to match up to the experience that a firm’s lawyer brings to the table.

Some disputes can be resolved informally without making a formal claim. Others will have to be brought as a formal claim all the way through a final arbitration award. Which option is right for you will depend on the nature of your dispute. A good attorney can help you make that decision early. Make sure to find an aggressive advocate in your corner.