Investor Protection Clinic - Student Blog

Simplified FINRA Arbitration: What You Need to Know

The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that oversees the activities of broker-dealers in the United States. When a broker-dealer who is a FINRA member violates its duties to an investor, that investor may bring a claim against the broker through FINRA arbitration. These claims can include misrepresentation, suitability, and breach of contract, amongst others. This dispute resolution mechanism is different than traditional litigation and involves one to three arbitrators who will render a final decision on the matter.

 

Depending on the amount in controversy however, your arbitration may be decided through a simplified arbitration process. In FINRA, all claims that involve $50,000 or less are decided in a simplified arbitration by a single arbitrator. Unlike the traditional format, this rule does not require the parties to attend a hearing and rather permits the arbitrator to decide the matter based solely on the parties’ pleadings. Investors however, may request to have either a telephonic (a “special proceeding”) or in-person (a “regular hearing”) hearing under the rule. At this proceeding, each side will have the two hours to present their case and an opportunity for a half-an-hour rebuttal or closing. Although the parties may not question the opposing party’s witnesses, the arbitrator may ask questions of any party during the hearing.

 

Investors should be aware of the potential benefits and disadvantages of requesting a hearing for simplified arbitration. If an investor is interested in the opportunity to tell their story and be heard by the arbitrator, a hearing or special proceeding may be appropriate for that investor. A well-drafted pleading however may also adequately tell the investor’s story without the costs of a hearing. Investors selecting this route however should be aware that it will take much longer than a case submitted solely on the documents. For example, in cases filed in 2019, cases submitted for decision through a regular hearing took almost three times as long to resolve. Investors should also be aware that while they will not have to be questioned by the opposing side, a hearing may still be very emotional for the investor who has suffered a loss. In addition to the costs of filing a claim with FINRA, each hearing session costs money that the investor could end up paying if the investor is unsuccessful at the arbitration.

 

While there are benefits and disadvantages to either option, investors should ensure that they weigh all options and consult with a lawyer who can assist with the process.

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