When clients have disagreements with their brokers or brokerage firms and they are not able to work it out on an amicable basis, they have the option of taking the case to arbitration. Arbitration, however, is no picnic.
Arbitration can be time consuming and requires a great deal of preparation. In fact, there are a number of positives and negatives associated with arbitration that all investors should be aware of before initiating the process.
Before delving into the pros and cons of arbitration, let's first look at how to file for arbitration and learn a little more about this method of dispute resolution.
1. Request a Proceeding
In the event that a client cannot rectify a disagreement with his or her broker, he or she may request an arbitration proceeding by first filing a statement of claim through the FINRA website. Using this form, the client must outline the parties involved, the circumstances of the disagreement, and a request for relief (in other words, a detailed summary of a requested monetary award). Proof or evidence may be filed in conjunction with the form.
Generally, if the dollar amount in dispute is less than $25,000, a simplified arbitration process is used. In this process, the matter is resolved primarily through written statements filed by each party. (However, a hearing may be requested by either the customer or an arbitrator.) For amounts greater than $25,000, a more formal, in-person arbitration will likely be required.
2. Service of Pleadings
After the initial claim, the next step is the "service of pleadings." With this step, each party must make all other parties aware of any motions they request to dismiss. Upon completion of this process, a venue will be selected and an arbitration panel (of usually three people) is formed.
A form referred to as the "uniform submission agreement" must then be signed by the claimant. The form essentially says that the claimant will abide by the panel's decision.
3. Pay Your Dues and Fees
Finally, filing fees and hearing session fees (more about them later) must then be paid by the claimant. After this is completed, a date will be set for the actual proceeding. This process is not always as simple and easy as it may sound, and because of that, here are some pros and cons associated with the process to help you decide which road you need to take. (To learn more about this process, see Broker Gone Bad? What To Do If You Have A Complaint and Tips For Resolving Disputes With Your Financial Advisor.)
Arbitration Panels Are Generally Unbiased
On its website, FINRA says that panels will be composed "of a majority of persons from outside the securities industry." This means that other financial professionals such as accountants, analysts, professors and others familiar with the securities business will be used as panel members. And while there is no guarantee, this suggests that they won't be overly biased "toward one of their own."
As evidence of their impartiality (as per the FINRA), in 2001 arbitration panels decided the outcomes in 1,365 cases; in more than half of the cases (725), awards were made to investors.
|Note: A claimant may request and receive a panel of securities professionals, but he or she must do so at the time of the claim.|
Decisions are Quick and Binding
As previously stated, all decisions made by the panel are binding. This is important because it means that the judgments are enforceable very much like in a court of law. Just as important is the fact that the process, and the decisions rendered, are made fairly quickly. In fact, according to the FINRA, arbitrators will generally "endeavor to render an award within 30 business days from the date the record is closed." But, with many arbitration proceedings (the actual hearings) take only a few days at a time. This means that an entire case might be resolved in a matter of weeks.
|Note: According to FINRA, although arbitration is fast, the entire process - from filing to a decision - takes an average of 14 to 16 months (including complex cases as well).|
You Can Represent Yourself
In a court of law, you have the option of representing yourself. However, because the legal paperwork (the filing of claims, motions, etc) is so cumbersome, and because judges and opposing attorneys often can overwhelm or confuse amateurs, it doesn't usually make sense to represent yourself in these cases.
In an arbitration proceeding, however, it is much easier to represent yourself. That is because the FINRA website walks you through the process (the filings and responsibilities) step by step. In addition, the regulatory body may be contacted directly by the claimant with any questions on the process. Finally, because arbitrators typically sit at a large table with all of the parties involved during a hearing, they are more approachable and more apt to give guidance to people who represent themselves.
|Note: An individual may still use an attorney in an arbitration proceeding if he or she chooses to do so. In fact, an individual may seek legal counsel at any point in the process.|
The Burden of Proof isn't as High as in a Court of Law
As per the FINRA, "arbitrations are conducted in accordance with the Uniform Code of Arbitration as developed by the Securities Industry Conference on Arbitration (SICA)." In short, this means there are rules to the process. Panels must maintain order, cannot accept hearsay as evidence and must allow for cross examination of witnesses and a variety of other practices also common in a court of law.
It is pretty common for panels to rely on a claimant's and/or witness's believability a great deal more than might a civil court judge. The burden of proof isn't generally as high, which may be more favorable for the claimant - particularly those who are representing themselves.
With that in mind, this does not mean that a claimant should not consider the use of expert witnesses when proving his or her case. Nor does it suggest that the compilation of evidence is not important. However, honesty, integrity and believability are traits that are admired and often rewarded by arbitration panels.
Most - but Not All - Panels are Unbiased
Typically when an arbitration panel is selected for the case, the names, titles and backgrounds of the panel members are provided to all parties involved in the process. If a particular party feels that a given arbitrator may have a particular bias (perhaps because of a past relationship with the opposing party), that person may launch what is referred to as a preemptory challenge, which means they can file a motion to strike the arbitrator from the panel.
However, even if the claimant is able to strike an arbitrator from the panel, there is always a chance that a particular panel member or the entire panel may be sympathetic toward the opposing party. If this happens, your case may fail, no matter how sound it is.
It is possible to appeal, or request that an award be vacated if the judgment seems to have been affected by a bias. However, because it is binding and generally considered final by FINRA, a claimant must usually find fraud or some other serious error with the process to have any hope of getting the decision overturned. Contrast this to a civil or criminal proceeding (in a court of law) where the appeals process can go on seemingly forever.
Some Panels are Stingy With Awards
While the FINRA itself does not publish statistics on alleged damages (as stated in the initial claim) versus the actual awards rendered, it is common belief that arbitration panels are stingy with their rewards.
For an example of payouts, let's take a look at the record of a random New Jersey-based firm, Looking back over the last five years, two cases alleging unsuitability were brought against the broker-dealer. In both cases, the claimants were granted awards. In the one case, the claimant alleged damages of $600,000. He or she was awarded just $250,000. In the other case, the claimant had alleged $60,000 in damages. That claimant was awarded just $10,000.
Again, any attorney or claimant with extensive experience in FINRA arbitration will tell you that such judgments are not uncommon.
The Process May Be Cheap, but it's Not Free
In a civil or criminal law proceeding, a person is often charged an enormous retainer fee or is billed by the hour over an extended period of time from when the case is filed, right through the appeals process. Fortunately for claimants, in typical arbitration proceedings, the attorney's fees are lower because of fewer days spent appearing for the hearing and, because less case preparation is involved, there are fewer billable hours.
Despite this, there are other charges investors should be aware of, such as filing fees and arbitrator fees.
Incidental costs, such as the fees associated with retaining expert witnesses (which can cost $100/hour or more based on the type of testimony), increase the bill as well. The cost of travel to and from the hearing venue, and the cost to you in terms of time or hours at work lost should be considered as well.
|Note: You can use the Financial Industry Regulatory Authority (FINRA) calculator to figure out how much a possible claim would cost you. For example, on a $50,000 claim, the filing fees would be $175, and another $600 would be charged for the use of three arbitrators.|
Arbitration is a terrific way to settle a dispute with a broker or member firm, but be aware that although the process is usually less costly and cumbersome than a civil case, there are potential pitfalls that all customers must be aware of before initiating the process.