Supervisory Systems - Code of Arbitration Procedure and Insider Trading


Customer complaints that remain unresolved are subject to mandatory arbitration. The FINRA Uniform Code of Arbitration requires that any dispute, grievance, claim or controversy between a customer and a member must be submitted for arbitration. Once a matter is submitted to arbitration, neither party is permitted to initiate a lawsuit or other action regarding any facet of the matter. Claims must be made within six years of the action being disputed.


It is a violation of NASD (now known as FINRA) Rule 2110 for any member or associated person to do any of the following:

  • Fail to submit a dispute for arbitration
  • Fail to comply with any injunction order
  • Fail to appear or provide documents as ordered
  • Fail to pay an award

Arbitration may be used for disputes:

  • Between or among members
  • Between or among members and associated persons
  • Between or among members, associated persons and customers
  • Between or among members and registered clearing companies who have an agreement with the FINRA

Either party to the dispute can file a claim with the FINRA Director of Arbitration. Such a claim must contain the following:

  • A detailed description of the facts of the dispute
  • Documentation that supports the claim
  • The amount of compensation requested
  • Check for the claim filing fee

The Director of Arbitration then sends a copy of the claim to the respondent party, who has 45 days to reply. The response must be complete, and include all defenses and relevant documentation, as well as any counter-claim against the complainant. Failure to respond within 45 days may bar the respondent from presenting any defense at the hearing (at the Director's discretion).

The next step of the process is for the claimant to provide a written reply to the respondent's answer within 10 days of receipt. A hearing is then scheduled, unless the parties waive their right to a hearing.

The Arbitration Panel is made up of both public and non-public arbitrators. Non-public arbitrators include current and previous members associated with a broker-dealer. Past member must have been associated with a broker-dealer within the past three years. Other non-public arbitrators include professionals such as attorneys and CPAs who spend at least 20% of their business working with securities and commodity issues.

When resolving disputes between members, only non-public administrators are used. When resolving disputes between members and customers, the majority of arbitrators are public.

The number of arbitrators on a panel varies with the dollar amount of the requested claim. If the claim is $50,000 or less, one non-public arbitrator is appointed. If the claim is more than $50,000, three non-public arbitrators are required. However, for claims of $50,000 or less, the parties can request that three arbitrators be used. And for any claim, a different panel composition can be requested, as long as all parties agree.

Once a decision is made by the panel, any monetary award must be paid to the claimant within 30 days.

Alternatives
There are several alternatives available in the arbitration process, including:

  • Simplified arbitration: Disputes for claims of less than $25,000 may use a single arbitrator rather than a panel. A decision is made within 30 days after the arbitrator has reviewed all the evidence.

  • Mediation: A mediator may be appointed to help the parties work out a settlement prior to the hearing. Both parties must agree to this arrangement.

Insider Trading
The Securities Act of 1934 prohibits insider trading, and the Insider Trading and Securities Fraud Enforcement Act of 1988 specifies the penalties for these prohibited activities.

What is an Insider?
An insider, affiliate or control person is defined as an officer, director or owner of more than 10% of the voting stock in a company, or the immediate family of any of these persons. This Act incorporates all of the prohibitions against the activities of insiders and the use of insider information. An insider is guilty of breaking SEC rules when using material, non-public information to trade securities, or when passing on information to another person who acts upon the information.

Insider Information Recipient Fines and Penalties
In addition to increasing the fines and penalties that can be levied, the 1988 Act also makes the recipient of insider information as guilty as the insider who was the source of the information. Investors who have suffered monetary damage because of insider trading have legal recourse against the insider or any other person who misuses non-public information. Furthermore, the SEC may seek civil and criminal penalties against anyone it believes to have violated this act. Liability for violating this act is capped at the greater of $1 million or 300% of profits made or losses avoided.

All broker-dealers must establish and actively enforce written supervisory procedures that prohibit the use of material non-public information by all persons affiliated with, interested in, or in any way engaged in securities-related activities.

FINRA Conduct Rules


Related Articles
  1. Professionals

    CODE OF ARBITRATION

    Code of Arbitration FINRA’s Code of Arbitration Procedure provides parties with a forum to resolve disputes. Most claims submitted to arbitration are financial in nature, although other ...
  2. Professionals

    Code of Arbitration Procedure

    FINRA Series 6: Section 12 Code of Arbitration Procedure. This section deals with arbitration agreement and procedure.
  3. Investing News

    If You Win a Broker Arbitration, But Can't Collect

    Here's what to do next if your broker stiffs you when you win an arbitration.
  4. Professionals

    Arbitration And Disciplinary Procedures

    Arbitration And Disciplinary Procedures
  5. Professionals

    Insider Trading and Securities Fraud Enforcement Act of 1988

    FINRA Series 6 Exam Study Guide - Insider Trading and Securities Fraud Enforcement Act of 1988. This section defines an Insider and discusses the fines and penalties for giving out insider information.
  6. Options & Futures

    So, You Want To Take Your Broker To Court

    Find out how to file a claim with your broker and what you can expect throughout the process.
  7. Professionals

    OPENING A NEW ACCOUNT

    Introduction Prior to opening an account for any new customer, a registered representative must complete and sign a new account form. Account ownership is divided into five main types: Individual ...
  8. Brokers

    Is Your Broker Ripping You Off?

    We show you how to resolve a problem without getting the lawyers involved.
  9. Financial Advisors

    Why Financial Advisor Background Checks Are Vital

    An alliance of public interest groups is pressuring FINRA to broaden its BrokerCheck tool.
  10. Professionals

    B. NASD and Codes

    The National Association of Securities Dealers / NASD The Maloney Act of 1938 was an amendment to the Securities Exchange Act of 1934 that allowed the creation of the NASD which now part of FINRA. ...
RELATED TERMS
  1. Arbitration

    Arbitration is a mechanism for resolving disputes between investors ...
  2. Mandatory Binding Arbitration

    A contract provision that requires the parties to resolve contract ...
  3. Alternative Dispute Resolution

    In an insurance sense, a number of disparate processes used by ...
  4. Act-As-One Provision

    A reinsurance contract provision that requires reinsurers party ...
  5. Insider Trading

    The buying or selling of a security by someone who has access ...
  6. Neutral

    1) A term that describes an option on a security or market that ...
RELATED FAQS
  1. Bob is a registered representative who recently left ABC Securities and has now ...

    The correct answer is c. Monetary disputes within the securities industry are settled through the NASD Code of Arbitration, ... Read Answer >>
  2. How often should I measure my company's key performance metrics (KPIs)?

    Learn the definition of illegal insider trading while reviewing the people who can be involved and the regulations and consequences ... Read Answer >>
  3. How do you mediate a dispute between primary and contingent beneficiaries of a trust?

    Learn about some of the different methods for resolving disputes between primary and contingent beneficiaries on transfer ... Read Answer >>
  4. What's the difference between insider trading and insider information?

    Learn about insider information and insider trading and the differences between the two; both involve nonpublic information ... Read Answer >>
  5. What exactly is insider trading?

    An "insider" is any person who possesses at least one of the following: 1) access to valuable non-public information about ... Read Answer >>
  6. Can you accidentally engage in insider trading?

    Learn why it's possible to commit insider trading by accident, and why insider trading laws create logical inconsistencies ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center