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.
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.
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.
Active TradingReturn on investment is a simple equation that can give you an edge when fine-tuning your portfolio - here's how to use it.
InvestingFreelancers are not covered under the Family and Medical Leave Act, but maternity leave is still doable with these tips.
RetirementLearn how to decide between a traditional or Roth version of the 401(k), 403(b) or 457(b) retirement plans to help you build your nest egg.
Mutual Funds & ETFsExchange-traded funds offer an investment alternative to cost-conscious millennials who want to diversify their portfolios with less risk.
MarketsThe Labor Market Conditions Index is a new Fed indicator to track labor statistics. How useful is it?
InvestingManagers must make investment decisions based on their personal investment process, which in turn should be based on solid research and due diligence.
InvestingInvestment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
Investing BasicsHere's everything you need to account for when calculating the present and future value of annuities.
EconomicsA look at the top ten economies in the world.
Forex EducationLearn how to use revenue and expenses, among other factors, to break down and analyze a company.
Percentage change is a simple mathematical concept that represents ...
A line that appears to proceed from left to right, or parallel ...
Brand identity is the way a business wants consumers to perceive ...
A situation in which the supply and demand for a good or service ...
Earnings Stripping is a commonly-used tactic by multinationals ...
Skinny down distribution is corporate practice of slimming down ...
North Korea is one of the poorest and least developed countries in the world. It is far from a developed country. Because ... Read Full Answer >>
NetSpend accepts some types of wire transfers to add money to the prepaid debit cards it issues to its customers. There are ... Read Full Answer >>
As of 2015, Mexico is not a developed country. However, it beats the majority of its peers in the developing world on most ... Read Full Answer >>
Despite having the world's second-largest economy and third-largest military, China is still, as of 2015, not classified ... Read Full Answer >>
Federal Housing Administration (FHA) loans require escrow accounts for property taxes, homeowners insurance and mortgage ... Read Full Answer >>
Greece is a developed country by most meaningful metrics. However, its financial struggles have been well documented in the ... Read Full Answer >>