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.

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
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