When clients open a brokerage account they usually sign a contract requiring them to resolve any disputes with the firm or their broker through arbitration rather than in court. The Financial Industry Regulatory Authority (FINRA) is normally the forum where these cases are heard.
There are pros and cons to FINRA arbitration, but the basic things you should know about arbitration are:
- It’s Mandatory – Although many investors object to the idea of mandatory arbitration, it is almost impossible to avoid being bound by the arbitration clause signed by a legally competent adult. Since 1987, the U.S. Supreme Court has upheld the validity of arbitration clauses between clients and brokerages.
- It’s Similar to Civil Litigation, but With a Few Wrinkles – The arbitration process is like litigation in many ways. For example, testimony is taken under oath, lawyers give opening statements and closing arguments, expert witnesses can be called to testify, and witnesses are subject to cross-examination. A few important differences do exist though:
1) In arbitration, the arbitrators serve as both judge and jury
2) The technical rules of evidence do not apply
3) There is discovery of documents, but no depositions or interrogatories
4) Unlike jurors, arbitrators are permitted to ask questions of witnesses.
5) Arbitration cases seldom get dismissed without a hearing on the merits
- Decisions are Swift – Cases heard in the court system can linger without a conclusion for years. Most arbitration cases are filed and concluded in under a year.
- Decisions are Final – Arbitration awards are supposed to be final and binding; thus, there are very limited grounds to vacate an award. In order to reverse an arbitration award, a party must prove that it was the product of fraud, obvious bias, serious arbitrator misconduct, or other strict legal grounds. Arbitration awards will not be reversed by a court even if the court thinks the arbitrators misinterpreted the law or the evidence.
We have created a detailed outline about FINRA arbitration to help investors learn more about the process. We have also described some of the most common claims that are brought against brokerage firms and stockbrokers in FINRA arbitration.
Smiley Bishop & Porter LLP represents individual and institutional investors in securities arbitration and business litigation. We focus on cases involving defrauded investors, suitability claims, and mismarketeted investment products. Smiley Bishop & Porter LLP is available for a free initial consultation.
