Tour of the Dispute Resolution Process

Business in the securities industry for the most part is conducted fairly, efficiently, and in a manner that satisfies everyone involved. Occasionally, however, disputes or problems arise. For example, you may disagree with how your broker handled a transaction. If you cannot resolve the matter yourself, there are effective alternative dispute resolution mechanisms, which usually result in a swift conclusion without the inconvenience and expense of a court "battle."

 

Dispute resolution methods, including mediation and arbitration, are non-judicial processes for settling disputes between two or more parties. In mediation, an impartial person, called a mediator, assists the parties in reaching their own solution by helping to diffuse emotions and keeping the parties focused on the issues. In arbitration, an impartial judge, called an arbitrator, hears all sides of the issue, studies the evidence, and then decides how the matter should be resolved. The arbitrator's decision is final.

 

Report Problems to Management

 

Despite precautions taken to invest safely and intelligently, it is still possible for a dispute to occur. Mediation and arbitration are important methods of dispute resolution that have been used successfully by the securities industry and others, but they generally should not be your first steps. Whether it is a discrepancy that has just arisen, or a disagreement that has escalated into a full-fledged dispute, the first course of action should be to report the matter to your broker's manager. Often, management has the authority and insight to take steps that will rectify the problem quickly and easily. If it is just a misunderstanding, management intervention may be enough to put the transaction back on course.

 

If the brokerage firm's management does not resolve the complaint within a reasonable period, you may want to seek legal advice. Even if you choose arbitration and/or mediation over a lawsuit to resolve the dispute, an attorney can provide you with valuable instruction and advice, and can help weigh the advantages and disadvantages of each method. Although not required, you have the right to have an attorney in mediation and arbitration. Keep in mind that in most cases, an experienced attorney will represent the brokerage firm.

 

Mediation

 

Before entering into arbitration or litigation, consider mediation--a natural first step in the dispute resolution process. Mediation is an informal process in which a trained and impartial mediator facilitates negotiations between disputing parties, helping them to find their own mutually acceptable resolution. What distinguishes mediation from other forms of dispute resolution--principally, arbitration and litigation--is that the mediator does not impose the solution, but rather, helps make it possible for you and the other party to form and accept a solution yourselves.

 

Mediation is not structured rigidly. The actual process varies from case to case, depending largely on the mediator's "style" and the frames of mind of those involved. In some cases, you and the other party might meet to discuss the issues face-to-face, with the mediator there to help you remain focused and calm. In other cases, the mediator might hold private caucuses with each of you separately, and would then carry messages--offers, counter offers, questions, demands, and proposals--back and forth between you. Often, the mediation process consists of a combination of both methods, plus any other technique the mediator feels is useful in moving the negotiation forward.

 

The mediator's role is to guide you and the other party toward your own solution by helping you to define the issues clearly and understand each other's position. Unlike an arbitrator or a judge, the mediator has no authority to decide the settlement or even compel you to settle. The mediator's "key to success" is to focus everyone involved on the real issues of settling--or the consequences of not settling. While the mediator may referee the negotiations--defining the terms and rules of where, when, and how negotiations will occur--he or she never determines the outcome of the settlement itself.

 

The mediator also serves as an agent and mirror of reality. With the help of the mediator, disputants often see things they initially did not want to see (like the weaknesses of their own case and the strengths of the other party's case) or they get a clearer view of matters previously distorted by anger and emotion. Since securities industry mediators are knowledgeable in the areas of controversy, they can often give each side an expert, but unbiased, view of the strengths and weaknesses of the case overall.

 

Historically, business disputes submitted to professional mediation services have had a settlement rate of about 80 percent. Mediation experts attribute this to the parties' complete control over the process, costs, and outcome. If you feel good about the process, you will likely approach it with enthusiasm and good intentions. Approximately eight out of ten cases settle within a few weeks to a few months of the formal agreement to mediate--when everyone approaches the mediation table in earnest.

 

You may consider mediation successful even when the dispute does not settle fully in the mediation process. Sometimes parts of a dispute settle in mediation, leaving fewer or less severe differences to be settled in arbitration or litigation--translating into huge savings of time and money for everyone involved. Generally, the mediation process improves communications, helps to narrow the issues involved, clears up misunderstandings, diffuses emotion, and defines areas of agreement so that future dispute resolution efforts, especially in arbitration, can become more efficient, effective, and more likely to produce settlement down the road.

 

Arbitration

 

When it seems that other efforts to resolve your dispute are not working, it is then time to decide whether you will file a claim to arbitrate. Even if you choose, or are required to use, arbitration rather than a lawsuit as a means of resolving your dispute, you should consider hiring an attorney who will provide valuable instruction and advice.

 

Arbitrators are people from all walks of life and all parts of the country. After being trained and approved, they serve as arbitrators when selected to hear a case. Some arbitrators work in the securities industry; others may be teachers, homemakers, investors, business people, medical professionals, or lawyers. What is most important is that arbitrators are impartial to the particular case and sufficiently knowledgeable in the area of controversy. Potential arbitrators submit personal profiles to FINRA; the profiles detail their knowledge of the securities industry and investment concerns. If accepted, their names and backgrounds go into a pool from which arbitrators are selected for any given case. Arbitrators do not work for FINRA, though they receive an honorarium from FINRA in recognition of their service.

 


Caution. When deciding whether to arbitrate, bear in mind that if your broker or brokerage firm goes out of business or declares bankruptcy, you might not be able to recover your money-even if the arbitrator or a court rules in your favor. Over 80 percent of all unpaid awards involve a firm or individual that is no longer in business.

 

(That is one of the reasons why it is so important to investigate the disciplinary history of your broker or brokerage firm before you invest. For tips on how to do this, please read the SEC publication entitled Check Out Your Broker located on the SEC Investor Education Web site. Through FINRA's BrokerCheck Program, investors, and others, can find out background information about brokers and brokerage firms.)

 

An April 11, 2003 General Accounting Office Report (GAO-03-162R PDF 1.6 MB) on securities arbitration confirmed that the most frequent reason an arbitration award goes unpaid is that the firm or individual respondent is out of business.

 

 

Deciding Whether to File a Claim


Firms and individual respondents who remain in the business generally pay arbitration awards entered against them, and information about unpaid awards should not discourage you from pursuing an arbitration case against most potential respondents. If you already have a dispute with your broker, and file an arbitration claim, FINRA will let you know once you have filed a claim if any of the respondents in your case is out of business. In those cases where the member firm is out of business, you have the option of pursuing claims against it in court (FINRA Code of Arbitration Procedure Rule 12202).  If the firm or individual respondent does not file a response to your claim, you may pursue your claim using the default proceedings of FINRA Code of Arbitration Procedure Rule 12801. To help you decide whether to pursue a claim, we suggest that you consult with an attorney.


FINRA also provides dispute resolution services for several exchanges through contracted agreements. If you did business with a firm that is not a FINRA member, but is a member of one of these exchanges, that firm may be required to arbitrate disputes at your election. Background information on non-FINRA member firms will need to be obtained from the relevant exchange.

 

In addition to initiating an arbitration, investors may also want to consider filing a complaint with FINRA's Investor Complaint Center. Through the Investor Complaint Center, investors and others can immediately alert FINRA to any potentially fraudulent or suspicious activities by brokerage firms or brokers. Investors may also notify FINRA's Office of the Whistleblower if they have evidence of or material information about, potentially illegal or unethical activity. The Office of the Whistleblower was established to expedite the review of high-risk tips by FINRA senior staff to ensure a rapid response for tips believed to have merit. Investors may also file their complaints with the appropriate regulatory authorities, such as the Securities and Exchange Commission (SEC), state securities commissions, or one of the self-regulatory organizations (SROs) listed in the SRO Directory. The regulator may then investigate the complaint and, if warranted, censure, fine, or suspend a wrongdoer. An investigation normally does not recover investor's losses which can be done through arbitration.

 

Filing a Claim

 

Arbitration starts with your Statement of Claim, a description of what happened, written in your own words. You should tell the story clearly, concisely, accurately, honestly, completely, and in sufficient detail so that someone reading it will understand what happened, what monetary damages you are seeking and why you feel you are entitled to receive a favorable decision. Remember that the respondents--that is, the broker or firm with whom you have a dispute--will use the Statement of Claim to prepare their case and you, as the claimant, should be prepared to prove each part of it.

 

The Submission Agreement is the document that shows you have presently selected arbitration as your means of solving a dispute. The arbitration process cannot begin without it. The Submission Agreement is also your agreement to be bound by the decision of the arbitrators.

 

FINRA charges a filing fee for handling the arbitration. A portion of the filing fee is non-refundable. You should check with FINRA or the Code of Arbitration Procedure for current fees before you submit your claim. A calculator to assist parties in determining required fees is available.

 

Your claim is served on the respondent, who is given time to provide an answer. After the respondent is served, both parties are then responsible for providing--or serving--copies of all other documents, pleadings, correspondence, etc., directly to the other parties and for providing additional copies of any documents to FINRA for its record and for the arbitrators. Keep in mind that the respondent may also file a claim against a third party, or may file a counter claim against you.

 

Arbitration Hearings

 

If your claim is for $25,000 or less, it is considered a "small claim" and usually, a single public arbitrator will render a decision solely by reading the written statements and supporting materials submitted by each party. However, as a public customer, you may request an in-person hearing where you appear and present live testimony instead of having the arbitrator render a decision based on the written submissions of the parties.  

 

In cases where the claim is for more than $25,000, or if you request an in-person hearing, the hearing will be scheduled as soon as possible. Hearings are conducted in sessions of up to four hours, usually with two sessions per day, though not necessarily on successive days. It is not possible to determine exactly how many sessions it will take to hear your case.

 

It is your responsibility to prepare yourself for the arbitration hearing. You must arrange for any witnesses and/or evidence to be available for presentation at the hearing. You must inform the other party of the witnesses you will have and provide copies of anything you plan to use at the hearing as evidence at least 20 calendar days before the start of the hearing. You will also need to bring to the hearing enough copies of each item for each arbitrator and one for the files of FINRA. It is important to be well organized and to have outlined and practiced what you want to say. Arbitrators appreciate cases that are concise and well focused, free from repetitive and irrelevant information.

 

The parties will select their arbitrator choice(s) from three computer-generated random lists based on Arbitrator disclosure information provided by FINRA. Each separately represented party may strike up to four of the arbitrators from each list for any reason (FINRA Code of Arbitration Rule 12404). The arbitrators conduct each hearing in the manner they think will be the most effective in permitting the full and fair presentation of the evidence and arguments of the parties. The process will usually proceed as follows:

 

  1. The arbitrators and the witnesses are sworn in.
  2. Each party has an opportunity to make a brief opening statement.
  3. The claimant presents facts to the arbitrators, including documents and live or written testimony.
  4. The respondent presents his or her case in the same manner as the claimant.
  5. Then, any counter claims are presented in the same way.
  6. Parties may provide rebuttal evidence.
  7. Parties may make closing statements or summations of the testimony.

 

You must be prepared to demonstrate proof of your claim. Your witnesses will be subject to cross-examination by the other party, and to questioning by the arbitrators. You will be able to cross examine any witnesses for the other party. You will also be able to object to any evidence presented by the other party before the arbitrators receive it. The arbitrators will examine the documents to determine if they will be admitted into evidence.

 

Decision and Awards

 

The decision is made after all parties complete their presentations and the arbitrators close the record. In cases where there is an arbitration panel, the outcome is based on agreement by a majority of the panel. Arbitrators will endeavor to make a final decision within 30 days after they close the record. They are not required to write opinions or provide reasons for their decision. You may request an opinion, but you should make that request in writing before the hearing date.

 

You will receive a written document called the "award" (i.e., the "decision") which contains the decision of the arbitrators, usually by first class U.S. mail or facsimile. All parties are notified at the same time. Arbitration decisions are also made public. If you are the claimant and the decision or award is made in your favor, you can expect to be paid within 30 days of the time that the other party is notified of the decision. The other party will pay you directly, usually by sending you a check in the amount specified by the arbitrator. Brokers and FINRA member firms must pay arbitration awards within 30 days of receipt, unless a motion to vacate is filed in court. Additional information about what to do if a broker goes out of business, or you have not heard from the brokerage firm is available.

  

Decisions made in FINRA arbitrations are final. Arbitrators cannot reconsider their decisions, once issued, even if new evidence surfaces later. You may certainly challenge the outcome of an arbitration in a court of law, but these cases are successful only under rare circumstances. The courts generally uphold arbitration decisions.

 

Case Results

 

Most arbitration cases end with a settlement between the parties either through direct negotiation or through mediation. In recent years, parties agreed on a resolution in about 60 percent of all cases. Other cases are withdrawn or closed before the process begins. For example, more than 5,345 investor cases closed in 2007. Arbitrators decided the outcome in 1,133 of those cases and in 4,185 cases (79 percent of the cases) were resolved without an arbitrator's decision. See the FINRA Dispute Resolution Statistics.

 

FINRA aggressively pursues disciplinary action against all active firms or individual brokers that do not promptly fulfill their obligations. (See FINRA's guidance entitled "What If I Don't Get Paid?")