FINRA's Arbitration Process
Arbitration is similar to going to court, but faster, cheaper and less complex than litigation. If the case settles, an arbitration will last around one year. If the case goes to hearing, an arbitration typically takes 16 months. There are typically seven stages of the arbitration process:
- Claimant Files a Claim
- Respondent Submits Answer
- Parties Select Arbitrators
- Parties Attend Initial Prehearing Conference
- Parties Exchange Discovery
- Parties Attend Hearings
- Arbitrators Deliberate and Render a Decision
1. Claimant Files a Claim
The first step for parties who want to file an arbitration claim is to submit the following to FINRA:
- Statement of Claim: This is a document that is drafted and submitted by the person filing the claim — the “claimant.” It includes your description of the dispute, the parties involved, and the monetary size (inclusive of non-monetary damages) of the claim. It is the claimant’s first opportunity to explain their side of the story, and it helps if claimant can explain the events clearly — in chronological order. The claimant should attach any supporting documents to their claim. They should also provide the full names and addresses of the people or firms that are named as parties in the case.
- Submission Agreement: The Submission Agreement lists the parties in the arbitration case and confirms that FINRA will administer it. It also establishes that, if the case ends with a hearing, the parties all agree to abide by the arbitrators’ decisions. The parties listed in the submission agreement must match the parties in the Statement of Claim.
- Filing Fee: FINRA also requires that the claimant submit the appropriate filing fee at the time of filing of the arbitration claim. FINRA has a fee calculator to help estimate the initial fees for filing an arbitration. Be aware that there may be additional fees as the case progresses. If a party is experiencing financial difficulties, they can request a waiver of some of the fees.
FINRA staff serves as the impartial provider of the arbitration forum. Staff members have no authority to evaluate the strengths and weaknesses of claims or defenses. That job is reserved for the arbitrators.
2. Respondent Submits Answer
A respondent is a firm or person against which claimant filed their case. FINRA notifies each respondent of the case by sending—or serving—them a “Claim Notification Letter” by mail, or at a designated claim service email for some FINRA member firms. If the respondent is registered with FINRA, then the respondent must arbitrate with the claimant. The respondent’s Claim Notification Letter will provide information about accessing the Party Portal to obtain a copy of the statement of claim, and service letters, which will include, information about the rules of FINRA’s forum, and a blank FINRA Submission Agreement for each respondent to fill out, sign and return to FINRA in electronic form (PDF) through the portal.
The service letter will contain the city in which the hearings for the case will take place and how to contact FINRA with questions. Usually, the hearing will take place in the FINRA hearing location nearest to where the claimant lived at the time of the original dispute. If the parties agree on a different hearing location, FINRA will try to accommodate the request. There is at least one, and as many as three, hearing locations in every state, plus the District of Columbia and Puerto Rico—69 in total.
A respondent has 45 days to submit an answer. In it, the respondent can outline the defenses they plan to argue and any exhibits that support this position. If the answer contains counterclaims (claims by the respondent against the claimant), cross claims (claims by one respondent against another respondent), or third-party claims, the party asserting the claims will have to submit the appropriate filing fees to FINRA.
If the answer contains a third-party claim, the respondent must serve the third party with the answer containing the third party claim as well as the Statement of Claim, and provide FINRA with proof of service.
3. Parties Select Arbitrators
Then, the parties select their arbitrators. FINRA provides identical lists of possible arbitrators for the case to both sides of the dispute. A computer generates the names randomly. FINRA also provides both sides with a detailed report, called the Arbitrator Disclosure Report, on each arbitrator’s background. The disclosure report resembles a résumé, and includes the arbitrator’s employment background, education and training. FINRA also provides a list of cases in which each of the arbitrators has issued a final decision, called an “award.” You can view awards for free on FINRA’s Arbitration Awards Online database.
Both sides can remove, or strike, some of the arbitrators on the list from consideration and rank the remaining names in order of their preference. This process gives both parties a say in who the arbitrators will be.
Arbitrators are not FINRA employees but work on a case-by-case basis as independent contractors. They must apply to be arbitrators, and FINRA evaluates their education, professional licenses, and employment. They also must take required training. FINRA divides arbitrators into two categories: those who have a connection to the securities industry and those who do not. FINRA refers to the arbitrators who have a connection as non-public arbitrators and all others as public arbitrators. FINRA strives to include people who represent different professions and backgrounds for both categories of arbitrators. FINRA requires people who chair arbitration panels to be public arbitrators in investor cases, and they must have special training and experience on previous arbitrations.
Customer Cases: A public arbitrator serves as the sole arbitrator on smaller claims involving customers. A three-arbitrator panel hears the larger customer claims. Customers in cases that proceed with three arbitrators have the option to have an all-public arbitration panel or a majority-public panel decide their claim.
Intra-Industry Cases: Disputes between firms are decided exclusively by non-public arbitrators. Smaller disputes between firms and their employees are decided by a single public arbitrator. Larger disputes between firms and their employees are decided by a three-arbitrator panel comprised of two public arbitrators and one non-public arbitrator. Disputes involving statutory discrimination claims use all public panels with specially qualified chairs.
In all cases, arbitrators are required to make decisions based on the facts and merits of the cases they hear, and they take an oath to remain neutral. FINRA constantly monitors arbitrators to ensure that they meet necessary standards and, if they fail to meet them, FINRA removes them from the pool of arbitrators.
4. Parties Attend Initial Prehearing Conference
Once the parties select their arbitrators, the panel holds an initial prehearing conference with the party representatives—typically over telephone or video conference. The parties are usually represented by an attorney, but some parties choose to represent themselves. During the call, the arbitrators and party representatives—usually lawyers—discuss procedural issues, the mediation alternative, and scheduling hearings. At this conference, the parties select hearing dates, and FINRA recommends that the representatives have their calendars available. The parties should also raise any issues that they think the arbitrators will need to address at this time.
5. Parties Exchange Discovery
The next stage is discovery. This is when the parties exchange documents and identify their witnesses. FINRA’s website contains detailed rules for parties and their representatives to follow during the discovery process. Also, all parties in a customer case should be familiar and comply with a document called the Discovery Guide, which lists the documents that should be exchanged by claimants and respondents in customer arbitrations, depending on the types of issues.
A motion is a request to the arbitrator(s) asking them to decide an issue in the case. The basis for the most frequently filed motions include issues like amending pleadings, discovery, and scheduling. Most motions are processed pursuant to Rule 12503/13503 but the parties and the arbitrator(s) may alter how a particular motion is processed. Unlike other motions, Motions to Dismiss are processed pursuant to Rules 12504/13504 and 12206/13206
6. Parties Attend Hearings
Once the parties complete the discovery phase of the case, it is time for the hearings. This is when each party presents its case to the arbitrators. A hearing may be held in person, via video conference, or by telephone.
After all the parties arrive, the arbitrators invite the parties, their counsel, and witnesses into the hearing room. There may be two types of witnesses: fact witnesses and expert witnesses. Fact witnesses testify to facts related to the matter, but do not give their opinions. Expert witnesses, on the other hand, have technical or other specialized knowledge that enables them to interpret and express their opinions about the facts of a case. The arbitrators may ask fact witnesses to wait in a waiting room until they are called in to testify. Expert witnesses generally remain in the hearing room.
The arbitrators sit at the head of the table, and claimants and respondents sit with their groups on opposite sides. The arbitrators usually reserve seats near them for witnesses. It will take a little while for everyone to bring in all of their materials and to get set up. While everyone gets settled, the parties should not have conversations with the arbitrators.
Once everyone is ready, the chairperson will call the hearing to order. The arbitrators will identify themselves, and then so will everyone else in attendance. The chair will then swear in all of the parties and witnesses in attendance who will testify. The claimant’s side is given the opportunity to make an opening statement, followed by a statement from the respondent’s side. These statements provide a brief outline of the issues and what the party will try to prove. This is not the appropriate time to present evidence.
After the opening statement, the claimants present evidence, that is, the details of their case. For example, they present witnesses and introduce any relevant documents. If the arbitrators did not swear a witness in at the beginning of a hearing, they will administer the oath before that person testifies. The other side can cross-examine any witness who testifies, which means they can ask the witness questions. The arbitrators may also ask the witnesses questions. After the claimant’s side has completed presenting its case, then it is the respondent’s turn to present its case.
Each party can object to any evidence being presented before the arbitrators receive it. Following an objection, the arbitrators will decide if they will accept the evidence. Hearings are digitally recorded, usually on a device operated by the arbitrators. Sometimes a party will arrange for a court reporter to be present at the hearing.
Once the parties have offered all witnesses and evidence, they present closing arguments. This gives them an opportunity to summarize what they believe they have proven. Either side can then rebut the other side’s closing arguments if they choose.
Upon request of the parties or order of the panel, FINRA Dispute Resolution Services provides videoconferencing through the Zoom platform. A Zoom hearing is similar to like an in-person hearing, but there are additional considerations (e.g., how to set up your environment and using breakout rooms). Additional resources are available on our website:
- Resource Guide for Virtual Hearings
- Zoom Security Features for Arbitrations and Mediations
- Arbitrator Training Videos for Virtual Hearings
7. Arbitrators Deliberate and Render Award
After the hearing, the arbitrators consider the evidence and decide the case—also called rendering an award—typically within 30 days. All the arbitrators have an equal vote, with the majority deciding the outcome. However, most awards in the FINRA forum are unanimous. Code of Procedure rules 12904 and 13904 describe the requirements of FINRA awards, including explained decisions.
The decision is put in writing and is signed by the arbitrators. This decision is called the arbitration award and is sent to the parties. In the award, the arbitrators decide the claims and counterclaims presented by the parties.
The arbitrators will also decide how to allocate FINRA forum fees. If the award requires a firm or a broker to take any action—like making a payment—then the firm or broker must comply and make the payment within 30 days. Firms or brokers who do not comply in a timely manner risk suspension from FINRA. If that happens, then they cannot sell securities to the public until they comply with the award.
Once the panel renders an award, it is legally binding and final unless there is a court challenge. There is no internal appeals process at FINRA. A party can challenge an arbitration decision in court by filing a motion to vacate or request that the court set aside the award as void. OR A party can challenge an arbitration decision in court by making a motion to vacate-a request of the court to set the award aside as void. These motions must typically be made within 90 days of the award, but a respondent can move to vacate before the payment is due. However, judges only overturn arbitration awards in very limited situations.
All the arbitration awards from FINRA’s forum, as well as from the forums whose arbitration programs FINRA administers, are available on FINRA’s Arbitration Awards Online database.