This article has been co-authored by FINRA staff and The PIABA Foundation.
The vast majority of interactions between investors and investment professionals are positive. However, sometimes the relationship doesn't go as planned, and the situation can't be resolved by communicating directly with your firm or broker. In such a situation, you may find yourself considering arbitration or mediation.
There are many factors to consider as you proceed down these paths, one of which is whether to hire an attorney to help you out.
Arbitration is similar
to going to court, but
is usually faster,
cheaper and less
complex than litigation.
An attorney that represents you during arbitration or mediation proceedings can provide experience, direction and advice. Brokerage firms are generally represented by an attorney in an arbitration proceeding, so even if you choose not to hire an attorney, there might be one representing the firm or individual on the other side.
Securities Arbitration Basics
Arbitration is similar to going to court, but is usually faster, cheaper and less complex than litigation. It is a formal alternative to litigation: two or more parties select a neutral third party, called an arbitrator, to resolve a dispute.
The arbitration process goes something like this. A FINRA arbitrator or panel (consisting of three arbitrators) will listen to the arguments set forth by the parties, study the testimonial or documentary evidence, and then render a decision. The arbitrator's decision, called an award, is final and binding, and all parties must abide by the award. FINRA does not have an appeals process through which a party may challenge an award. However, under federal and state laws, there are limited grounds on which a court may hear a party's motion to vacate an award.
The size of the claim will determine how the arbitration process works. Claims involving more than $100,000 require an in-person hearing decided by a panel of three arbitrators, with one chairing the hearing. Smaller claims up to $50,000 can be decided by a single arbitrator in one of three ways: a regular hearing where evidence is presented in person; a phone hearing that incorporates many aspects of a standard arbitration hearing; or a "paper" hearing where an arbitrator makes a decision based solely on the documents submitted.
To Hire or Not to Hire
FINRA's Code of Arbitration Procedure states that parties are entitled to be represented by an attorney at any stage of the arbitration proceeding. Here are some things to consider when you are trying to decide whether to hire an attorney to represent you in securities arbitration or mediation.
- The process governing arbitration proceedings will likely be unfamiliar to you. Hiring an attorney with experience in these matters might be a comfort to you and help you appropriately present your case to the arbitrators.
- Arbitration can be faster, less expensive and more streamlined than litigation, but some arbitrations involve complex legal and regulatory issues or large claims for monetary damages. You might benefit from legal guidance if your case falls into these categories.
- An attorney can provide guidance even before the arbitration process begins. An experienced attorney can assist aggrieved parties in determining whether they have a viable claim for arbitration. This can be critical so that parties do not waste money or time filing a case that does not have a good chance for success.
- FINRA provides identical randomly-generated lists of proposed arbitrators to both parties, along with a detailed report on each arbitrator's background. An attorney can help you evaluate which arbitrators might be a better fit for your case.
- Parties to an arbitration can come to the forum with a lot of emotion about what has transpired to this point. An attorney can serve as a detached third-party representative and provide legal advice to help you meet your goals.
- Speaking with an attorney is confidential and protected by attorney-client privilege. This means that your attorney is not allowed to discuss what you tell him or her with anyone else, and that statements you make will be kept between the two of you. Attorney-client privilege helps both parties better understand the strengths and weaknesses of the case and establishes a relationship of trust that can lead to better guidance and decision-making.
- If you cannot afford an attorney, some law schools provide legal representation through securities arbitration clinics. Under faculty supervision, law students provide legal services and guidance on the arbitration process in disputes between individual investors and their investment professionals.
A word about non-attorney representatives or NARs. Although NAR firms are an alternative to representation by attorneys, NAR firms are not subject to the same professional rules or guidelines, nor are they subject to malpractice insurance requirements. Investors may also not be aware of the absence of these protections, and therefore may not properly evaluate the benefits and costs of representation by NAR firms.
Finding an Attorney
Whether you decide to engage an attorney or not, a good resource to consult is An Investor's Guide to Securities Industry Disputes published by The PACE Law School Investor Rights Clinic.
If you decide hiring an attorney is the right choice for you, the first step to take is to locate qualified candidates. The Securities and Exchange Commission (SEC) offers these tips:
- Consult with your own attorney, if you have one, about your situation and whether you would benefit by an attorney who specializes in securities arbitration or litigation.
- Contact the American Bar Association and the Public Investors Arbitration Bar Association (PIABA). Both allow you to search their member attorney directories for someone to represent you in your area. PIABA members have specific experience representing investors in disputes with the securities industry.
You can also check with your state, county or city bar associations.
Ask These Questions
Picking the right attorney is a personal decision that is often unique to your own needs and preferences. It's a good idea to interview more than one attorney—and ask the following questions:
Do you have experience representing investors in securities arbitrations? Experience matters. Representation by someone with specialized legal knowledge of the investments sold to you and the procedures that apply to the arbitration process are important. Ask how long the attorney has been in business and how many securities arbitration cases he or she has handled.
How will you represent my interests? Aggrieved investors commonly do not understand, or cannot articulate, the extent of their harm. A critical component to effective representation is your attorney's ability to communicate to you, the opposing counsel and, ultimately, the arbitration panel any underlying problems with the investments or actions at issue. Your attorney should also be expected to articulate the regulatory standards your investment professional is held to, and how those standards were breached.
How are you paid? Attorneys are paid under different arrangements. Many attorneys who specialize in representing investors in securities arbitrations do so on a contingent fee basis. This means the attorney is willing to advance their time with the hope and expectation of recovering money from the investment firm or professional. Read the fee agreement presented by the attorney to make sure that you understand the terms.