Securities Arbitration

Our securities law practice involves the representation of customers, brokerage firms, and brokers in claims about the handling of brokerage accounts and in other securities-related matters. If you want to discuss your case, please email us or call us at 512-322-8100.

When a customer has a claim over the handling of his brokerage account, it is usually handled through arbitration, not a lawsuit at a courthouse. Arbitrations are an out-of-court process that is hopefully faster and less expensive in the long run. It does not use juries or judges. Instead it uses one or three people called arbitrators to decide the case. Arbitrations can be handled in just about any way that the parties agree to, but securities arbitrations are usually handled through a securities regulatory organization like the Financial Industry Regulatory Authority (FINRA). 

Disputes between a customer and a brokerage firm or broker are usually handled through arbitration because most of the forms that are used to open a brokerage account include an agreement to arbitrate the claims.

FINRA is the most common forum for handling securities arbitrations, and it will be the basis for this discussion. For more information, see the FINRA's website and pick "Arbitration and Mediation."

An arbitration is started by filing a Statement of Claim with FINRA's office covering the geographical area where the customer lives. In the Statement of Claim, the customer is the Claimant, and the brokerage firm and broker are the Respondents. The Statement of Claim does not need to be very detailed, but it must contain enough information to allow the brokerage firm and broker to defend themselves. The Statement of Claim must be accompanied by the an agreement to arbitrate and a filing fee.

There may have been complaints and other communications between the parties before the arbitration is filed, but the first the brokerage firm and the broker will know that an arbitration has been filed is when FINRA sends them a copy of the Statement of Claim with a deadline to file an Answer.

After the Statement of Claim and Answer are on file, the parties begin discovery and the process of picking the arbitrators (or single arbitrator for small cases). Each party gets lists of potential arbitrators and a short biography and list of previous awards for each person on the list. The parties then strike off potential arbitrators that worry them, rank the ones that are left, and send in their marked-up lists. FINRA compares the lists and produces three arbitrators. These three are the arbitration panel. Normally one of the three will be a current or former broker or supervisor.

The first time the parties and the arbitrators meet is by telephone in the Initial Prehearing Conference. This is done by telephone conference call. The arbitrators, the parties' lawyers, a representative from FINRA, and the parties (if they want to be) are present on the call. During this call the parties formally accept the makeup of the arbitration panel, work out a schedule for the rest of this case, and let the panel know if there are any preliminary disputes the panel needs to decide.

After the initial prehearing conference, the next time the parties and the panel will see each other will likely be the final hearing at which the arbitration is decided. Discovery disputes that come up between the Initial Prehearing Conference and the final hearing are handled by the panel chairman in a conference call.

Discovery is the process that allows the parties to find out information from the other side to try to help them prove their claims or defenses. FINRA had prepared lists of materials that must be produced by each side. These lists are contained in the Discovery Guide or Notice to Members 99-90. To see the Discovery Guide, go to FINRA's website and pick Arbitration and Mediation, then Code of Arbitration Procedure, then Discovery Guide for Arbitration Proceedings.

The Discovery Guide lists a lot of helpful information, particularly for customers who may not have access to the internal materials of brokerage firms. Still, the Discovery Guide is not all the discovery that may be asked. There may be a need to ask for additional information, and the Discovery Guide allows that. The discovery allowed in arbitration is limited to document production and very basic written questions. This is one of the tradeoffs between arbitration and lawsuits in court. Arbitration is intended to be shorter and less costly, so it limits discovery, but the discovery is not as thorough as the discovery in court. The best example of this is that depositions are not allowed except in extraordinary situations.

The final hearings take place on the date agreed to in the Initial Prehearing Conference. While the Initial Prehearing Conference was done by telephone, the final hearing is in person although some witnesses may be allowed to testify by telephone. The final hearing usually takes place in a conference center or a hotel conference room. In many ways it is similar to a trial in court, but in other ways it is very different. The most noticeable difference is that there is no jury. Also, instead of a judge, there are three (or one in small cases) arbitrators. The similarities are that each side is usually there in person and with its lawyers. The witness are put under oath and are examined and cross examined. There is not a court reporter unless one of the parties agrees to pay for one, usually at its expense. In Texas, all final hearings take place in Houston or Dallas.

The final hearing begins with formal introductions and a review of some FINRA procedures applicable to the case. Then each side makes its opening statements, puts on its evidence, and makes its closing statements. After that the arbitrators decide the case. They may meet right then to make their decision, or they may recess and meet later, in person or by conference call, to decide the case. Once the arbitrators make their decision, they work with FINRA staff to prepare the form of the written Award. FINRA then provides that Award to all parties.

Arbitration awards usually can not be appealed. The Federal Arbitration Act sets out some narrow grounds for appeal, and parties rarely try to appeal. If the customer wins money from the brokerage firm or broker, FINRA's membership rules require that the award be paid within 30 days, or the brokerage firm or broker are at risk of having their right to do business in the securities industry revoked. The award also deals with the payment of FINRA's costs. If the customer does not pay the costs that may be assessed against him, FINRA may turn the account over to a collection agency.

We hope this discussion helps you start to understand securities arbitrations. We also hope that it shows that securities arbitrations can be a complex process, and they require specialized knowledge of securities law and arbitration law. Our firm has years of experience handling securities arbitrations. If you have any questions about a securities dispute or questions about how a securities account was handled, please email us or call us at 512-322-8100.