The FINRA & NFA Dispute Resolution Process
An Overview of Arbitration & Mediation
Arbitration and mediation are two distinct methods of resolving securities, commodities and futures disputes between two or more parties. Disputes, claims or controversies arising out of business dealings with any Financial Industry Regulatory Authority (FINRA) or National Futures Association (NFA) member firm can be resolved in arbitration or mediation.
Arbitration is a formal dispute resolution process in which the parties—customers, brokers, employees or brokerage firms making or responding to a claim—select an arbitrator, listen to the arguments set forth by parties, study the testimonial and/or documentary evidence, and render a decision on the matter. By arbitrating your claim, the parties forego the opportunity to have the same matter decided by a court of law because an arbitration award is final and binding.
Mediation is an informal, voluntary and non-binding process. A mediator facilitates negotiations between disputing parties. The mediator's role is to help the parties find a mutually acceptable solution to the dispute.
Rather than having their disputes decided by a judge and jury, participants to arbitration proceedings have their dispute resolved by a panel made up of typically three arbitrators who are knowledgeable in the area of securities laws and regulation. The U.S. Supreme Court decision, Shearson v. MacMahon, 482 U.S. 220 (1987) enforced mandatory binding arbitration clauses in the securities industry. One of the most important legal aspects of arbitration is that arbitration awards are final and binding, subject to review by a court only on a very limited basis.
Duty to Arbitrate
Investors are bound to FINRA arbitration by contract and registered representatives and their firms are contractually bound to arbitrate their disputes by their membership in the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers (“NASD”). Upon applying for membership in the FINRA, the broker-dealer and the Registered Representative agreed to be bound by the rules of the FINRA.
Commencing an Arbitration
Arbitrations are commenced by filing a statement of claim within the applicable arbitration forum, together with a submission agreement and the required fees. The filing fees for claims filed by customers, associated persons, and other non-members with the Financial Industry Regulatory Authority (“FINRA”) can range from $50 to $1,500 depending on the amount in controversy. The filing fees for claims filed by members can range from $225 to $1500. Prior to filing the Statement of Claim, many attorneys will advise the client to have an initial damage analysis performed by a forensic accountant or securities fraud examiner, which may range from $400 to $2,000. Depending on the nature of the case a damage analysis may not be necessary. An experienced Securities Expert Witness or independent FINRA Expert Consultant is frequently retained, to testify at the final hearing depending on the complexity and size of the case.
Statement of Claim
The Statement of Claim may be in narrative or pleadings form. The Statement of Claim must specify the relevant facts of the dispute, detailing the nature of the dispute, the relevant dates, the transactions in dispute, the investments involved and the amount of damages sought, and the relief sought.
Like the Statement of Claim, the answer can be narrative or in pleadings form. The answer will specify all of the available defenses that the party relies upon, and all facts relative to those defenses.
After the filing of all claims, answers and replies, FINRA will typically notify the parties of the location of the hearing. The hearing location is typically the location where the investor was a resident of when the transactions at issue occurred.
All parties are entitled to "discovery", that is the exchange of documents prior to the actual trial. Discovery is a large part of the arbitration process and most attorneys will participate as exhaustively in discovery as the case permits. Many attorneys will retain an independent Securities Expert Witness or FINRA Litigation Consultant to assist in the preparation of complex cases.
In bringing an arbitration claim, customers and brokerage firms are required to exchange documents through what is called the discovery process. FINRA has compiled a list of documents that customers and brokerage firms must produce to each other in securities claims involving customer disputes. These documents include, but are not limited to the clients: tax returns for relevant years, statements, trading confirmations, marketing material, correspondence, resume, statements from other brokerage accounts, and other relevant documents which tend to prove your claim.
Securities arbitrations are conducted in the same manner that a court trial is held. There are opening statements; examination of witnesses, evidence is introduced by the claimant and by the respondents, and closing arguments. It is a formal proceeding and the arbitrators are typically attorneys, retired judges, and industry professionals who are skilled in the handling of evidentiary objections. Awards typically take 10 days before they are published.
Mediation is an informal and flexible dispute resolution process. The mediator's role is to guide the parties toward their own resolution. Through joint sessions and separate caucuses with parties, the mediator helps both sides define the issues clearly, understand each other's position and move closer to resolution.
Generally speaking, the mediation process begins with a joint session used to set the ground rules and an agenda. The joint session also helps define the issues and determines the parties' positions.
During the process, parties may move to separate caucuses at the recommendation of the mediator. The mediator will carry messages, offers, counter offers, questions, demands, and proposals—between both sides to help the parties move closer to resolution.
Most FINRA mediators have subject-matter expertise, so that parties may select a mediator who is knowledgeable in the areas of controversy that are the subject of the dispute. Thus, mediators can often give each side an expert, yet unbiased, view of the strengths and weaknesses of the case overall. They may also discuss with the parties what might happen if the dispute does not settle.
A FINRA Mediator has no authority to decide the settlement or even compel the parties to settle. Mediation is non-binding, until parties agree on a resolution. If the matter does not settle, the claimant has preserved the right to pursue arbitration.
A typical mediation progresses through the following stages:
• Initiate a Mediation -The parties may file a request to mediate to begin the process, or, if the matter is already in arbitration with FINRA, they may contact their arbitration administrator for a referral to mediation.
• Mediator Selection - Once the parties begin the mediation process, they learn how to select a mediator.
• Mediation Sessions - The parties will learn what takes place at a mediation session.
• Settlement - A settlement occurs if the parties resolve their dispute.
• Impasse - Impasse occurs if the parties do not settle their dispute.
FINRA Mediation is a less formal and is voluntary processes in which a person trained in dispute resolution techniques, can help the parties reach a mutually acceptable agreement. Mediation is an alternative to having your case decided by a panel of FINRA Arbitrators at final hearing. Mediation is non-binding, less costly than arbitration and FINRA Mediation has an 80%+ success rate. The mediator does not impose a solution but rather works with the parties to create their own solution. Mediated solutions often include relief not available in arbitration or litigation. Parties can agree to opt into mediation at any point of the arbitration process.
Mediation is the fastest growing segment of dispute resolution and should always be considered.
National Futures Association (NFA)
The National Futures Association (NFA) is the industry-wide, self-regulatory organization for the U.S. futures industry. Their goal is to help protect investors. Disputes occur in any business, and the futures industry is no exception. In 1983, NFA began an arbitration program, providing a convenient, inexpensive and prompt method for investors to resolve futures-related disputes.
NFA offers a mediation alternative during the early stages of the arbitration process. Mediation is a process where the parties work together with a mediator to reach a mutually agreeable settlement. Settling a dispute through mediation can also save the parties time and money.