Nearly all national brokerage companies and many larger regional stock brokerage firms require their customers to sign FINRA arbitration agreements as a condition upon you doing business with their company. This means that if you, for any reason, need to sue your investment advisor, stock broker, and/or company for either fraud or investment malpractice, you will not be able to do so in court, and instead must use the FINRA arbitration process and hire a securities arbitration lawyer. In general, the FINRA arbitration process works as follows:
To start an arbitration, the lawyer for the investor (known as the claimant) files a “statement of claim” and other arbitration forms with FINRA. FINRA then serves the claim on the stock brokers or financial advisors (known as the respondents) that are being sued. Respondents then file an answer to the claim, which usually denies responsibility for the conduct and losses described in the claim.
The attorneys for both sides receive a list of 30 potential arbitrators on three different lists, known as Chair Qualified, Public and Non-Public. The claimant can now insist on all public arbitrators. Each side ranks and strikes the names on the list, based upon their knowledge of and experience with the arbitrators. From the ranked lists prepared by each side, FINRA selects a panel of three arbitrators. Once the panel is selected, FINRA schedules an Initial Prehearing Conference (IPHC). The IPHC is a telephone conference between the arbitrators and the attorneys for the parties. At the IPHC, the parties agree upon the length and dates for the hearing that will decide the claims.
To prepare for the hearing that will decide the case, both sides participate in “discovery of the evidence”. The parties exchange pertinent documents and information that is needed to present, argue and decide the case. Each side provides the others with relevant records that may be used at the hearing. It’s your opportunity to look at records you may have wondered about but could not obtain, such as information about how much money a financial advisor made from your portfolio.
Twenty days before the hearing begins, each side must tell the other who will be called as witnesses. At that time, they will also provide copies of all the exhibits they intend to offer at the hearing not already exchanged during the discovery process.
The arbitration hearing takes place in a conference room in a hotel or office suite, or at the FINRA offices, usually in the city where you lived when the investment problems arose. Hearings begin with opening statements by each side. Then we call our witnesses and offer our exhibits. After we have finished presenting our case, the brokerage firm presents its witnesses and exhibits. Each side gets to cross examine witnesses and make objections. When all witnesses have been called, the lawyers each give closing arguments. The arbitration panel closes the hearing, and issues a written award, usually within a week or two. The stock brokerage firm or financial advisors have 30 days to pay any award made against them. If they fail to do so, they lose their securities license.