Arbitration: What Is It?

Arbitration is a method for settling conflicts between brokers or investors. The Financial Industry Regulatory Authority (FINRA), which is in charge of overseeing it, makes final and binding judgments. In contrast to mediation, where parties talk to reach a consensual solution, decisions made in arbitration are not legally enforceable unless both parties agree to them.

Arbitration is distinct from filing an investor complaint, in which an investor complains about a broker but does not have a specific issue with that broker over which the investor is suing for compensation.

The Process of Arbitration

Practically speaking, arbitration is comparable to a lawsuit, but because of the reduced costs and time commitments, it may be preferred by all parties. An investor or broker may file a claim with FINRA detailing the alleged misbehavior and the amount of money they are seeking in damages when they have a specific disagreement with a broker who is registered with FINRA.

If the aggrieved party doesn’t request otherwise, FINRA will select a panel of three financial industry experts who do not work in the securities sector. Although there should be no prejudice, if one of the parties feels that a panel member is biased, they may ask for a change.

Hearings in arbitrations

In-person hearings are not deemed required for disagreements under $50,000; instead, the matter is decided by a single arbitrator after the parties exchange written submissions. A single arbitrator hearing in person is the most frequent arbitration for disputes between $50,000 and $100,000.

In-person hearings with three arbitrators are the norm for disputes exceeding $100,000. A ruling may only be made with the support of two out of the three arbitrators. Arbitrators are exempt from giving reasons for their decisions.

Arbitration petitioners can represent themselves without legal counsel or with it. Since arbitration panels are often less formalistic than courts, investors can succeed even when acting pro se.

Particular Considerations

Amounts requested in a dispute may not always be awarded in full by arbitration panels. For instance, the panel may rule in favor of the investor but only pay $10,000 if the investor makes a claim for $38,000 against their broker.

Arbitration rulings are final and cannot be appealed, save in extremely specific situations. Contrarily, FINRA’s mediation procedure is not enforceable unless both parties accept the settlement.

FINRA has come under fire from the Public Investors Arbitration Bar Association for its lack of diversity on its arbitration panels and inadequate measures to prevent prejudice and conflicts of interest. The regulator has claimed that these objections are unwarranted, especially the emphasis on the age of the arbitrators.

Most brokers include in their terms of service that investors must consent to obligatory arbitration to resolve any issues, as opposed to going to court. Due to FINRA’s near monopoly on arbitration, many investors’ sole option is to use the organization’s panels.

Conclusion

• A complaint from an investor is not the same as arbitration.
• Because arbitration involves fewer expenses and time obligations for all parties, it may be preferable to litigation.
• Less than $50,000 in controversy does not necessitate in-person hearings.
• Require an in-person hearing with a single arbitrator for disagreements between $50,000 and $100,000.