FINRA’s efforts to date have focused on increasing investor awareness and providing investors with more options. However, these measures do not address the core issue of how to collect when a brokerage fails to pay an award.
FINRA’s Arbitration Rules
Arbitration is a formal alternative to litigation in which two or more parties select a neutral third party, an arbitrator, to settle their disagreement and deliver a final, binding decision known as an award. FINRA operates an arbitration forum—a series of rules and procedures approved by the Securities and Exchange Commission (SEC)—that allows member firms, registered representatives, and associated persons to submit disputes to a private process for resolution.
To initiate a dispute, a customer must file a statement of claim with FINRA through its online portal or by mail. The claim must include a description of the dispute, the relief requested, and any evidence the claimant believes is necessary to support the request for award.
Once a claim is filed, a hearing is scheduled. Before the hearing, the parties participate in a discovery period. During this time, the respondent may be asked to produce documents and information such as account records, trading history, and other business-related materials. The respondent will also be expected to identify witnesses who can testify at the hearing.
Once the discovery phase is complete, the arbitrators will hold an evidentiary hearing. During the hearing, the respondent will likely deny that they committed wrongdoing and present any defenses they believe are appropriate. The respondent can also file counterclaims, cross-claims, or third-party claims.
FINRA’s Response to Record-Breaking Awards
FINRA’s arbitration rules, policies, and procedures provide for a fast, efficient resolution of disputes. In contrast, a trial in court can take months to years, depending on the nature of the case and the complexity of the evidence.
The largest FINRA arbitration awards typically need to be reasoned or explained, which allows the panel to decide a dispute based on its view of fairness to all parties rather than on the strict letter of the law. This provides, rightly or wrongly, greater flexibility in the arbitration process and makes a FINRA award less precedential.
Finally, FINRA should collect and publish data on unpaid customer arbitration awards in a database. It should also consider allowing a customer to file a bankruptcy petition (or be subject to SIPA liquidation) to trigger expedited suspension proceedings against a firm or associated person that has not paid an arbitration award.
FINRA’s Fee Structure
In nearly 80% of resolved customer claims, an arbitrator decides the case after a hearing, which includes testimony by the investor and the broker. In less than half of those cases, FINRA awards damages to the investor. The cost of a case depends on how much time the arbitrators spend deliberating and what the award amounts are.
A three-arbitrator panel issues an award after closing the record; decisions are based on a majority vote. The arbitration award includes how much the arbitrators think the claimant should recover and how they should be compensated. In most cases, an award will also include any costs and forum fees to be assessed against the respondent firm or associated person.
FINRA staff tells customers when a respondent firm or associated person is inactive, which makes deciding whether to pursue the case in arbitration easier for investors. This is especially important because inactive firms and individuals are more likely to not pay their arbitration awards than active ones, even though customers need to negotiate arbitration agreements with these firms and individuals.
FINRA also makes information on unpaid awards publicly available in charts that display data about monetary awards awarded to customers for the past five years. FINRA collects and publishes this information to support its ability to determine when to institute expedited disciplinary proceedings under FINRA Rule 9554 against firms and associated persons that fail to pay awards.
FINRA’s Enforcement
When investors file a claim in arbitration, they ask FINRA to review alleged misconduct by brokerage firms and their brokers. FINRA aims to resolve these disputes by providing an efficient and fair forum for resolving securities and employment-related claims without court proceedings.
The process begins with filing a Submission Agreement, which lists all parties and confirms that the case will be decided by arbitration (if it ends with an award). There is also an initial prehearing conference with the arbitrators where the arbitrators select hearing dates and discuss procedural issues and the mediation alternative. This conference is typically held over the phone or video; both parties are encouraged to bring their respective attorneys.
When an arbitrator is assigned a case, they must declare any relationships, accounts, or conflicts that may jeopardize their capacity to provide a fair ruling. This includes whether the arbitrator’s firm makes a market in the security/investment involved or has placed clients in such investments. Arbitrators are under a continuing obligation to update this information.
In addition, when customers file an arbitration claim against a respondent firm or associated person, FINRA staff alerts them that these firms have a higher incidence of failing to pay arbitration awards and that FINRA may institute expedited suspension proceedings to prevent those firms from re-registering with FINRA without first paying any outstanding arbitration awards.
