Most investments carry some type of risk; however, you should always be able to count on your broker to act in your best interest. Unfortunately, broker misconduct occurs more often than many people realize—and the results can be devastating. If you believe misconduct or fraud has resulted in your loss, you need to understand the processes involved in resolving the dispute.
The Financial Industry Regulatory Authority (FINRA) handles the majority of disputes between customers (i.e., individual investors) and their brokers and brokerage firms. These cases are typically resolved in mediation or arbitration. In fact, FINRA reports that it handles about 7,000 arbitrations and more than 1,000 mediations each year. While the purpose of mediation and arbitration are the same—to resolve a dispute—the processes involved are very different.
Below are some of the key issues you need to know about each dispute resolution process.
The majority of broker misconduct cases are handled in mandatory binding arbitration as opposed to court because all brokerage firms require their customers to sign what is known as a "pre-dispute arbitration clause" contained in the opening account documents. During the final arbitration hearing, a panel of individuals, who have completed training through FINRA, will hear your case. You will have the opportunity to present evidence and witnesses to support your claim.
Arbitration takes the place of going to court and the decision made by the panel is considered final and binding (with very few exceptions). One of the major advantages of arbitration is the speed at which the decision is reached; typically, it is given within 30 days after the proceeding.
Mediation is completely voluntary, unlike arbitration. It is less formal than other types of dispute resolutions and can also be less expensive. A neutral third-party mediator, selected by both parties, will facilitate the negotiations. It is important to recognize that the mediator will not be making a decision on the case, although he or she may provide an evaluation of the claims and defenses and recommend a settlement to both sides. Therefore, mediation is non-binding.
Although there are many people who claim to be "mediators," not all of them are effective in the field of broker misconduct cases. Selecting an effective mediator is an important part of the process. Since the mediation process is non-binding, most brokerage firms will not pay the full value of the claims in a mediation session unless a formal arbitration claim is also pending. Mediation and arbitration can occur on parallel tracks, so that if an acceptable compromise is not reached during mediation, the formal arbitration process can continue and move toward a final hearing (which will result in a binding determination of the claim).
Arbitration proceedings are initiated by an investor who files a statement of claim with FINRA. The statement of claim usually details the nature of the dispute and damages being sought. After the initial statement of claim, investors must also file a Submission Agreement.
This does a few things:
With mediation, the both parties file a Request for Mediation rather than a statement of claim. Both parties must agree to mediation (whereas with arbitration, the respondent is served).
Resolving a dispute with your broker is not easy. The brokerage firm will have a sophisticated group of lawyers well-versed in the securities laws and regulations attempting to limit their liability and to pay as little money as possible. You need to ensure you have someone on your side to even the playing field. If you are considering a claim against your broker, you should talk with a securities arbitration attorney. Contact us today for your free consultation.