Arbitration is a different process than filing an investor complaint. It may be a more suitable option than a lawsuit because it involves lower costs and time commitments for all involved parties. Disputes involving less than $50,000 do not require in-person hearings. For disputes ranging from $50,000 to $100,000, an in-person hearing with a single arbitrator is necessary.
Arbitration is a dispute resolution method between investors and brokers or between brokers themselves, regulated by Financial Industry Regulatory Authority (FINRA). The decisions made in arbitration are final and binding. Unlike mediation, where parties negotiate for a voluntary settlement, arbitration decisions do not require unanimous agreement.
It's essential to differentiate arbitration from filing an investor complaint. An investor complaint involves an allegation of broker misconduct but lacks a specific dispute seeking damages against the broker.
How Does Arbitration Work?
Arbitration is comparable to a lawsuit, but it can be a better choice for all parties involved due to its cost-effectiveness and time-saving nature. If an investor or broker has a specific dispute with a FINRA-registered broker, they can file a claim with FINRA stating the alleged misconduct and the sought damages.
To ensure fairness, FINRA appoints a panel of three financial industry professionals who are not employed in the securities industry (unless requested otherwise). This measure aims to avoid bias, but if any party suspects bias from a panel member, they can request a replacement.
Flexible Approach to Dispute Resolution
Arbitration provides a flexible approach to resolving disputes based on the amount at stake. For cases involving less than $50,000, in-person hearings are not required, and the decision rests with a single arbitrator based on written materials from both parties. For disputes ranging from $50,000 to $100,000, the common practice is to have in-person hearings with a single arbitrator.
In contrast, disputes exceeding $100,000 follow a more formal process with in-person hearings involving three arbitrators. The decision requires a majority ruling from the three-member panel. Arbitrators are not obliged to provide explanations for their decisions. Parties can choose to represent themselves, and the arbitration panels generally offer a more relaxed atmosphere compared to the formalities of the court system, providing investors with a fair chance of success even without legal representation. However, it's essential to be mindful of the fees, time, and travel expenses associated with filing for arbitration when considering this option.
Arbitration Panel Decisions and Criticisms
Arbitration panels may not grant the full amount sought in a dispute, even if the claim is for a higher sum. For instance, if an investor claims $38,000 against their broker, the panel's decision could result in an award of only $10,000, if ruled in the investor's favor. Arbitration decisions are typically binding and seldom subject to appeal, except under specific circumstances. In contrast, FINRA's mediation process is non-binding unless both parties agree to the settlement.
The Public Investors Arbitration Bar Association criticized FINRA for lacking diversity on its arbitration panels and for having inadequate safeguards against bias and conflicts of interest. In response, FINRA defended its position, emphasizing that the criticisms regarding the age of arbitrators were misplaced.
Many brokers require investors to agree to mandatory arbitration, foregoing the court system to resolve disputes. Given FINRA's near-monopoly on arbitration, the organization's panels often serve as the sole recourse for many investors in case of disputes.
Arbitration can be a cost-effective and time-saving alternative to lawsuits for resolving disputes between investors and brokers. While the decisions made in arbitration are typically final and binding, the process provides a flexible approach to dispute resolution based on the amount at stake. Despite criticisms, many brokers require investors to agree to mandatory arbitration, making it a common recourse for dispute resolution in the financial industry.