There are some situations in which FINRA arbitration is required, such as when a written agreement between the parties mandates it. In order to be eligible for FINRA arbitration, an investor must be seeking to file a claim stemming from the business activities of their broker or brokerage firm, and the event in question must have taken place within the last six years (in most states). [1]

Generally, FINRA arbitration allows an investor to seek either monetary or securities damages resulting from the business activities of their broker or brokerage firm. To get the filing process started, an investor must submit a Statement of Claim, a FINRA Submission Agreement, and related filing fees, all of which are available to view on FINRA’s website. [2]

The format and related fees for the arbitration itself vary based on the amount of money in controversy. When the amount in controversy is below $10,000, a hearing session will be conducted with just one arbitrator, and the session fee will be between $50 and $450. If the amount in controversy is above $10,000, a panel of three arbitrators may be used instead, and the hearing session fee will range from a minimum of $600 to a maximum of $1,575. [3]

Once FINRA receives all of the initial required documents, they analyze the claim and determine whether a one- or three-person arbitration panel will be used. A case number is created, and FINRA will notify the respondent – the party the investor has filed their claim against – about the case. So long as the respondent is registered with FINRA, they will be required to arbitrate.

The respondent then has 45 days to research the claim lodged against them and to respond. FINRA analyzes the response along with any counter claims or cross claims.

Next, the parties choose their arbitrators from a randomly generated list of names supplied by FINRA. FINRA arbitrators are not FINRA employees, instead they are contractors who are evaluated by FINRA on the basis of their employment, professional licenses, and education. They are chosen from diverse backgrounds and must take an oath to remain neutral and decide cases solely on the facts and meris.

Once arbitrators are chosen and agreed upon by both parties, there will be an initial pre-hearing conference, where investors are typically represented by an attorney. The arbitration hearing is scheduled, and discovery begins.

Discovery allows both parties to exchange documents and identify witnesses and is governed by rules within FINRA’s Discovery Guide. After discovery is completed, the arbitration hearing takes place.

The arbitration hearing takes place around a conference table, with arbitrators at the head of the table and the parties on each side. The claimant presents their side of the case first, complete with an opening statement, witnesses, and evidence, and is followed by the respondent. Objections are permitted, and the arbitrators determine whether or not they will accept evidence.

At the completion of the hearing, the arbitrator(s) will deliberate, and render their award, typically within 30 days. The award is legally binding on both parties, and FINRA offers no internal appeals process. While a party may choose to appeal an arbitration award in court, it should be noted that judges rarely overturn these awards.

From start to finish, FINRA arbitration cases that don’t settle before their hearing take approximately 16 months. The process allows for a streamlined and more private alternative to litigation in the courtroom, as FINRA arbitration documents are not made public like court documents. We invite you to contact us for details and support on your potential FINRA arbitration claim.

Sources: [1] https://www.finra.org/arbitration-mediation/arbitration-overview] [2] https://www.finra.org/sites/default/files/Education/p117486.pdf [3] https://www.finra.org/rules-guidance/rulebooks/finra-rules/12902]

Interactive Brokers that Saroop and two others (collectively, the “Investors”) opened accounts with Interactive Brokers where they were required to sign the contracts that provided that all transactions were subject to “rules and policies of relevant market and clearinghouses, and applicable laws and regulations.” Interactive Brokers hired a third-party to trade the Investors’ accounts (the “Manager”). Using the Investors’ margin accounts, the Manager invested in short-term futures, with a symbol of VXX. The Manager sold naked call options for VXX, meaning that the Investors had the right to buy VVX at a set price until the option expired. This works great if the market price increases but is a serious problem if the value decreases. To make matters worse, the Manager traded using the Investors’ margin accounts. A margin account is when you borrow money to purchase stock. This means that you can lose more money than you invested.

The high risk associated with margin trading prompted FINRA to prohibit purchases of VXX using margin.

The Manager was heavily invested in VXX when the market dropped and the Investors’ accounts dropping 80%. The drop triggered a ‘margin call’ for the Investors to deposit money or marketable securities to get the margin balance back to the minimum required. Interactive brokers began auto-liquidating wiping out the Investors’ accounts. The end result was that the Investors owed hundreds of thousands of dollars to Interactive Broker in their margin accounts.

The Investors filed arbitration against Interactive Brokers to recoup their losses alleging, among other things, breach of contract. The arbitration panel found for the Investors and awarded damages based on the account values before the margin trading started.

Interactive Brokers moved to vacate the award and the court criticized the arbitrators, essentially saying that they were not fit to make the decision. This court remanded to the arbitrators to explain their award. The arbitrators explained that the liability was based on FINRA Rule 4120 and that the damages came from value of the Investors accounts before the ineligible VXX investment. Interactive Brokers again asked the court to vacate the arbitration award, and the court did.

The Investors appealed to the Fourth Circuit that held that it is not ‘manifest disregard of the law’ to premise liability on a breach of contract. ‘Manifest disregard’ is one of the ways to overturn an arbitration award. In this case, Interactive Brokers admitted that parties may incorporate FINRA rules into a contract and the arbitrators found that Interactive Brokers had not complied with FINRA rules. As such, the Fourth Circuit held that since the contracts between the parties invoked the FINRA rules, Interactive Brokers breached the contract.

The Fourth Circuit reaffirmed that contract damages are awarded to place the injured parties in the same position had there been no breach of contract. The court found that even if this is not the best reading of the law, a court cannot overturn an arbitration award because it believes the arbitrators misinterpreted the applicable law.

This case is of interest because it holds that when investors sign contracts with a brokerage firm that incorporates FINRA rules, a finding that the brokerage firm did not comply with FINRA rules is a breach of contract. Another interesting feature of this case is that the court pointed out very clearly that it supports arbitration as a valid resolution forum.