What Is Arbitration?
Let me explain arbitration to you directly: it's a process for resolving disputes between investors and brokers, or even between brokers themselves, all overseen by the Financial Industry Regulatory Authority (FINRA), where the decisions are final and binding.
You need to understand that this isn't the same as mediation, where parties negotiate a voluntary settlement that only becomes binding if everyone agrees. And it's definitely not like filing an investor complaint, where you're just alleging wrongdoing without a specific dispute or seeking damages from the broker.
How Arbitration Works
In practice, arbitration functions much like a lawsuit, but I can tell you it's often preferable because it involves lower costs and less time for everyone involved.
If you have a specific dispute with a FINRA-registered broker, you file a claim with FINRA, stating the alleged misconduct and the damages you're seeking. FINRA then appoints a panel of three financial industry professionals—unless you request otherwise, these won't be current securities industry employees—to avoid bias. If you suspect bias in the panel, you can request a change.
Key Takeaways
- Arbitration is not the same as filing an investor complaint.
- Arbitration could be preferable to a lawsuit due to the lower costs and time commitments for all parties involved.
- 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 required.
Arbitration Hearings
For smaller disputes under $50,000, you don't need an in-person hearing; instead, both sides submit written materials to a single arbitrator who makes the decision. When the amount is between $50,000 and $100,000, expect an in-person hearing with one arbitrator.
For larger claims over $100,000, in-person hearings with three arbitrators are the norm, and a decision requires a majority—meaning at least two agree. Arbitrators don't have to explain their rulings, and you can represent yourself or hire an attorney. These panels are less formal than courts, so even if you're going it alone, you have a fair shot at success.
Keep in mind there are filing fees, plus time and travel costs, so weigh those when deciding to pursue arbitration.
Special Considerations
Arbitration panels might not award you the full amount you're seeking—for instance, if you claim $38,000, they could side with you but only give $10,000. Decisions are binding and can't be appealed except in very limited cases, unlike FINRA's mediation, which isn't binding unless both sides agree.
The Public Investors Arbitration Bar Association has pointed out issues with FINRA's panels, like lack of diversity and weak protections against bias and conflicts. FINRA pushes back, saying these criticisms, especially about arbitrators' age, are off base.
Most brokers include mandatory arbitration clauses in their terms, forcing you to use it instead of court. With FINRA holding a near-monopoly on this, their panels are often your only option for recourse.
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