The FINRA Arbitration Process
The following is a transcription of a recent episode of Wall Street vs. Main Street, a radio show hosted by the firm’s managing partner D. Daxton White.
In this episode, Mr. White explains the FINRA arbitration process and provides statistical information that may be valuable to investors who are trying to decide if they want to sue their brokerage firm.
Producer: Welcome to Wall Street versus Main Street, a different take on the investment show with our host Dax White. Dax White is the managing partner of the White Law Group a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Vero Beach, Florida. The White Law Group has represented hundreds of investors in FINRA arbitration claims against their brokerage firms. Throughout the show Mr. White will shine a light on some of the tricks of the brokerage industry while also providing valuable information for investors on how to successfully navigate the investor/ financial advisor relationship.
Dax: Welcome everyone you’re listening to Wall Street versus Main Street I’m your host asked Dax White. As we mentioned in the lead in I am not an investment professional, I am a securities attorney that represents investors and claims against their brokerage firm. The object of the show is not to provide investment advice and say hey buy this sell that or anything like that instead what were attempting to do through the show is to even the playing field a bit between the brokerage industry and investors, providing some of the information that I’ve picked up to the course of my practice, things that I think that I wish more investors knew, cause then they wouldn’t need me. Each week we sort of tackle various topics and provided information try to shine some light on the tricks the brokerage industry uses to sell products and get paid commissions etc.
The thought we are going to talk about today is just the arbitration process in general, because I feel like a lot of people are either unaware that they have the possibility of bringing a claim or are think it’s too daunting to go through and don’t do it. So I thought I’d break it down. The reason we’re talking about FINRA arbitration rather than court is because when you established your brokerage relationship at the very beginning in your first documentation that you signed with the brokerage firm, somewhere buried in the fine print of that document is an agreement that said something to the effect of if you have a dispute with us you agree to waive your right to sue us in court and to instead sue us through arbitration. That used to be called NASD now it’s called FINRA so that that’s where all claims involving brokerage firms that are US-based FINRA registered broker-dealers, that’s were all these claims are heard and in so there’s certain things that make the arbitration different than court that would be importance for someone to know who’s contemplating do I really do this because I watch courtroom dramas and I’m afraid to be deposed or I’m just scared to do it, like what are my obligations, how much will be involved for me. Because I most of our clients is the first time they’ve ever contemplated suing anyone so they’re just skittish about the process concerned about you know what’s involved for them. So that’s what we are going to tackle, again it’s FINRA and not court and there are some significant differences.
The biggest differences have to do with how quickly the process takes, how expensive it is and the obligations of the of the person who’s bringing the dispute because in court things can take years depending on the judges docket, there’s depositions, there is discovery obligations, there is a lot more costs that are involved than in FINRA so that’s to the benefit of the investor is that that it is less expensive and it doesn’t take quite as long and arbitration generally take we tell clients between 12 to 15 months and that has to do with sort of the scheduling process. You really can do it faster some cases do end up taking a little longer but it’s not like court where things drag on and drag on and appeal and this and that. FINRA arbitration usually are in that range, and it has to do with me again how the scheduling order is is is laid out. Typically you’ll file your complaint, we call the statement of claim, you’ll file it through the FINRA office in New York and then they’ll serve the brokerage firm in the brokerage firm once served as you have 45 days to respond. After that the next step in the process is to be the ranking of arbitrators. where you select the three arbitrators that are to hear your dispute and once you have those arbitrators selected going to schedule what they call initial prehearing conference which is basically just a scheduling conference where you lay out all of the discovery deadlines and whens the hearing and all that stuff. Arbitrators are instructed by FINRA to make best efforts to schedule from that initial prehearing conference which again is probably between three and six months from when you filed. They’re instructed to try to schedule a hearing within nine months. That’s where the 12 to 15 months comes from is because arbitrators are told make your best efforts unless there’s an extenuating circumstance with with one of the parties calendars are or what have you to try to schedule it within nine months of that conference call that initial prehearing conference So that’s typically why it will take that long and and frankly it again and couldn’t really be done quicker because in the interim there’s a lot going on you usually by the lawyers assuming the parties have both hired a lawyer that requires that you can’t do it faster. You are going to issue a discovery request that says here’s all the documents that we want, their going to issue one saying here’s what we would like and invariably i as we lawyers like to do you’re going to fight about it. There’s going to be emotions and so those things take time. and so that’s that’s typically why you’re gonna have a hearing at nine months and that scheduling order because by the time you do all those things you know you just goes by quickly at least from my perspective as were working through all theses cases. By time the time you get all that stuff done its time to try the case but it’s usually about nine months after that process starts. So that’s where the 12 to 15 months comes from. I know for parties that seem like a long time but again in comparison to court that’s actually very quick. and you know again it goes by pretty quickly.
In terms of what’s involved for clients you know this goes back to the difference between arbitration and court, Unlike court where parties are deposed, where you actually have to sit in a room and have the opposing lawyer ask you a ton of questions, in FINRA that is very uncommon. It is generally prohibited unless there’s some extenuating circumstances including the possible death of a witness. So if that persons may not be able to attend the hearing, one of the parties can move to have them depose so that you can preserve their testimony, what they would have said at a hearing. But short of a very extending circumstance like that, generally that there is no deposition. So we tell our clients it’s very unlikely that you’ll have to do a deposition. the only time that you would have to be deposed or asked questions would be at a hearing under oath at that point, but most cases settle so the vast majority of our clients that’s not something they have to worry about but certainly something to have to be prepared for. I mean you obviously wouldn’t want to bring a claim hoping that you would not be deposed if you’re not willing to be deposed, willing to sit down and under oath answer questions many clients again don’t have to deal with that but it’s but it’s but it happens it’s can be a hearing.
As I mention most cases, Oh sorry,I was skipping ahead a bit. We’re talking about client obligations. The big obligation has to do with just the documents. you know the majority of these cases have to do with suitability representations regarding particular investments of breach of fiduciary duty with respect to recommendations but they all generally relate to who are you as an investor and was this recommendation appropriate for you and with that comes certain documents that are going to be discoverable. virtually in every case because in order to do that analysis there’s documents you need. You need brokerage statements from the the brokerage firm your suing, you’re going to need brokerage statements for other firms because that’s gonna speak to your investment history and your willingness to take risk, at least in your other accounts, you’re going to need tax returns because that’s going to talk about your investment history your income. The components that go into suitability or are generally income, net worth, investment objective, investment experience and age. So you know if those are the components of, you know, is an investment suitable. The only way to really determine that is to fill in all those gaps and so really what the documents are the things that both sides would need to figure out who you are is an investor. So that’s the primary obligation for someone who would bring a FINRA arbitration. Obviously you have to get those documents put together. If you are not willing to do that, than then you’re not willing to go for with a Finn arbitration because if you don’t produce documents I can tell you that what what you’re going to end up with is a discovery order from an arbitration panel that says you have to do it and if you don’t do it they’re going to take sanctions up to and including dismissing your case. Ultimately you got to produce the documents. That’s the primary obligation for at least what we tell our clients is you are going to have to respond to us and give us information we need to prepare the complaint. And than we’re going to do the discovery stuff to get the documents we need from the brokerage firm but when they come calling asking for stuff we’re going to need you to answer the phone get what we need. But again, no depositions and it is limited discovery it’s not the same that you would see in court with interrogatories and all this like expansive information you would have to provide. It’s fairly limited to just you know the documents you have in your custody or control . So that that’s the obligations
In terms of the process generally, again mostly cases do settle, I think the latest statistic was that 80% of FINRA arbitrations settle. So again for the vast majority of at least our clients, if you bring a complaint your obligations are going to be provide the documents, and assuming you fall in the category of the cases that settled, that I might be it. If you go hearing then you obviously are gonna need to be sworn in and answer questions about what happened in what your background is etc.
In terms of the hearing it is not going to be in a court. There again are difference there too. It’s typically going to be in a large conference room at the FINRA location closest to you. There’s FINRA locations throughout the country and in most major cities. So if you’re in the Lakeland Florida you’re probably closest to Orlando and so you go to Orlando for a few days and FINRA will select, you know either a hotel or conference center wherever to have you sit there for the week and you have the three arbitrators at one sided at the end of the table, you’re on one side, and the other party and their lawyers on the other. Beyond that there are similarities to courtroom, again you’re not in a courtroom, but you’re going to be sworn in, your gonna have to testify, your lawyer can ask you questions their lawyers going to get to cross-examine you. You know so from that standpoint terms of what you’ve seen on TV or what your expectation of a hearing would be, even though it’s arbitration, it it does feel like a trial. It feels like a hearing but without maybe some of the pomp and circumstance and some the things I think to intimidate people.There is not a judge there, there’s not a jury, you’re just sitting there in a conference room with your lawyer arguing your case in front of these three arbitrators that are going to decide whether or not you’re entitled any kind of recovery. So that’s sorta the expectations of a hearing.
Arbitrators are an interesting lot. For FINRA arbitration the only requirement is that you have five years work experience in any field and then go through the FINRA training program. So we tell clients to expect the arbitrators to be not unlike the composition of your neighbors. If you had to go pick three of your neighbors at random that sort of going to be the background of your panel. So what makes it interesting, to me at least, is not necessarily going to have lawyers on there, your not necessarily going to have judge or a retired you know admin judge or whatever and yet they are empowered with making both legal conclusions and factual conclusions and a binding result that you have to live with. This is part of the challenge for both sides and part of the reason that the cases settle is that because of that you do see wild results where you just you scratch your head and kind of wonder how they arrived at that conclusion. It goes both directions but again you are basically just picking three people off the street and they have their own external biases that they bring to the table that you don’t really understand or know going into it and you’re stuck with their decision. This is the critical fact that again applies to both sides but arbitrators are empowered to make again legal and factual conclusions and their decision is binding. You have agreed by bringing the claim through FINRA that you will you will deal with what their decision is and it’s incredibly difficult to vacate arbitration award. There have been examples where one of the arbitrators fell asleep and a party moved to vacate based on they were clearly not paying attention of the proceedings and the arbitration was up held. Short of the the few times were maybe you could prevail on vacatur could be where an arbitrator didn’t disclose an obvious conflict like they used to work with one of the opposing lawyers or whatever. Some obvious conflict where they should have told you that, they are required to disclose certain items, they didn’t and you find out after the fact. Then you might have a shot at vacating but for the most part if you lose, you lose. There’s very limited ability to appeal. Again, that’s good and bad because it does cut both ways. I’m sure defense lawyers that represent brokerage firms are giving their clients similar advice saying hey whatever happens happens. If we’re ordered to pay an award I would tell you that you’ve got a very limited ability to have that vacated so you should pay. So that goes back to you you have to live with that decision, but assuming you prevail, that it goes back to FINRA being quicker than court because one of the things that can drag out court cases is the appeal process and the fact that can be taken and dragged out longer and longer. Generally speaking in FINRA you get an award, they pay 30 days later, you move on. And so again if you’ve tried the case within 12 to 15 months of filing,you get your award couple weeks later, they pay 30 days later. The time from when you brought the claim to when maybe you get some money is much less than it would be in court.
In terms of again going back to client obligations, expectations, into things that you would have to deal with certainly there are costs involved. Again, this is one where FINRA is considerably less expensive than court and primarily has to do with those depositions because when you remove depositions you remove lawyers having to fly all over deposing people and incurring travel costs and ordering transcripts and exhibit binders and all that good stuff that comes in play when you have all those depositions. So that’s the primary reason why arbitration would be less expensive. But you do have costs. You have to pay for the arbitrators to hear your case. That’s generally incorporated in the FINRA filing fee which ranges depending on the amount of the claim that you’re bringing. If you’re suing for million dollars plus I think the filing fee right now is $2000 so not deminimis but not you know extraordinary either. Certainly there are other processes like AAA arbitration and jams where your costs are considerably higher. So in the grand scheme of things that’s fairly reasonable. We tell clients thats the only guaranteed a costs because you can’t start your case without paying that filing fee. Everything else that comes up in the process really has to do with is the case going to hearing. So for a lot of clients there are no other cost because 80% of cases settle. But if you did go to hearing that’s when you get into some additional expenses, like are we gonna hire an expert, does my lawyer need to travel, how many hearing days are we talking about. If you lose you could potentially be on the hook for hearing costs although that’s a pretty extraordinary remedy, that to me suggest the arbitrator really did like your case and didn’t think you should bring it because typically those expenses are our shared. But that’s sort of your worst-case scenario is to pay a filing fee, you take your shot, you lose and now you’re on the hook for some travel and an expert etc. So those are all things that should be considered when, if you are sitting at home going mam I think I got taken advantage of but i don’t know if I really want to do anything about it because I think the process might be daunting or cost prohibitive or I’m not sure I’m going to live that long. That’s sort of a bullet point on expectations and how long it would take, and what you would you have to do and what would it cost.
We’re going to take quick break and then when we come back I will talk to you generally about FINRA statistics because again I think that sort of plays in on is worth it should I do something.
Welcome back everybody. You’re listening to Wall Street versus Main Street I’m your host asked White today were talking about the FINRA arbitration process, you know reaching out to those people who maybe think they’ve been taken advantage of by their financial advisor and going through a little bit of a blow-by-blow on what would the process be and what would be entailed if I decide I want to bring a complaint and try to recover some investment losses because I think of and taken advantage of. So before the break we talked about the arbitration process generally how long it takes, what’s involved for clients, what you know what are some potential costs that they may have to worry about. Obviously those are important in deciding do I want to do this. Now we’re going to talk about sort of statistics because obviously that would play into it too. I mean it if you thought was to take 12 to 15 months and you might spend between$2000 and $5000 but you had a 0% chance of winning, you’re not going to do it. So statistics certainly play into, is it worth it. The FINRA statistics are are constantly changing of course. But I think the last time that I saw published statistics people were winning on average about 43% of the time and so based on, a little less than a coin flip, and when they win they are usually getting about half of what they’re asking for. And so those may not sound like fantastic odds not insurmountable but again you about a 50-50 shot is it worth it to me. The one thing that colors that statistic of course though is that 80% of the cases settle. In my experience, if you’re a brokerage firm and you you’re pretty sure you’re going to lose that’s a case to settle. So to me the ones that get tried are ones where one or the other lawyers mis-evaluated their case and you couldn’t come to an agreement on whether or not settle and so now you’re there trying the case and the three arbitrators tell you which one is wrong. But the most the cases settle and certainly the very strong ones do. So if you remove the very strong cases, the vast majority the very strong cases from the ones that get tried, that’s going to impact your statistic. So that to me is sort of where that number comes out, is because you’re in that 43% you’re seeing a lot of bad cases. Ones where the brokerage firm said lets take our shot on this one we think we can win. Or you’re seeing ones were maybe one of the parties had unrealistic expectations, they were asking for far too much and the brokerage firms said there is now way we can settle this. But again in my experience if you’re filing good cases and this would be from the perspective of me the securities lawyer who is evaluating these cases. My experience is you’re filing good cases and the brokerage firm knows they’re going to spend a bunch of money to try the case and they’re pretty sure they’re gonna lose. That’s the case are typically going to settle. So again that should weigh in on your decision-making and that something that frankly you should be talking to a lawyer about if you think you have a case. You should talk to them about what are the strengths weaknesses of my cases and what do you think our chances are, and if they’re like me they’re going to spout off those statistics and say we’ll there’s chances because thousand these cases get tried every year and here’s the statistics. But you know there might be a really good chance your case settles because we think yours is better than average.
So if you’re out there thinking, you know yeah, I lost some money in the last few years and I think maybe I’ve been taken advantage of, I should talk to somebody but you’re on the fence because you didn’t known enough about the process. I hope that information helped give you some idea of what’s involved and what are your chances.
Next week were to talk about the top eight things that the brokerage industry doesn’t want you to know. I had set out to do ten but I thinks eight is scary enough as I put together the list. So tune in next week for that. If you want to send in questions for me, I’m happy to answer them. You can find us at Wall Street V MainStreet.com or at my law firm website white securities law.com and send a question to either of those and I’ll try to get to you in a future episode. You can also find us on Twitter and Facebook and LinkedIn and everywhere else. Thanks for joining us.
Producer: You’ve been listening to Wall Street versus Main Street. The views expressed by the participants of this program are their own and do not represent the views of nor or they endorsed by The White Law Group, its officers, directors, employees, agents, representatives, shareholders, nor any of its subsidiaries, none of the content should not be considered legal advice. As always consult a lawyer.
This transcription has been created by Dragon Software. There may be grammatical or translation errors. For clarification, listen to Episode 13 here.