Understanding the Securities Arbitration Process
Arbitration is a method of having a dispute between two or more parties resolved by impartial persons who are knowledgeable of the securities issues in controversy. These individuals are called arbitrators. Arbitration of disputes with broker/dealers has long been used as an alternative to the courts because it is a prompt and inexpensive means of resolving complicated issues. There are certain laws governing the conduct of an arbitration proceeding that must be considered by those planning to use arbitration to resolve the dispute. Perhaps most important is the fact that an arbitration Award is final and binding, subject to review by a court only on a very limited basis. Parties should also recognize that in choosing arbitration as a means of resolving a dispute, they generally give up their right to pursue the matter through the courts. Typically, when investors open an account with a brokerage firm, the customer agreement contains a binding arbitration clause which requires the customer to arbitrate any disputes which may arise against the brokerage firm. For a statistical comparison and study of the success rates of investors through securities arbitration and class actions, click here.
When you arbitrate there will be a filing fee and deposit based on the size of your claim. The filing fees due to the Financial Industry Regulatory Authority (“FINRA”) at the time the claim is filed run anywhere from $475, for a claim between $10,000 to $25,000, to $1,800, for claims seeking damages in excess of $1 million. After filing the Statement of Claim and engaging in the discovery process with the brokerage firm, it may be necessary to retain an expert in the securities or investment strategies field to testify at a mediation and/or final hearing. These experts charge a retainer and hourly fee. Our legal fees are set on a case by case basis. Our firm accepts cases on the following terms: a contingency fee basis; a contingency fee basis with an up-front retainer which is credited towards any recovery made; and hourly.
Most arbitrations are administered by FINRA. This institution hires independent arbitrators, usually lawyers or businesspeople, who sit and hear your case and render a decision. They will conduct a hearing. Each side will have a chance to tell its story and there will be cross-examination by attorneys. Most cases are handled in the largest city closest to your home. The trial will occur in an office building and not a courthouse. It could last several days.
Arbitrators are impartial persons who are knowledgeable in securities industry disputes. Organizations which sponsor arbitrations maintain a roster of individuals whose professional qualifications and experience qualify them for service as arbitrators. The arbitrators are not employees of the sponsoring organization and they, not the sponsoring organization, will decide your dispute.
How is Arbitration Commenced?
To begin arbitration, the prospective claimant must do the following:
File with the Director of Arbitration a typewritten or printed document stating the claim. This document should set forth the details of the dispute, including all relevant dates and names, in a clear, concise, and chronological fashion and should conclude by indicating what relief (e.g., money damages in a specific amount, performance of a particular agreement, interest, etc.) is requested. The claimant should attach copies of documents and supporting materials as exhibits to the Statement of Claim. The claimant should provide sufficient copies for each party, the arbitrators, and the self-regulatory organization.
Self-regulatory organizations such as FINRA have a simplified arbitration for claims in the amount of $50,000 or less. In public customer disputes, the claim will be decided solely on the basis of reading the parties’ submissions. The arbitrator, however, also may request a hearing or require a party to submit additional documentation. Parties may ask to submit additional documents to an arbitrator who is deciding the case without a hearing.
After the initial Statement of Claim is served by the Director of Arbitration, it is each party’s responsibility to provide every other party directly with any further pleadings, motions, and/or correspondence. In addition, it is each party’s responsibility to simultaneously provide sufficient copies directly to FINRA for the arbitrators and its files. Service of the filings and correspondence on FINRA and the other parties should be made on the same date and by the same means (i.e., via overnight mail, facsimile, etc.)
State whether the claimant will be represented by an attorney and, if so, the attorney’s name, address, and telephone number.
State where the claimant wants the case to be heard and the reasons for that choice. The decision as to the location of the initial hearing is made by the Director of Arbitration. Consideration generally will be given to a number of factors, including the convenience of the parties, the availability of necessary records or witnesses, and the availability of qualified arbitrators. In customer cases, the hearing will generally be in a major urban area near where the customer resided when the dispute arose unless the parties agree to a different location after the case is filed.
In appropriate cases, parties may request special services such as mediation, findings of facts and conclusions of law, expedited hearings, and the appointment of arbitrators with special qualifications. Parties seeking special or additional services should advise FINRA at the earliest time possible. Additional fees may be charged for these services. In many complex cases, the parties may desire block scheduling of hearing dates. To the greatest extent possible, such cases will be scheduled in five day blocks.
At the discretion of the customer, the proposed panel will be composed of a majority of persons from outside the securities industry, or of an all public panel. The preference of the customer should be requested in writing when filing the claim.
Complete and return three signed copies of the Submission Agreement provided by the sponsoring organization. The claimant should provide sufficient copies for each party, the arbitrators, and FINRA. By signing the Submission Agreement, the claimant agrees to submit the dispute to arbitration and to abide by the decision (the “award”) of the arbitrators. The claimant also agrees to be bound by the decision of the arbitrators with regard to any counterclaim (a claim against the claimant) permitted under these procedures that may be brought by an opposing party. Once a Submission Agreement has been signed, the procedures and timing set out in the Code of Arbitration Procedure become operative and binding. After a Panel is appointed, parties may not withdraw the Submission Agreement and Claim without the consent of either the other parties or the arbitrators.
Include a check or money order made payable to FINRA for the appropriate filing fee. Where multiple hearing sessions are scheduled or conducted the arbitrators are authorized to require additional fees by one or more parties. Additional fees may also be due as a result of prehearing conferences, or for the postponement of a scheduled final hearing date. The arbitrators will determine in the final award if these fees will be returned or assessed to another party.
At some sponsoring organizations, customers must state in writing whether they either permit or decline to permit the inclusion of their names in the public version of the award.
A filing may be returned if it does not comport with the rules. The Statement of Claim, with exhibits, Submission Agreement, and non-refundable filing fee and hearing session deposit should be submitted to the Director of Arbitration of the sponsoring organization. All pleadings, correspondence, and exhibits after the claim is served must be sent to all parties directly with sufficient additional copies sent to the Director of Arbitration for the arbitrators and for the Arbitration Department.
In bringing an arbitration claim, customers and brokerage firms are required to exchange documents through what is called the discovery process. In 1999, the National Association of Securities Dealers (“NASD”) n/k/a FINRA, compiled a list of documents that customers and brokerage firms must produce to each other in securities claims involving customer disputes. Please review NASD Notice to Members 99-90 for a list of these documents. However, FINRA recently instituted a new guide for discovery, which can be found in FINRA’s Regulatory Notice 11-17. Regulatory Notice 11-17 governs the discovery process in arbitration for claims filed after May 16, 2011, and sets forth the items that are required to be produced by the parties.
WHAT IS MEDIATION AND HOW DOES MEDIATION DIFFER FROM ARBITRATION?
Mediation is an informal, voluntary process in which an impartial person, trained in facilitation and negotiation techniques, helps the parties reach a mutually acceptable resolution. What distinguishes mediation from other forms of dispute resolution, principally, arbitration and litigation, is that the mediator does not impose a solution but rather works with the parties to create their own solution. Mediated solutions often include relief not available in arbitration or litigation.
Mediation is flexible and creative. The actual process varies from case to case depending largely on the parties’ needs and the mediator’s style. Usually, the parties meet to discuss the issues face-to-face. The mediator helps the discussions remain focused and productive. Then, the mediator may hold private caucuses with each party separately, and will carry messages, clarifications, questions, proposals, offers, and counter offers, back and forth between them. The mediator uses the private caucus and other techniques to facilitate the negotiation.
Mediation is non-binding. The emphasis is on fashioning a solution satisfactory to all. However, if the parties cannot negotiate an acceptable settlement, they may still benefit from the process by narrowing the issues to be arbitrated or litigated.
THE MEDIATOR’S ROLE
The mediator assists and guides the parties toward their own solution by helping them to define the important issues and understand each other’s interests. The mediator focuses each side on the crucial factors necessary for settlement and on the consequences of not settling. The mediator does not decide the outcome of the case and cannot compel the parties to settle.
The mediator can defuse hostile attitudes and remedy miscommunications. The mediator is a mirror of reality, who can help soften or eliminate extreme negotiating positions. Through the mediator, parties assess weaknesses in their own case and recognize potential strengths of the other side. The parties can more clearly view matters previously distorted by anger and emotion.
Within the privacy of the caucus, mediators can help each party analyze the strengths and weaknesses of its complete case. Most significantly, the mediator can explore creative and innovative solutions that the parties, caught up in adversarial negotiations, might never contemplate.
BENEFITS OF MEDIATION
- Control – Mediation belongs to the parties. The disputing parties control the process, scheduling, costs, and outcome of the dispute.
- Less Adversarial – The mediation process is informal. It is less confrontational than arbitration or litigation.
- Preserves Options – Parties can enter into mediation without jeopardizing their option to arbitrate or litigate.
- Swift Settlement – Most mediations are successfully concluded in a single day. Since mediation can be scheduled soon after a dispute arises, parties reach settlement much earlier than in arbitration or litigation. Many mediations conclude before a formal arbitration claim is filed.
- Lower Cost – Mediation usually entails lower legal and preparatory costs, there is minimal interruption of business or personal life, lost productivity is kept to a minimum, and the fees and expenses of mediation are modest.
- Preservation Of Business Relationships – By reaching an early resolution with minimal financial or other strain on either party, the chances for preserving business relationships are greatly enhanced.
- Protects Privacy – Mediation offers greater confidentiality than arbitration.
- Creative Solutions – Mediators help the parties craft creative solutions.
- Low Risk – Settlement potential is high. The case proceeds quickly. The cost is modest and there are benefits even if a settlement is not reached.
HOW SUCCESSFUL IS MEDIATION?
Historically, parties settle most business disputes submitted to mediation. Mediation experts attribute this to the parties’ control over the process, costs, and outcome. The parties approach the process with confidence, leading to successful resolutions. Approximately 80 percent of the cases in the submitted to mediation settle within a few weeks to a few months of the parties’ formal agreement to mediate.
Mediation is valuable even when the parties do not reach full settlement. Sometimes parts of a dispute are resolved in mediation, leaving fewer or less extreme differences to be resolved in arbitration or litigation. Gaining agreement on collateral issues can translate into significant savings of time and money for everyone involved.
The mediation process improves communications, narrows outstanding issues, defuses emotions, and defines areas of agreement. Through the mediation process, the parties and their representatives also learn where to focus their energies should arbitration or litigation become necessary. Therefore the parties’ future dispute resolution efforts become more efficient.
THE MEDIATION SESSION
A mediation typically consists of a joint session involving all participants as well as separate private sessions between the mediator and each party. Before the start of the mediation, most mediators require parties to sign the Mediation Submission Agreement and deposit the estimated fees.
The joint session may start with an opening statement by the mediator. The mediator explains the framework of the session, encourages active participation, and reminds all parties of the shared goal of resolving the conflict and of the confidentiality of the settlement negotiations. In the joint session, the mediator gives each party the opportunity to make a presentation and asks for a commitment by all participants to work hard toward resolution.
Party presentations generally address facts, liability, and damages, as well as background information, key issues, and needs. The tone is one of respectful communication. Each presentation is directed to the mediator and to the other side.
Participants do not provide sworn testimony and are not subject to cross-examination. At the conclusion of the presentations, the mediator may ask clarifying questions.
The second stage of the mediation may then involve meetings, or “caucuses,” held by the mediator privately and separately with each party. Caucuses are confidential so that each party can be open and candid about the case. Only if a participant grants permission will the mediator reveal information disclosed in these private sessions. This gives the mediator the opportunity to help the parties examine strengths and weaknesses of the case, analyze risks objectively, and develop options for resolution. The mediator explores each party’s needs and underlying interests in resolving the dispute. Through a series of caucuses, the mediator can compare settlement expectations, facilitate the exchange of settlement offers, and help the parties reach common ground.
It is critical to the success of any mediation process that all individuals with authority to resolve the dispute attend the mediation session. The failure to bring parties or representatives with authority to settle will hamper the efficiency of mediation. Neither the parties nor the mediator may disclose anything said during the mediation in any other proceeding, unless authorized by all other parties or compelled by law. No verbatim or other record is made of mediation sessions.