Practical Insights for Business Owners
Client Q&A: What is FINRA and how can it help me?
I think my stockbroker cheated me. When I complained, they said something about FINRA. What is FINRA and how can it help me?
What is FINRA?
When customers sign brokerage agreements, somewhere in the fine print they almost always agree to waive their rights to sue either the brokerage firm or its employees in court. Instead, investors must bring their claims in an arbitration forum provided by an entity called the Financial Industry Regulatory Authority, or FINRA. FINRA is an independent, not-for-profit organization authorized by Congress to help regulate the securities industry.
FINRA writes and enforces the rules governing securities broker-dealers, audits broker-dealers for compliance with those rules, licenses financial advisors (called "registered representatives" because they must be registered with FINRA), and brings disciplinary actions against both securities firms and individual representatives. It has arbitration and mediation procedures to help aggrieved investors resolve disputes against securities firms and their registered representatives.
Customers can file complaints directly with FINRA's enforcement division. FINRA decides whether to bring enforcement action based on those complaints, which are not the subject of this Client Q&A.
How do I Bring a Claim Against a FINRA Member?
An investor who has previously agreed to arbitrate any disputes also can bring a claim directly against an industry participant. To do so, the investor must commence an arbitration through FINRA.
Arbitration begins when the investor (called the "claimant") files a complaint (called a "statement of claim") that alleges the facts and asks for relief from the arbitration panel. The industry participant (called the "respondent") then answers the statement of claim, by responding to the claimant's allegations and setting out any defenses.
FINRA Arbitration Panels
FINRA arbitration panels are composed of one or three arbitrators (depending on the size of the claim) who are selected by the parties. Prior to the hearing, the arbitrators and parties meet telephonically to schedule hearing dates and resolve preliminary issues.
Discovery in a FINRA arbitration is typically more limited than in federal or state court. For example, document requests are governed by FINRA's Discovery Guide, which is more restrictive in terms of what documents may be requested from the other side than the requests usually exchanged in state or federal court. Further, there are usually no depositions (pretrial testimony under oath) in FINRA arbitrations. While parties to a FINRA arbitration can serve subpoenas seeking documents or testimony from non-parties, such subpoenas must first be authorized by the arbitration panel and are generally enforceable only in a court of law.
The parties and arbitrators meet in person to conduct the hearing in which the parties present arguments and evidence in support of their respective cases. The hearing is conducted in a conference room, not a courtroom, but otherwise proceeds much like a trial in front of the arbitrators. The rules of evidence, however, are relaxed (for example, hearsay evidence is admissible in a FINRA arbitration).
Decision & Award
After the hearing ends, the arbitrators deliberate on the facts of the case and render a written decision called an award. On a panel of three arbitrators, the award must be agreed upon by at least two of the panelists (in other words, unanimity is not required). The award is binding on all the parties, who must abide by it unless it is successfully challenged in court within the statutory time period. It is extremely difficult, and therefore very unusual, to get an award overturned in court. Courts will overturn arbitral awards only in limited circumstances, such as where the arbitration panel had an undisclosed conflict of interest or the panel exercised "manifest disregard" of the law.
Arbitration is generally confidential, and documents submitted in arbitration are not publicly-available, unlike court filings. However, if an award is issued at the conclusion of the case, FINRA posts it in its Arbitration Awards Online Database, which is publicly available.
Enforcing an Award
If a claimant is awarded damages, the respondent must pay within thirty days of receiving the written award, unless the respondent files a motion to vacate the award in court. Courts can either vacate (i.e., overturn), confirm, or modify the award. A confirmed award stands as issued by the arbitrators and results in a court judgment. An award vacated by the courts is voided.
Investors are not required to retain counsel to commence a FINRA arbitration. But unless the amount at issue is very small, they would be wise to do so. Securities brokerage firms and their registered representatives often hire sophisticated defense counsel to defend them in FINRA arbitrations. Schlam Stone & Dolan LLP has experience representing claimants in FINRA arbitrations and we are available to discuss potential FINRA matters with you.