FINRA Arbitration: For Most Investors—The Only Game in Town

Nearly every time an investor opens a brokerage account, he or she agrees to arbitrate any disputes with the brokerage firm at the dispute-resolution wing of FINRA, the Financial Industry Regulatory Authority. Just by signing the account-opening forms, the investor gives away the right to litigate legal claims in court and agrees to submit to a very different dispute-resolution process administered by Wall Street’s self-regulatory organization.

FINRA arbitration has its proponents and its critics—and both sides of the argument have plenty of fodder—but at least for now, it’s the only game in town when it comes to holding a broker accountable for fraud, inappropriately recommending high-risk or illiquid investments and other types of misconduct.

So it’s important to understand how FINRA arbitration works, warts and all. In a recent article in the New York Times, journalist Tara Siegel Bernard takes a careful and evenhanded look at the forum and the process.

The article points out that “While arbitration has its share of benefits—it’s much quicker and cheaper than litigation—some securities lawyers who represent investors argue that they would get better results before a jury of their peers. But other legal experts point out that many investors wouldn’t have a chance to be heard if it weren’t for arbitration; federal securities laws, along with some states’ laws, are not always investor-friendly.”

These are important observations; affordability and efficiency are two of the biggest benefits of FINRA arbitration. Typically a case at FINRA will take between twelve and fifteen months from start to finish, far shorter than the years it sometimes takes cases to wind their way through state and federal courts. And there are plenty of cases that do not fit neatly into the legal framework of federal securities laws, but that have great merit and value when brought at FINRA, where arbitrators are able to “do equity.”

The article goes on to analyze some of the numbers we have about how well investors do in FINRA arbitrations, reporting that the most recent statistics indicate that customers prevail in about 42% of the cases they bring. As Bernard points out, though, what it means to “win” is up for debate. For example, a case in which one of my clients recovers 100% of her losses is counted as a “win” on par with a case in which another investor recovers a tiny percentage of losses. So clearly there is room for added transparency on how investors fare at FINRA, and that’s just one type of transparency that many observers and participants have been advocating for years.

The Times article also reports that many observers believe that FINRA needs to do a better job training its pool of arbitrators and ensuring that they are qualified to fulfill their crucial role. That is consistent with what I’ve seen in my years of representing investors before FINRA panels. Many arbitrators are dedicated, deeply experienced, professional and fair-minded. Those arbitrators are able to conduct a hearing that leaves all parties with the sense that they were given a full and fair opportunity to air their dispute. But some arbitrators fall short of that standard, and there should be zero tolerance for arbitrators who are not up to the job, leaving investors feeling their claims were given short shrift.

No matter what one concludes about the pluses and minuses of FINRA arbitration, as Bernard notes, “For people who decide to pursue arbitration, legal experts suggest finding a lawyer with significant experience in [FINRA] arbitration.”

At The Galbraith Law Firm, we work to protect investors and assert their legal rights if they have suffered investment losses as a result of their brokerage firms’ misconduct. If you have questions regarding investment losses, the conduct of your brokerage firm or the FINRA arbitration process, please contact a securities attorney at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.