Arbitration is a streamlined process for resolving disputes between investors and brokers, or between brokers themselves. It takes place under the oversight of the Financial Industry Regulatory Authority (FINRA) and results in decisions that are final and binding. Arbitration differs from mediation in that the latter involves a voluntary settlement negotiation, whereas arbitration results in an enforceable decision.
The Mechanics of Arbitration
Arbitration functions similarly to a lawsuit, offering a preferable alternative due to generally lower costs and shorter timelines for all involved.
Key Takeaways
- Arbitration is different from filing an investor complaint.
- It offers a cost-effective and time-saving alternative to lawsuits.
- Disputes with claims under $50,000 do not necessitate in-person hearings.
- Claims between $50,000 and $100,000 typically require in-person hearings with a single arbitrator.
When there is a dispute involving a FINRA-registered broker, the complaining party can file a claim specifying the alleged misconduct and sought damages. FINRA appoints a three-member panel, usually from the financial industry, but not employed therein to avoid bias. If either party suspects bias, they can request a change of panel members.
Arbitration Hearings Explained
- Disputes under $50,000: Handled without in-person hearings. Parties submit written statements to a single arbitrator.
- Disputes between $50,000 and $100,000: Commonly require an in-person hearing with a single arbitrator.
- Disputes over $100,000: Standard procedure involves in-person hearings with a three-arbitrator panel. Decisions are based on a majority vote.
Arbitrators are not obliged to justify their decisions in writing. Parties may represent themselves or hire legal representation. Arbitration is less formal than court proceedings, enhancing the likelihood of success for self-represented individuals. Filing fees and other expenses such as travel should be considered.
Special Considerations in Arbitration
Arbitration panels may not grant the full amount sought in disputes. For instance, an investor seeking $38,000 may only receive $10,000 even if the decision is in their favor. Arbitration outcomes are binding and generally not subject to appeal, except under specific, rare conditions.
In contrast, mediation results are only binding if all parties agree to the settlement. Despite criticisms regarding potentially biased and non-diverse panels, FINRA aids in alleviating these concerns and mostly holds a monopoly in arbitration services. Most brokerage agreements mandate arbitration for disputes, restricting court options.
Final Thoughts
Navigating the arbitration process can be beneficial for efficiently resolving financial disputes without the complexities and costs associated with court proceedings. By understanding arbitration’s structure, mechanics, and implications, investors and brokers can make informed decisions when disputes arise.
Related Terms: FINRA, mediation, mandatory arbitration, investor complaints, conflict of interest.
