Methods of Formal Dispute Resolution

Now that you understand how FINRA investigates and sanctions misconduct, let's look at how disputes between customers and firms are actually resolved. FINRA arbitration is the primary method, and the exam tests its procedures in detail.

FINRA Arbitration Overview

FINRA arbitration is the primary method of resolving disputes in the securities industry:

• 12000 Series: Code of Arbitration Procedure for Customer Disputes (customer vs. firm)
• 13000 Series: Code of Arbitration Procedure for Industry Disputes (firm vs. firm, or firm vs. employee)
• Arbitration awards are generally final and binding - a court's ability to reverse or modify an award is extremely limited

Predispute Arbitration Agreements (FINRA Rule 2268)

Most brokerage account agreements contain a predispute arbitration clause requiring customers to arbitrate disputes rather than go to court.

Key Rules

• FINRA rules do not require firms to include predispute arbitration clauses; it is the firm's choice
• If used, the clause must be highlighted in the customer agreement and preceded by specific disclosure language
• The customer must be made aware that the agreement contains an arbitration clause

Prohibited Provisions

A predispute arbitration agreement cannot:

• Limit or contradict SRO (Self-Regulatory Organization) rules
• Limit a party's ability to file claims in arbitration
• Limit arbitrators' ability to make awards
• Include class action waivers that would prevent customers from participating in judicial class actions

Exam Tip: Gotchas

Class action claims CANNOT be brought in FINRA arbitration; they must go to court. Firms may not include class action waivers in customer agreements. Also, predispute arbitration agreements are NOT required by FINRA; firms choose to include them.

Simplified Arbitration (FINRA Rule 12800)

For smaller disputes, FINRA offers a streamlined process:

• Applies when the amount in dispute is $50,000 or less (excluding interest and expenses)
• Default: decided "on the papers" (no hearing) by a single arbitrator, unless the customer requests a hearing
• If the customer requests a hearing, they choose between:
  • Option One: regular hearing (full process, standard fees)
  • Option Two: special proceeding (abbreviated hearing)

Panel Composition

The number of arbitrators depends on the size of the claim:

Three-Member Panel Composition

For customer disputes with three arbitrators:

• Default composition: 2 public arbitrators and 1 non-public (industry) arbitrator
• Customers have the right to request an all-public panel (no industry arbitrators)

Think of it this way: "Public" arbitrators have no significant ties to the securities industry. "Non-public" (industry) arbitrators have industry experience. Customers can choose to exclude industry arbitrators entirely.

Exam Tip: Gotchas

The $50,000 threshold (simplified arbitration) and $100,000 threshold (panel size) are high-frequency test items. Remember: customers can request an all-public panel with no industry arbitrators.

Industry Arbitration (FINRA 13000 Series)

Industry disputes have different rules:

• Governs disputes between FINRA member firms or between a firm and its associated persons
• Industry disputes are mandatory - FINRA members must arbitrate disputes with other members and with associated persons
• Associated persons who sign Form U4 agree to arbitrate employment disputes (except statutory employment discrimination and whistleblower claims)

Arbitration Timeline and Awards

• Typical arbitration takes 12 to 18 months from filing to award
• The arbitration award must be rendered within 30 business days after the close of the hearing record
• Awards are enforceable in court and reported on CRD (Central Registration Depository)
• Unpaid arbitration awards may result in suspension of the member firm or individual's registration