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.

What Is FINRA Arbitration?

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

• Code of Arbitration Procedure for Customer Disputes: governs customer vs. firm disputes
• Code of Arbitration Procedure for Industry Disputes: governs firm vs. firm or firm vs. employee disputes
• Arbitration awards are generally final and binding; a court's ability to reverse or modify an award is extremely limited

What Are Predispute Arbitration Agreements?

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.

Class Action Notice Requirement

• A customer whose individual claim shares the same facts, law, and defendants as a certified or putative class action must first notify FINRA that they are not participating in (or have withdrawn from) the class before arbitrating individually
• A firm cannot enforce its arbitration agreement against that customer's claim until certification is denied, the class is decertified, the customer is excluded, or the customer opts out or withdraws as the court permits

What Is Simplified Arbitration?

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)
• Filing fees range from $50 to $600 depending on the size of the claim

How Is the Panel Chosen?

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

Three-Member Panel Composition

For customer disputes with three arbitrators:

• Default composition: FINRA normally appoints 1 non-public arbitrator, 1 public arbitrator, and a public chairperson from separately ranked lists, so a standard panel is 2 public plus 1 non-public
• An all-public panel results only when the parties collectively strike every non-public arbitrator, or no non-public arbitrator is available or willing to serve; a customer cannot unilaterally elect an all-public panel

Think of it this way: "Public" arbitrators have no significant ties to the securities industry. "Non-public" (industry) arbitrators have industry experience. Getting to an all-public panel takes both sides striking the non-public names, not a customer's unilateral choice.

Exam Tip: Gotchas

The $50,000 threshold (simplified arbitration) and $100,000 threshold (panel size) are high-frequency test items. An all-public panel is possible, but it takes both sides striking the non-public names, not a unilateral customer election.

How Does Industry Arbitration Differ?

Industry disputes have different rules:

• Governs disputes between FINRA member firms or between a firm and its associated persons
• Industry arbitration is required when a dispute arises from the business activities of a member or associated person and is between or among members and associated persons, unless the Code provides an exception; insurance-business disputes of a member that is also an insurance company are not required to be arbitrated under the industry code
• Statutory employment-discrimination claims are not required to be arbitrated; the parties may arbitrate them only by an agreement made before or after the dispute arises. A whistleblower claim covered by a statute barring predispute arbitration may be arbitrated only by an agreement made after the dispute arises. A party may also elect, after the dispute arises, not to arbitrate a sexual-assault or sexual-harassment claim that was covered by a predispute agreement
• Industry class-action claims cannot be arbitrated, and neither can collective actions under the Fair Labor Standards Act, the Age Discrimination in Employment Act, or the Equal Pay Act; a person who opts in to a certified or putative collective action cannot arbitrate the same claim under the Code

Exam Tip: Gotchas

Employment-discrimination and whistleblower claims are not barred from arbitration outright; they simply cannot be forced into it by a predispute agreement. A whistleblower claim can still be arbitrated if the parties agree to it after the dispute has already arisen.

What Governs the Timeline and the Award?

• Typical arbitration takes 12 to 18 months from filing to award
• The award must be in writing and signed by a majority of the arbitrators (unless applicable law requires otherwise); the panel must endeavor to render it within 30 business days after the record closes, though that is not a guarantee every award issues by that date
• An award may be entered as a judgment in a court with jurisdiction, and is generally final, not subject to review or appeal, unless applicable law directs otherwise
• Monetary awards must be paid within 30 days of receipt, unless a court motion to vacate is filed; interest runs from the award date if payment is late, a motion to vacate is denied, or the panel specifies it
• Unpaid arbitration awards may result in suspension of the member firm or individual's registration

What Should You Check on Exam Day?

• Simplified arbitration applies at $50,000 or less; panel size flips from 1 to 3 arbitrators above $100,000 (unless the parties agree otherwise).
• An all-public panel requires both sides to strike the non-public names; a customer cannot elect it unilaterally.
• Class action claims cannot be arbitrated, in customer or industry disputes alike; a firm cannot enforce its arbitration agreement against a class member while the class claim is pending.
• The panel endeavors to render an award within 30 business days of the record closing; that is a target, not a guarantee.