Quick Answer
Litigation is the exception, not the rule, for securities disputes: it applies mainly to class actions, cases with no predispute arbitration agreement, and certain statutory claims. Courts give broader discovery, formal evidence rules, and a real right to appeal, but litigation is slower and more expensive than arbitration.
While arbitration and mediation handle the vast majority of securities disputes, some claims must go to court. Understanding when litigation applies (and how it compares to arbitration) rounds out your knowledge of dispute resolution.
When Does Litigation Apply?
Customers may bring claims in state or federal court in certain circumstances, even if a predispute arbitration agreement exists:
- Class action claims: these cannot be filed in Financial Industry Regulatory Authority (FINRA) arbitration and must be brought in court
- Claims where no predispute arbitration agreement exists between the parties
- Certain statutory claims that may not be subject to mandatory arbitration
Industry participants (firms and registered representatives) generally cannot pursue litigation for disputes covered by FINRA arbitration rules. The arbitration requirement is mandatory for industry disputes.
Exam Tip: Gotchas
- The key reason disputes go to court instead of arbitration is class actions: FINRA arbitration does not handle class action claims. If a question describes a group of investors with a common complaint against a firm, the answer is litigation (court), not arbitration.
How Does Litigation Compare to Arbitration?
| Feature | Litigation (Court) | Arbitration (FINRA) |
|---|---|---|
| Discovery | Broader discovery rights | Limited discovery |
| Rules of evidence | Formal rules of evidence apply | More relaxed evidentiary standards |
| Appeal | Full right to appeal | Extremely limited grounds for appeal |
| Speed | Generally slower | Generally faster (12-18 months) |
| Cost | Generally more expensive | Generally less expensive |
| Punitive damages | Available under applicable law | Also available: arbitrators may award them for serious misconduct |
| Decision-maker | Judge or jury | Arbitrator panel |
| Public record | Court filings are generally public | Awards are reported on the Central Registration Depository (CRD) but proceedings are private |
Exam Tip: Gotchas
- Arbitration awards have extremely limited appeal rights compared to court judgments. If a question asks about challenging an arbitration decision, the answer is almost always that it cannot be appealed on the merits.
What Should You Check on Exam Day?
- Litigation is the path for class actions, disputes with no predispute arbitration agreement, and certain statutory claims outside mandatory arbitration.
- Industry participants generally cannot sue over disputes that FINRA arbitration rules already cover.
- Punitive damages are available in both venues; arbitrators may award them for serious misconduct, not only courts.
- Court judgments carry a real right to appeal; arbitration awards do not, on the merits.