Litigation
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 Litigation Applies
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.
Litigation vs. 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 | Not available in the same way courts may award them |
| 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.