Methods of Formal Dispute Resolution

Arbitration is not optional once one of these rules applies, so knowing which rule reaches a dispute, and what the process guarantees, matters as much as knowing the process exists.

When Must a Customer Dispute Go to Arbitration?

• The Customer Code requires the parties to arbitrate a dispute when arbitration is either required by a written agreement or requested by the customer, the dispute is between a customer and a member or associated person, and the dispute arises from the business activities of the member or associated person, except disputes involving the insurance business activities of a member that is also an insurance company.
• The insurance carve-out is written inside that third condition, not beside it as a fourth. An insurance dispute does not fail a separate test; it fails the business-activities condition itself.

When Must an Industry Dispute Go to Arbitration?

• The Industry Code requires arbitration of a dispute arising from the business activities of a member or associated person, when the dispute is between or among members, a member and an associated person, or associated persons. The same insurance-business carve-out applies.
• A dispute between a representative who has left a firm and that firm, over commissions or other business matters, is an industry dispute under this rule. Interfering with a customer's account transfer during that departure is a separate matter, governed by the account-transfer interference rule covered in the previous unit.

Exam Tip: Gotchas

• The Customer Code and the Industry Code both route a dispute to arbitration, but they are triggered by who the parties are, not by the dispute's subject matter. A dispute between two registered representatives is an industry dispute, never a customer dispute, even if it concerns a customer's account.
• Leaving the industry does not end the duty to arbitrate. The Industry Code defines an associated person to include a person formerly associated with a member, and it defines a member to include one whose membership has been terminated, suspended, cancelled or revoked, or who has been expelled or barred, or is otherwise defunct.
• The member definition has a second branch on the same terms: a broker or dealer admitted to another self-regulatory organization that, with FINRA's consent, requires its members to arbitrate under the Code and to be treated as FINRA members for the Code's purposes.

Is There a Time Limit on Filing for Arbitration?

• The six-year eligibility rule bars a claim from arbitration once six years have elapsed from the event giving rise to the claim.
• This is an eligibility limit on filing in arbitration, not a statute of limitations. Dismissal on this ground does not prohibit the party from pursuing the same claim in court.

Exam Tip: Gotchas

• Do not treat a six-year dismissal as the end of the claim. It only closes the arbitration door; the party may still be able to bring the same claim in court, subject to whatever statute of limitations applies there.

How Many Arbitrators Hear a Case, and Is the Award Final?

• The panel-size rule sets the number of arbitrators by the claim's size, and every band is measured exclusive of interest and expenses:
  • $50,000 or less: one arbitrator, and the claim also goes to the Code's simplified arbitration procedures. The panel size is not the only consequence of this band.
  • More than $50,000 but not more than $100,000: one arbitrator, unless the parties agree in writing to three.
  • More than $100,000, or a claim that is unspecified or does not request money damages: three arbitrators, unless the parties agree in writing to one.
• Once the panel decides, the awards rule makes that decision final. It is not subject to review or appeal, unless applicable law directs otherwise.

Exam Tip: Gotchas

• Each dollar band excludes interest and expenses from the claim amount before sorting it into a band. Do not let a large interest figure push a claim into a higher band on its own.

Is Mediation Required, and Does It Pause a Pending Arbitration?

• Mediation under the Code of Mediation Procedure is voluntary and requires the written agreement of all parties. No party may be compelled to participate in a mediation, or to settle a matter, by FINRA or by any mediator.
• FINRA's Director of Mediation has sole authority to decide whether a matter is eligible for mediation.
• If all parties agree, they may mediate any matter that is eligible for arbitration under either Code, or any part of one, or any related dispute, including a purely procedural issue.
• Any party may withdraw at any time before a written settlement agreement is signed, by giving written notice to the mediator, the other parties, and the Director. That withdrawal right is what makes "voluntary" concrete.
• Mediation is private and confidential, and what is said in it generally cannot be used as evidence later. That confidentiality is not absolute. The fact that a mediation happened is not confidential. The parties' undertaking does not apply where all other parties authorize the disclosure in writing, or where the disclosure is compelled by law. And the confidentiality does not shield documents or information from FINRA or another regulator.
• Submitting a matter to mediation does not stay or delay an arbitration already pending at FINRA, unless the parties agree otherwise. If all parties agree to stay the arbitration in order to mediate, it is stayed.
• If the mediation is conducted through FINRA, FINRA charges no postponement fee for that stay.

Exam Tip: Gotchas

• Mediation does not resolve anything by itself. FINRA and the mediator cannot force any party to settle, so a mediation that produces no settlement leaves the underlying dispute exactly where it was, still eligible for arbitration or litigation.

How Do Arbitration, Mediation, and Litigation Compare?

• Litigation, filing suit in court, is the forum a predispute arbitration agreement removes for the claims it covers. Where no such agreement or FINRA arbitration requirement applies, a customer dispute can go to court instead.

What Should You Check on Exam Day?

• Sort a dispute by who the parties are, not what it's about: customer versus member or associated person is the Customer Code; among members or associated persons is the Industry Code.
• Treat a six-year-old claim as barred from arbitration, not from court.
• Exclude interest and expenses before sizing a claim into a panel-size band.
• Remember mediation cannot bind anyone without a signed settlement, and cannot pause a pending arbitration unless every party agrees.