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What Investors Need to Know about Arbitration

Before filing an arbitration claim against your brokerage firm, read this article first. This will teach you the pros and cons of arbitration. Here, you will also learn the basic steps of initiating an arbitration procedure.

Arbitration: Advantages

Compared to litigation, arbitration is generally a quicker and cheaper conflict resolution method. It is also easier to prepare for and has a much less formal format that litigation.

In fact, if the principal amount being disputed is worth $25,000 or less, simplified arbitration rules apply. You won't have to appear in person for arbitration to proceed. You will only have to write a description of your claims, submit the required documents to support your claims and respond to counterclaims as needed.

In a simplified arbitration case, a hearing can be held only if you request it. If no hearing has been requested, then there can also be no pre-hearing conferences between the parties and the arbitrator.

Arbitration: Drawbacks

If you elect to use arbitration instead of litigation, you cannot file suit in a court of law at the same time. Nor can you file a case in court if you don't like the arbitrator's resolution.

The arbitrator or arbitrators' decision is final. If you are not satisfied with the resolution to your dispute, you cannot appeal to a higher court - or to any court, for that matter - to reverse the decision.

Your only recourse is to file a "motion to vacate." This is an appeal to a court of law to cancel the arbitrator's decision. This will not reverse the decision; it will void it. The court may also rule for a rehearing or re-arbitration.

Just note, however, that you can only file a motion to vacate an arbitrator's decision if you can show that

  • the arbitrator is biased or has been corrupted,
  • the arbitrator did not conduct himself properly (e.g. refusing to postpone the hearing even if reasonable cause has been established, refusing to consider pertinent evidence, etc.),
  • the arbitrator has exceeded his authority, and
  • the arbitrator was incompetent in the administration of his duties.

If you have the grounds to file a "motion to vacate" in federal court, make sure to do so within 3 months of the arbitrator's decision or award. If you are filing this motion in a state court, check this state's statute on arbitration. You may have an even shorter time to file a motion to void an arbitration decision.

Initiating an Arbitration Claim

Before anything else, you should decide whether or not you should use litigation or arbitration as a method of dispute resolution. Consult your lawyer so you can become aware of the ramifications of each option.

If you have decided on arbitration, follow these steps:

  • Determine where to file your claim.

    If the respondent to your claim is a member of the Financial Industry Regulatory Authority (FINRA), you can file your arbitration claim with the said organization's Dispute Resolution division. Arbitration claims may also be filed with FINRA if the brokerage firm you have a conflict with is a member of an exchange to which FINRA provides dispute resolution services.

    Otherwise, you can also file an arbitration claim in the Exchange where the respondent to your brokerage firm is a member. The New York Stock Exchange, for instance, has its own arbitration program although an arbitration contract is also in place between NYSE and FINRA.

  • Prepare your Statement of Claim.

    This statement should relate what your dispute is about and the amount of monetary compensation you're demanding. This document must be brief but comprehensive. Moreover, make sure that you can prove or support every point you make in your statement.

    You should seek your securities lawyer's help when drafting your Statement of Claim.

  • Fill out the Submission Agreement.

    This agreement is proof that arbitration is your method of choice for resolving your dispute with your broker or brokerage firm. It is also your agreement to be bound by the decision of the arbitrator or arbitrators that will rule on your claim.

    Without a Submission Agreement, arbitration cannot commence.

  • Submit your Statement of Claim and completely filled out Submission Agreement with the Director of FINRA Dispute Resolution. Pay the required filing and handling fees.
  • Wait for the respondent's response. Note that the other party may also file its own claim against you or another party.
  • Send or serve the other party with all required documents, making sure to provide FINRA copies of such documents for its records and for the benefit of the arbitrator/s deciding your claim.
  • You and the other party will select your arbitrator/s separately using randomly generated lists provided by FINRA.

    For claims above $25,000 but no more than $100,000, only one arbitrator is required unless you and the other party agree (in writing) to have three arbitrators.

    For claims where the damages sought is non-monetary, unspecified or greater than $100,000, the standard arbitration panel is composed of 3 members unless you and the respondent opt (in writing) for only one arbitrator.

  • Attend the pre-hearing conferences and hearing/s set by the arbitrator/arbitrators.

    If your claim $25,000 or lower and no hearing is required, a hearing is still possible if you request one.

  • Wait for the Closing of the Record

    The arbitrator or arbitrators will decide when it will close your case. After the records on your claim have been closed, there can be no further submissions from both parties.

  • Wait for the Award.

    The "award" is a document stating the decision of the arbitrator or arbitrators. The decision is made within 30 days of record closing.

    If the arbitrator or arbitrators' have decided in your favor, you can expect payment of your claims within 30 days of the respondent's receipt of the award document.

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