Resolving disputes: a FINRA forum perspective
December 2018 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
December 2018 Issue
It is no secret that today’s clients are demanding increased efficiency from their lawyers. Luckily, for those whose practice involves securities-related disputes, the Financial Industry Regulatory Authority (FINRA) dispute resolution department has been ahead of the curve in creating streamlined dispute resolution procedures that help lawyers and law firms make these client expectations a reality. This article explores the benefits of litigating and mediating before the country’s largest securities dispute resolution forum.
An overview of FINRA
FINRA operates the largest securities dispute resolution forum in the US, with hearing locations in all 50 states, as well as in Puerto Rico and London. In fact, FINRA’s dispute resolution division handles over 99 percent of all securities-related arbitrations and mediations in the US. To manage this incredible volume effectively, FINRA maintains a roster of more than 6400 arbitrators and nearly 250 mediators.
FINRA’s predominance in the area of securities dispute resolution is due, in large part, to the fact that every firm and broker that sells securities to the public in the US must be licensed and registered by FINRA. Once registered, these firms and brokers must abide by FINRA’s by-laws, schedules to the by-laws, rules and regulations and codes of procedure.
These governing documents require FINRA members and their associated persons to submit to arbitration when there is a dispute between member firms, between member firms and associated persons, and between customers and member firms or associated persons, if the customer requests arbitration. This alone would have resulted in the majority of securities-related disputes being resolved before FINRA. However, in 1987, the US Supreme Court upheld the right of broker-dealers to enforce pre-dispute arbitration agreements between them and their customers. As a result, brokerage firms and brokers may, and almost always do, compel their customers to arbitrate. Initially, these arbitrations were conducted by the various exchanges to which broker-dealers were members. However, those exchanges have moved their arbitration programmes to FINRA and, in turn, have allowed FINRA to become, for all practical purposes, the sole arbitration forum for resolving disputes between and among broker-dealers, their associated persons and their customers.
Arbitration is an alternative to litigating in court. Instead of a judge or a jury, arbitrated disputes are heard and decided by arbitration panels. The panels are generally composed of one or three arbitrators that the parties select from a list that FINRA randomly generates from its arbitrator roster. Once selected, the arbitrators read the parties’ pleadings, listen to and evaluate the arguments and evidence presented at an arbitration hearing and, ultimately, render a decision that is final and binding on all parties. Unlike court proceedings, arbitration hearings are generally confidential and documents submitted to the arbitrators are not publicly available. The final award issued at the conclusion of an arbitration, however, is publicly available and accessible from FINRA’s Arbitration Awards Online Database.
The ground rules of arbitrations before FINRA are set forth in two codes of procedure. The first is the Code of Arbitration Procedure for Customer Disputes, which governs arbitrations between investors and brokers or brokerage firms and is the 12000 series of the FINRA Rules. The second is the Code of Arbitration Procedure for Industry Disputes, which governs arbitrations between brokers and brokerage firms, in other words, disputes between industry parties only, and is the 13000 series of the FINRA Rules.
Arbitrations are less formal than traditional courtroom litigation and, as a result, typically allow for faster turnaround times than court cases. Thus, while you may be waiting years after the pleadings are filed before actually going to trial in state or federal court, an arbitration before FINRA can go from initial pleadings to final award in 12 to 18 months. This is because FINRA arbitrations offer an expedited discovery process in which less discovery is exchanged and, thus, fewer discovery disputes and corresponding motions arise. FINRA arbitrations also eliminate almost all pre-trial motion practice, including motions to dismiss and motions for summary judgment, except under very limited circumstances. This allows arbitrations to be substantially less costly than traditional litigation. Adding to these efficiencies is the fact that FINRA allows lower-value disputes, disputes in which the amount at issue is $50,000 or less, to proceed as ‘simplified arbitrations’, which gives the parties the opportunity to have their dispute decided based on the pleadings and written submissions, rather than full, and more costly, evidentiary hearings.
If you do proceed to an arbitration hearing before FINRA, you will experience many of the same benefits of trial. Both sides are permitted to make a full presentation of the evidence before a neutral decision maker – the arbitration panel. This includes documentary evidence as well as the direct and cross-examination of witnesses. The rules of evidence are relaxed during these proceedings, which allows the hearings to proceed with relatively fewer interruptions than are seen during trial. After the hearing, arbitrators issue awards promptly – within 30 days under the FINRA Rules. The decision of the arbitration panel is final and binding on the parties. In addition, the grounds to appeal (or vacate) an arbitration award are fairly limited. Thus, parties to arbitration can be confident in the awards they receive. Additionally, FINRA has the ability to enforce awards against its members and their associated persons.
Mediation is another form of alternative dispute resolution (ADR). Mediation is a confidential, voluntary process where a neutral third-party facilitates negotiations between the parties. Through a variety of techniques, the mediator guides the parties toward a mutually satisfactory resolution of their conflict. Mediation is often more successful at resolving disputes than merely attempting direct settlement negotiations between the parties. Mediators are generally trained in the art of conflict resolution. The parties may choose an evaluative mediator who gives the parties a sense of the value of the case or a facilitative mediator who merely attempts to get the parties to resolution without an opinion as to the claims merits. In either case, the mediator is not a decision maker. Their job is not to decide or resolve factual disputes, but rather to help the parties solve the problem without taking sides.
FINRA has a flexible mediation process governed by the Code of Mediation Procedure, which is the 14000 series of the FINRA Rules. Any matter that is eligible for arbitration before FINRA is also eligible for mediation. All parties must agree in writing to mediate, and no party can be compelled to participate in a mediation. The parties can decide whether participation in mediation stays the arbitration. As with FINRA arbitrations, the parties in a mediation can represent themselves or be represented by an attorney. Under certain circumstances, a party can be represented by someone other than an attorney. As with the arbitrators, FINRA maintains a roster of mediators and can provide the parties with information about the mediator’s professional background, including education, training and any other disclosures made by the mediator. The parties can rank mediators from a list provided by the director of dispute resolution, or the parties may jointly agree on a mediator. Once selected, the Code requires that “the mediator shall act as a neutral, impartial, facilitator of the mediation process and shall not have any authority to determine issues, make decisions or otherwise resolve the matter”.
In general, mediation, which is less formal than court proceedings, tends to be expeditious and generally less expensive than going to trial. Mediation is also private and confidential, unlike court litigation where the proceedings and filings are public. A mediation can therefore help parties to avoid embarrassing or negative publicity. Due to the informality, mediation is not as stressful on the parties as litigation or arbitration may be. Mediation is non-binding because the parties arrive at the resolution together; the mediator is not ‘deciding’ the case or making any factual determinations. However, while there is the potential for a quicker resolution, a resolution is not guaranteed. The only requirement is that the parties in a mediation must participate in good faith.
Generally, the parties have greater flexibility and control over the mediation process. In fact, the parties to a FINRA mediation can actually agree to amend any and all of the ground rules set forth in the Code. In addition, unlike a court hearing or arbitration proceeding where the parties are limited to answering questions posed by the attorneys and generally must always communicate through their attorneys, parties in a mediation are full participants and can express their own opinions to the mediator. This is a major benefit of mediation. A party can confidentially and directly speak to a neutral person and tell him or her their story, as well as express his or her feelings about the conflict at hand. This can have a cathartic effect. A party’s sense of having been heard can be very powerful and can help the parties to arrive at a settlement.
Mediation also provides the parties with an opportunity to gauge the effectiveness and credibility of their witnesses, as well as witnesses on the other side. The parties can also learn from the mediator the effectiveness of their arguments. Generally, mediators do not focus on the ‘good’ facts or arguments, but rather point to weaknesses. In this way, even if mediation is not successful in resolving the dispute, it can still provide immense benefits to the parties.
FINRA’s dispute resolution forum, through arbitrations and mediations, provides two distinct methods of resolving disputes between and among broker-dealers, their associated persons and their customers. While there are pros and cons to each method, both are effective in resolving disputes and both provide lawyers with the efficiencies that they want and that their clients demand.
Sandra D. Grannum and Tracey Salmon-Smith are partners and Jennifer G. Chawla is an associate at Drinker Biddle & Reath LLP. Ms Grannum can be contacted on +1 (973) 549 7015 or by email: firstname.lastname@example.org. Ms Salmon-Smith can be contacted on +1 (973) 549 7038 or by email: email@example.com. Ms Chawla can be contacted on +1 (973) 549 7176 or by email: firstname.lastname@example.org.
© Financier Worldwide
Sandra D. Grannum, Tracey Salmon-Smith and Jennifer G. Chawla
Drinker Biddle & Reath LLP