Losing money while trading in the stock market is not unusual, but your stock broker should never be the cause of it. This is where broker arbitration comes in.
So, what legal options are available to you when your broker has been negligent?
In this post, we go into further detail about when traders or investors might need to file a lawsuit against their stock broker for misconduct and how they can go about holding their negligent brokers accountable for their actions.
In most cases, when a stock trader signs a brokerage-account application, they also sign away their rights to sue the brokerage firm.
Consequently, if you have an issue with your stock broker and you can’t resolve the dispute on your own, you most likely won’t get your day in court.
Instead, you can settle the dispute through the dispute resolution process laid out by the Financial Industry Regulatory Authority (FINRA).
FINRA oversees Wall Street brokerage firms including the arbitration forum, in which it lays out rules for traders selecting an arbitration panel.
If you opt to use their dispute resolution process to resolve an issue with an investment broker or financial company, you have two options, mediation or arbitration.
In the case of arbitration, your complaint is going to be heard by a panel of arbitrators, probably in a conference room somewhere.
What is Arbitration?
Arbitration is a non-judicial mechanism for resolving disputes between traders and brokers. As previously mentioned, the arbitration process is overseen by FINRA.
Arbitration panels are usually composed of one or three arbitrators.
The panels read the claims filed by the party that initiates the arbitration, as well as the claims filed by other parties (if any).
They then listen to the arguments of the parties, consider the evidence, and then determine how the dispute should be resolved.
The decision that an arbitration panel arrives at is called “an award” and is final and binding on all the parties.
But unlike court-related filings, documents that parties submit in arbitration are not available to the public because arbitration is generally confidential.
Arbitration is compulsory in any dispute involving brokers and traders.
All traders must take their grievances to the dispute-resolution system set out by FINRA rather than going to the courts.
Since the late 1980s, the arbitration process has been favored by the U.S. Supreme Court, particularly in the securities industry because it is an efficient way of solving disputes.
Arbitration is different from mediation, a process whereby parties agree to appoint a mediator to assist them to resolve their dispute, and decisions are not binding unless every party involved agrees to them.
What You Can Arbitrate
Not every trader can take legal action against their registered stock broker or lodge a complaint against them through FINRA.
To be able to so, the broker must have breached their fiduciary duty to always prioritize your investment goals and best interests as outlined in your investment portfolio.
If your broker engages in negligence or misconduct, and you incur losses, you can seek recovery of the losses by filing an arbitration claim with FINRA.
Some of the common types of negligence or misconduct that you can arbitrate as a trader or someone who has money with a financial advisor include:
- Unauthorized trading
- Excessive trading/churning
- Selling away
- Lack of diversification
- Unsuitable financial products
- Failure to supervise
- Issues when trading on margin.
FINRA Arbitration Rules
Arbitration panels set up by FINRA can consider its rules when resolving disputes between traders and brokers.
However, individuals cannot file lawsuits to enforce those rules.
The panels are made up of either one or three arbitrators/members. Under the rules laid out by FINRA, the number of arbitrators depends on the amount in controversy.
If a trader brings a case that involves disputes of $50,000 or less, it will be heard by one arbitrator.
If the amount of a claim is more than $50,000 but less than $100,000, the case will be heard by one arbitrator unless the trader and the broker agree to three arbitrators in writing.
If the amount of a claim exceeds $100,000, a claim is non-monetary, or a claim is unspecified, the case will be heard by three arbitrators, unless the parties agree to one arbitrator in writing.
Under the current rules, the trader can choose between a panel of three public arbitrators or a panel with two public arbitrators and one with industry experience.
But an inexperienced trader without professional guidance from an attorney might not choose an all-public panel at the outset.
In 2011, the industry watchdog group introduced an option to have all members of a hearing panel be from the “public” category of arbitrators, i.e., those who are not involved in the securities business, as opposed to the “non-public” category.
The move was hailed by investor advocates, who viewed it as a big step in that direction as FINRA is largely funded by the brokerage industry.
Steps you can take if you have a dispute with your broker
- Initiate an arbitration by filing a statement of claim that details the relevant facts and remedies requested.
- A respondent will then respond to your arbitration claim by filing an answer that specifies the relevant facts and available defenses to the statement of claim.
- You and the other parties involved receive lists of potential arbitrators and select the panel to hear the case.
- Before the hearing, you, the arbitrators, and the other parties meet to resolve preliminary issues and plan hearing dates.
- Arbitrators and parties exchange information and documents in preparation for the hearing.
- Arbitrators and parties meet for the hearing where the parties present evidence to support their respective arguments.
- Once the hearing comes to a conclusion, the arbitrators deliberate the facts of the case and give a written decision/award.
If you have incurred losses due to the negligence of your broker, arbitration is in most cases the best route to take.
However, it is important to note that pursuing arbitration through FINRA may be costly when a trader doesn’t have legal help.
Moreover, going before the watchdog, your broker, and/or a stock broker on your own can be a daunting.