Mandatory Arbitration Lacks Sexiness of Gekko’s Greed Speech, but…

September 29th, 2010. By Kristine B

With Wall Street: Money Never Sleeps just out, you can’t think about securities fraud and financial wrongdoing without thinking about Gordon Gekko and his classic line about greed (it’s good)…but let’s step back from fantasy and consider a bit of reality…

So you’ve invested some money and now you’re concerned that you got some bad financial advice. Or you’re concerned that your financial advisor failed to follow your advice, churned your account or invested your money in stocks that weren’t appropriate for you. Your initial instinct might be to say, “Let’s sue the guy!” but in reality, what you have to say is the less succinct but more realistic, “Let’s file a FINRA arbitration against the guy!” It’s screenplay dialog just waiting to happen, no?

So just what is FINRA arbitration you ask? Well, it’s today’s Pleading Ignorance topic, so here goes… 

Here’s the thing, and it’s the most important thing you need to know. When you signed a contract with your brokerage firm, you almost definitely agreed to a clause regarding mandatory arbitration. This means that if you have a dispute with your broker or brokerage firm, you have to file an arbitration—you can’t file a lawsuit (except in certain conditions, such as in a class action). 

FINRA is the Financial Industry Regulatory Authority and it basically oversees the financial industry (hence the name). Its members have to agree to mandatory, binding arbitration to resolve disputes. So that means that if you have a complaint against your financial advisor or brokerage firm, you file an arbitration. 

Although it sounds like a downer—you don’t often hear about multimillion dollar awards in arbitration cases—there are some very good points to mandatory, binding arbitration:

1. Arbitration often takes less time than a lawsuit. Lawsuits, from the date the lawsuit is filed to the date of the final appeal, can take years and years. Arbitration typically takes between 11 and 14 months.

2. Arbitration means little chance of appeal. With lawsuits, the losing side can file appeal after appeal to dispute a decision, with binding arbitration, there is almost no chance for an appeal.

3. Arbitration means a speedier award. All awards given are due within 30 days of the decision. 

At any point in the process, the two sides can reach a settlement, putting off the need for a hearing.  

Now, here is something you need to know if you think you’ve been the victim of an unethical financial advisor or financial firm: you are not entirely off the hook. How? You have the responsibility to report any mishandling of your investment as soon as you become aware of it or suspect it. The reason for that is because, with arbitration, it’s assumed that once you are aware of illegal activity, you then have the means to prevent any future losses that may stem from the illegal activity—it’s like wearing a seatbelt when you get in a car; if you choose to not wear it even though you know it can result in injury, then you take on some of the responsibility for getting hurt should you crash. With investing, if you sense some wrongdoing, you have the chance—the obligation—to prevent future losses by reporting it. Otherwise, you’re in part responsible for those future losses. 

If that sounds a bit crazy, it isn’t. If you don’t take steps to prevent avoidable losses, you are partially at fault for those losses in the eyes of the arbitrators (and the courts). So, if you suspect something illegal or unethical has happened, you should take steps to prevent it from happening again. Simply ignoring it and hoping you’re wrong isn’t in your best interests (although, honestly, aside from bullies, when is it ever in your best interests to ignore a problem).

So don’t forget to check your statements, review your investment goals and objectives, your risk tolerance level…and if you suspect some wrongdoing, don’t take ’em to court, you take ’em to arbitration! (yeah, it still sounds ridiculous).

Tags: FINRA, Mandatory Arbitration, Pleading Ignorance

This was posted on Wednesday, September 29th, 2010 at 4:57 pm and is filed under Emerging Issues, Financial, Securities . Feel free to respond, or trackback. Read our comments policy.