Understanding the Stockbroker Arbitration Process

Miami, FLFor investors who have suffered at the hands of stockbroker fraud, stockbroker arbitration may not sound very appealing. It does not have all the glitz and glamour of a lawsuit, nor does it usually carry the ridiculously high awards. But for many investors, stock fraud arbitration is actually a much better option, because cases are resolved more quickly and because arbitration is almost always binding.

Arbitration cases are handled by the Financial Industry Regulatory Authority (FINRA) through their arbitration process. Unlike a lawsuit, which can take years to go through, arbitration typically takes between nine and 15 months to resolve, although settlement negotiations can happen at any time in the process. According to FINRA statistics, in 2009 it took an average of 11.5 months from the start of a claim to the closing of the case, including in situations where the claim was settled. Cases that required a hearing took an average of 14 months to close.

To start, the investor makes an "Initial Statement of Claim" with FINRA, which sets off the arbitration process. FINRA analyzes the claim and sends it to the respondent (the stockbroker or brokerage firm). The respondent then has 60 days to respond to the complaint. Following that, both sides are given a list of potential arbitrators to hear the case, and then an initial prehearing conference is held and procedural matters are addressed. Next is the discovery, when records relating to the claim are handed over to the other side in the claim. After this is a last attempt to settle the claim.

If the case is not settled by this point, it goes to an arbitration hearing, which usually lasts two to three days. Then the arbitrator or arbitration panel makes a binding decision about the claim.

In securities cases, it is very difficult for investors to file a lawsuit. This is because brokerage firms have a mandatory arbitration clause in their contracts, which forces the investor to file an arbitration in situations where a dispute arises. However, if the situation involves a potential class action, a lawsuit can be filed.

According to FINRA, the allegations most often cited in arbitration claims are breach of fiduciary duty, misrepresentation, negligence, unsuitability, failure to supervise and breach of contract.

Arbitration is different from a lawsuit because the findings of the arbitrator or arbitration panel are binding. Only very limited cases are subject to review by the courts, meaning that claimants will not have to wait years while appeals to the decisions are filed.