What to Expect in FINRA Arbitration
Suffering investment losses from fraud, dishonesty, or other unethical behavior on the part of a financial advisor or securities firm can be devastating. There are feelings of embarrassment, anger, and betrayal, as well as a fear of the future. You might be wondering if you can regain your losses, and if so, what the process will look like.
FINRA, the Financial Industry Regulation Authority, is a non-profit organization that exists to help protect individual investors like yourself. For investors who have suffered losses from a broker’s misconduct, it may be possible to recover losses in a process called FINRA arbitration. FINRA arbitration is where investors and brokers go to settle disputes – like a court. Even if you trust your current broker, it’s important to understand how the process of FINRA arbitration works in case you should ever need to go through it to recover losses.
FINRA is a venue, it’s like a court. It runs a program, it’s not actually working out the disputes, it’s just the place that disputes happen. It is a neutral venue where investors are required to litigate their disputes with brokers and brokerage firms.
How FINRA Arbitration Works
If you have a complaint about misconduct or an investment dispute with your broker, after hiring an attorney, the FINRA arbitration process is started by filing a claim statement with its Dispute Resolution department. There are a variety of different forms of misconduct or fraud you may encounter that could lead you to file a claim. An investor’s first step in restitution is filing an FINRA arbitration claim. Examples of common FINRA arbitration claims include:
- Churning. This is when a broker “churns” up commissions by trading excessively and unnecessarily through an investor’s account.
- Lack of diversification. This is when a broker fails to advise, either through thoughtlessness or blatant misconduct, an investor to appropriately diversify his or her investment portfolio, resulting in significant losses.
- Misrepresentation. Misrepresentation can take a variety of forms in the securities industry, but it generally involves brokers or financial advisors failing in some way to fully inform their clients about the risks or advantages of a particular investment opportunity.
- Negligence. Brokers may also provide investors with bad advice not through fraud or blatant misconduct, but because they themselves are not well informed about the industry. This constitutes negligence, and even though it’s not intentional, finance professionals still need to be held accountable.
- Unauthorized trading. This is when a broker makes trades, purchases, or sales on an investor’s account without his or her knowledge, through a non-discretionary account.
- Unsuitable investments. Your financial advisor has a professional obligation to direct you toward investments that are suitable for your individual needs and goals. Brokers and advisors can have claims filed against them for advising clients to take on unsuitable investment opportunities.
- Violating securities law. Obviously, if a financial advisor or brokerage firm knowingly violates the law, not only will FINRA arbitration likely take place, but the district attorney can file criminal charges against them as well.
- Breach of Fiduciary Duty. Under certain circumstances, or under State law, brokers may owe customers a fiduciary duty. A fiduciary duty means that brokers must place their client’s interest before their own, including full and fair disclosure, among other ongoing duties.
The arbitration panel reviews pleadings, arguments, and testimonial evidence. Its decision (“award”) is final and binding to all parties. A party may challenge the award in court within the statutorily provided time based on very limited grounds. It’s important to understand that, during a FINRA arbitration, FINRA is not there to help the investor, rather, their role is to be neutral – like a clerk of a local court and to administer the arbitration proceeding.
If you have suffered losses from your financial advisor’s wrongful or dishonest activities, an experienced investment loss attorney can help you navigate the FINRA arbitration process for a more successful resolution. If you have more questions, visit our securities fraud frequently asked questions page, or contact our firm to speak with one of our qualified attorneys.