The term arbitration may be familiar to those who follow sports. It’s a term normally used when individual players or an entire league work to resolve disputes with team owners. In the financial industry, arbitration is utilized to resolve financial issues between investors and brokers.
Arbitration is different from mediation. In this form of conflict resolution, the parties work to reach a potential agreement. It’s only made permanent if those represented agree to the terms.
The act of arbitration is overseen by the Financial Industry Regulatory Authority (FINRA). All judgments by the FIRA are final and binding. Failure to act upon their decisions can result in fines and even criminal charges.
The steps to arbitration start with complaints filed against FINRA-registered brokers. These can be filed by an investor or another broker. The complaint must detail the misconduct the broker allegedly committed. Additionally, they need to include the amount in damages they seek.
Once received, FINRA appoints a trio of industry professionals as a panel to review the issue. These subject matter experts are normally not employed in the securities industry. In turn, they can hear the arguments of both parties without bias.
The panel chooses a time and location for hearings related to the complaint. Disputes that involve less than $50,000 are done through written arguments. These are sent to a single arbitrator for review. In-person arbitration occurs if the dispute is more than $50,000. All three arbitrators are utilized when the amount requested is over $100,000.
The parties involved in the arbitration can represent themselves or they can hire an attorney. The panel that hears the arguments isn’t as formal as a judge in a lawsuit. So, there’s an equal chance that an investor’s argument will be received equally as well as that from an attorney.
The arbitrator assigned to cases that involve less than $100,000 has the final say in whether the investor or broker who filed the initial complaint is entitled to damages. When the three-person panel is involved, decisions are made with two-thirds of approval.
Judgment to the plaintiff in arbitration cases does not mean they will always receive the full amount in damages. Though they might request, for example, $60,000, the arbitrators might decide the award should only be half as much. While something like this could be appealed in a court of law, this rarely happens in arbitration.
It comes down to costs and time. A lawsuit requires time in court or the conference room. This means both parties need to travel to one destination or another. It may take weeks or months to resolve the complaint.
On top of this, investors or brokers need to hire attorneys to get the best results in a lawsuit. Should they win, a portion of the damages earned have to be paid to these legal experts in the form of fees and commissions.