The Arbitration Process

1. Introduction

Nearly all brokerage account agreements contain an arbitration clause.  Arbitrations are different from court trials in several respects.  Judges and juries are replaced by Arbitrator(s). The discovery of documents and information in arbitration is more limited than in court.   Arbitrator’s decisions are final and appeals are extremely limited.  Most arbitration matters are resolved much faster than if they were tried in court.  Today, most securities matters are administered by the Financial Industry Regulatory Authority (FINRA).

2. Investigation

The first step in the arbitration process is investigation by our office.  We will interview you at length concerning your matter.  You will be asked to provide certain documents that substantiate your claim such as your brokerage statements and correspondence between you and the brokerage firm.  In addition, a profit and loss analysis of your account may be needed to determine the type of trading in your account as well as the damages you may have suffered. This will be done by an expert in the securities industry.

Upon completion of our investigation, we will make a decision as to whether it makes sense from a legal and economic perspective to proceed with your matter.

3. Preparation of the Statement of Claim

After investigating your matter and if it makes sense to proceed, we will draft a Statement of Claim. The Statement of Claim sets forth the facts of your matter, the claims you are making and the damages you are seeking.  The Statement of Claim is filed with the arbitration forum administrating your matter along with your agreement to be bound by rules of that forum.

4. Respondent’s Answer or Reply to the Statement of Claim

FINRA serves the Statement of Claim on the Respondent.  Respondents are required to provide an answer or reply to the Statement of Claim within 45 days of the Statement of Claim.   The answer contains the Respondent’s facts and defenses.

5. Arbitration Panel Selection

Shortly after the Respondent files an answer, FINRA will send a letter to both parties stating that the dispute is ready for arbitrator selection.  Accompanying FINRA’S letter will be a list containing the names of potential arbitrators.

The arbitrator selection process will result in a panel of three arbitrators. If your matter does not settle, the panel will hear your claim against the brokerage house and a make a determination as to culpability and your entitlement to damages, if any.

6. The Prehearing  Tele-Conference

After the panel has been selected, a initial prehearing tele-conference will be held.  This conference is attended by the attorneys for both parties and the full arbitration panel.  During this conference the dates for future hearings, including the time and location of the final hearing, are set. The final hearing date is usually set within 6 to 12 months after the prehearing conference.  The date depends on the parties and arbitrators’ availability.  The location is typically held in a city closest to where the Claimant lives or where the dispute arose.  In addition, other procedural matters specific to your case may be considered and ruled upon. Such matters may include initial discovery and or whether briefs will be filed.

7. Discovery

The parties may start the discovery process of exchanging documents and information after the answer is received by the Claimant.  This process is governed by the FINRA discovery guide.   Certain documents listed in the guide are deemed presumptuously discoverable.  This means that a party in possession of a document listed in the guide must turn the document over to the opposing party unless that party has a good faith objection for not producing the document.  Additional requests may be made for documents not otherwise listed in the discovery guide.   Again, unless there is a good faith objection, additional documents must also be produced.

8. Mediation

At some point during the arbitration process, the parties may attempt to settle the matter.  Sometimes this is accomplished between the attorneys for the parties and sometimes at mediation.  All offers of settlement will be communicated to you.  No offer will be accepted or rejected without your permission.

Mediation is an informal confidential process where the parties meet face to face to hear each other’s point of view on the case.  Meditations are conducted by a Mediator.  The Mediator is trained to help parties find resolution to conflict.

9. The Twenty Day Exchange of Documents, Information and Witnesses.

Assuming your matter hasn’t settled, twenty days prior to the final hearing both parties must exchange a list of witnesses who may testify and documents that will be offered into evidence.  Usually the list of witnesses include the Claimant, the Stock Broker, the Stock Broker’s mangers, individuals who have knowledge of the facts at issue and expert witnesses if retained by any party.  Most of the documents that will be offered into evidence have already been exchanged between the parties.

10. Expert Witnesses

If we deem it necessary we may decide to hire an expert witness.  An expert witness is a witness, who by virtue of education, training, skill, or experience, has knowledge in a particular subject beyond that of the average person, so that the panel may legally rely upon the witness’s specialized opinion about the evidence or fact issue within the scope of their expertise referred to as the expert opinion. A Expert Witnesses could be a current or former stock broker, investment manager, branch manager or a compliance manager.

11. The Final Hearing.

The final hearing is the trial. Both parties put on witnesses and present their evidence.  It is conducted in a conference room large enough to accommodate all of the parties, witnesses, attorneys and arbitrators. The Claimant presents its case first and the Respondents second.  Each side makes an opening and closing statement, direct examination of witnesses and cross examination of the opposing parties’ witness.

Typically hearings last between 3 to 5 days depending on the complexity of the matter.   Hearings with multiple Claimants and Respondents may last several weeks and may be on non-consecutive days.

12. The Award

Within 30 days after the close of the final hearing, you will be notified of the Panel’s decision, normally called an award.   The award is the final document of the panel.  It may be unanimous or a majority decision.  The award sets the names and parties, the rulings the panel may have rendered during the proceedings, the amount of the award, if any, and how the costs of the proceedings are to be split.  The award is final.  Once the award is rendered the arbitrators cannot look at any additional evidence. Assuming a monetary award is made, the respondent has three choices; pay the award, appeal the award or close their doors.

13. Payment of Award

The Respondent will have 30 days to pay unless the award is appealed.  If the Respondent fails to pay the award, FINRA can suspend their license to act as a broker dealer.  Therefore if the Respondent wants to continue doing business, they will pay the award within 30 days.

14. Appeal

Appeals from arbitration awards take the form of Motions to Vacate or Motions to Modify award. The Motions are filed in either state or federal court.  Appeals are rarely successful.

15. Bankruptcy

If the broker or brokerage firm enters bankruptcy, your likely hood of collecting is slim.



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