Investing is complicated – that’s probably the primary reason you chose to work with a broker.  Unfortunately, despite one’s best efforts, things may have gone disastrously awry.  Now, you are sitting down to a late night Google session and attempting to figure out your options.  Obviously, when you embarked upon your investment journey you expected some market hiccups, but nothing which would require litigation.  Sadly, your eyes have been opened to this possibility, but even that may be other than you expected, because if you want to pursue a claim related to investment losses or misconduct, then you must step into the world of arbitration.  Here’s some basic information to get your feet wet:

Why do I have to arbitrate?

Remember when you opened your securities account or first invested through the brokerage firm?  Lots of paperwork, right?  Sign, sign, sign.  Well, amongst those papers you signed, the brokerage firm likely required you to agree in writing to arbitrate disputes concerning the account.

If the brokerage firm is a member of FINRA (such as UBS, Merrill Lynch, Raymond James, etc.), then the chosen arbitration forum with be FINRA. FINRA Rule 2268(a) requires firms to highlight predispute arbitration agreements and disclose that by signing the arbitration agreement the parties agree that:

  1. All parties to this agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.
  2. Arbitration awards are generally final and binding; a party’s ability to have a court reverse or modify an arbitration award is very limited.
  3. The ability of the parties to obtain documents, witness statements and other discovery is generally more limited in arbitration than in court proceedings.
  4. The arbitrators do not have to explain the reason(s) for their award unless, in an eligible case, a joint request for an explained decision has been submitted by all parties to the panel at least 20 days prior to the first scheduled hearing date.
  5. The panel of arbitrators may include a minority of arbitrators who were or are affiliated with the securities industry.
  6. The rules of some arbitration forums may impose time limits for bringing a claim in arbitration. In some cases, a claim that is ineligible for arbitration may be brought in court.
  7. The rules of the arbitration forum in which the claim is filed, and any amendments thereto, shall be incorporated into this agreement.

This provision of FINRA Rule 2268 became effective on May 1, 2005, so if you are a customer whose relationship pre-dates May 1, 2005, then the account agreement you signed will be subject to the provisions of FINRA Rule 2268 in effect at the time you opened your account.  In other words, if you do not recall this detailed disclosure it might be that your agreement did not have it.  (It is also equally possibly you were flush with enthusiasm for your new investment adventure and inundated with papers to sign — such that you saw this disclosure language but it simply failed to register.)

Arbitration is the subject of contract between the parties.  Thus, the parties can determine their own rules, or choose to adopt the rules of an arbitral forum.  Investment advisors who are not FINRA members may include predispute arbitration clauses in their account agreements, which require submission of disputes to the American Arbitration Association (“AAA”) or Judicial Arbitration and Mediation Services (“JAMS”).
Continue Reading Remind Me Again Why I’m Arbitrating — And Who the Heck is FINRA?