Whether it’s a private action under the 1934 act, an action under your state’s securities laws, or a common law action for breach of fiduciary duty or contract, there are grounds for suing if your broker stole from you, lied to you or cheated you in some way.
Time to head for court? Not quite. It’s very unlikely you can actually take your broker to court. Most likely, you’ll need to bring him or her to arbitration.
So you may be asking yourself, “Why did they just waste my time telling me about grounds to sue if they don’t matter and I can’t get to court?” It’s because the causes of action matter, as they are what give you right to take action. If there wasn’t a violation of securities laws or a breach of a common law duty, there is no lawsuit or arbitration.
Arbitration is a method of dispute resolution in civil cases. It’s an alternative to going to court. One or a group of arbitrators hear both sides of the story then render a decision. Basically, arbitration is a court without judge, jury or formality; the arbitrators, who take the place of judges, are essentially knowledgeable laypeople.
There is a lot to recommend arbitration. Because of the informality, it tends to be much less expensive than going to court. It’s also quicker, so you’ll get your “day in court” faster, and without mortgaging your home to pay your attorney. In fact, owing to the informality and the nature of the process, you could represent yourself without a lawyer, though one is still recommended – if you think your case is worth pursing, it’s worth pursuing the right way.
But in life, you generally take the bad with the good, and that’s true of arbitration, too. The downsides to arbitration are:
- There is less right of review or appeal – if the decision goes against you in arbitration, it’s very difficult to reverse it;
- Arbitrators don’t have to follow precedent, or what’s been decided before, the way judges do, so the outcome may be more arbitrary; and,
- Most importantly, your brokerage or mutual fund wants arbitration, which is itself almost enough reason to go to court instead.
In the typical securities arbitration, one of the three arbitrators will be an industry professional. That person may be more likely to find for your broker, or at least to reduce the amount you might win. After all, do you think your brokerage or mutual fund would want arbitration if it was more likely to be bad for them? Almost by definition in disputes, if the other side wants something, it’s good for them, bad for you.
Unfortunately, you almost certainly do not have a choice. Almost all brokerage account or mutual fund agreements will contain a clause saying that any disputes – and a claim that your broker defrauded you is certainly a “dispute” – will go to arbitration. Remember, those agreements are contracts; you’re bound by what you agreed to in writing by signing the agreement, and courts have consistently found arbitration clauses in brokerage contracts valid and enforceable.
By signing an account agreement, you agree to everything in it. Since pretty much all agreements have an arbitration clause – you’d have to look really hard to find one without – you’re going to end up in arbitration if you bring an action, and you’ll probably be in FINRA’s arbitration process.
What Is FINRA?
The Financial Industry Regulatory Authority is the largest “non-governmental regulator” for securities firms in the United States. It’s an SRO, or self-regulatory organization, and it does much of the regulation and policing of the securities industry. It was formed from a merger of the National Association of Securities Dealers and the self-regulatory functions of the New York Stock Exchange.
And it is very likely to provide the people who hear your arbitration case. Worried? You probably should be, since brokers and funds – you know, the entities you’re thinking of suing – make up FINRA’s membership.
FINRA says it’s impartial, and let’s give it the benefit of the doubt and assume it tries. But realistically, its members must find it hard to be unbiased toward the people they identify with, who they may have worked with in the past or may work for in the future, and whose funding keeps their organization afloat.
Just like the FDA is often accused of leaning too much in the direction of pharmaceutical companies, or the FAA of being too much about keeping airlines running and not enough about keeping air travel safe, industry organizations often end up being “captured” by their industries and putting industry interests first.
Typical Securities Arbitration
Since your claim is almost certainly going to end up in arbitration, let’s look at a typical one. And since so many securities industry arbitrations are under the auspices of FINRA, let’s look at the FINRA dispute resolution process.
Before getting to arbitration – that is, before filing a formal claim – FINRA recommends you report the problem to your broker’s or adviser’s manager. Their boss or company may be able to help you.
If there’s no joy – i.e., they don’t provide the relief or compensation you think you’re entitled to – another FINRA-recommended option is voluntary mediation. A mediator – a professional negotiator or middleman – may be able to help you and your broker come to terms that work for both sides.
However, if that doesn’t happen, it’s on to the arbitration process:
- File a claim: In a lawsuit, you’d start the ball rolling by filing a complaint. Here, you file a Statement of Claim, which describes what happened, why you think you have a claim and how much money is at stake. You’ll also file a Submission Agreement, which confirms that you have selected arbitration and agree to be bound by it. Of course, you’re there in the first place only because your brokerage agreement said you had to arbitrate.
- Serve the claim on the respondent, which is the broker and/or brokerage. Now they know you’re proceeding against them.
- Small claim – $25,000 or less: Usually, there will be one arbitrator, and he or she will resolve the matter and render a decision without any in-person hearings, based just on your and your broker’s written materials and evidence. You do have the right to request in-person hearings, though, and if you do, or if it’s a larger claim, you proceed to the next step.
- Large claim or request for in-person hearing: You’ll present your case before an arbitration panel of three arbitrators. The parties – you and your broker – choose the arbitrators from computer-generated lists provided by FINRA. You’ll appear before the arbitrators, and each side has an opportunity to present its case and rebut the other side’s case. You need to have evidence to back up your claims, and you have the right to cross-examine the other side’s witnesses.
- “The decision is….” If it was a single arbitrator, he or she just makes a decision; if it was a panel, majority rules. In either event, the arbitrators come up with a decision and that’s that.
Note: They don’t need to provide the reasons behind their decisions in writing unless you requested they do so in advance and in writing.
Arbitrator decisions are final. The arbitrators themselves cannot reconsider them; there’s no “arbitration appeals panel”; and even courts are very limited in being able to review, and reluctant to second-guess, arbitration awards. You will almost never win if you later challenge the award in court.
Some of the best news is, besides arbitration being cheaper than a lawsuit, it’s typically a lot faster, too.
According to FINRA’s typical time frame, from start to finish – claim to award – arbitration might take only two to three months. You will not get that kind of turnaround from court.
Arbitration vs. Mediation
Often talked about together as “alternative dispute resolution” – in other words, not court – arbitration and mediation are actually very different.
Arbitration has teeth, and the arbitrator’s job is to use them. This means that an arbitrator listens to evidence and renders an enforceable decision. In that respect, arbitration is like court, just with fewer rules and procedures, no judge, less cost and less right of review or appeal. Think of it as an “alternative court.”
Mediation is just suggestive. The mediator’s job is to help you and the other side come to an agreement. It’s not the mediator’s job to cram down a decision, and he or she does not have the power to make one stick, anyway.
Mediation is purely voluntary. Note that a good mediator can help you get to a satisfactory result – FINRA claims 80 percent of mediations end up settling, which means that both sides came to something they could live with.
Since it is voluntary and you could always walk away if you don’t like where it’s going, it may be well worth your while to try mediation.
Who is the “other side”? Consider who you should file a complaint against – just your broker or also your broker’s employer.
About the Author
Attorney Steven Peck has been practicing law since 1981. A former successful business owner, Mr. Peck initially focused his legal career on business law. Within the first three years, after some colleagues and friend’s parents endured nursing home neglect and elder abuse, he continued his education to begin practicing elder law and nursing home abuse law.