by Richard A. Lewins
You are speaking with a friend, client, business associate, or family member and the subject of investments comes up. They indicate that they have lost thousands of dollars on investments recommended to them by their broker or investment advisor, and they wonder if there is anything you can do about it.
While there are some investments that are sold by non-licensed individuals, for purposes of this article we will assume that the person who recommended the investment at issue was licensed. The fastest and easiest way to determine what type of licensing you are dealing with is to go to www.brokercheck.com, and enter the person’s name.
If an advisor is licensed with a broker dealer, then any claim against such person will need to be filed in arbitration governed by the Financial Industry Regulatory Authority (FINRA). If such advisor is not affiliated with a FINRA broker dealer, but is licensed as an investment advisory representative with a Registered Investment Advisory firm, the advisor may also have a mandatory arbitration clause in its account opening documents, usually with either the American Arbitration Association (AAA), or JAMS. This article will focus on arbitration through FINRA.
For cases between FINRA members and their customers, the case will be governed by the rules and procedures set out in the FINRA Code of Arbitration Procedure for Customer Disputes (the Code). The Code can be found at the FINRA website, www.FINRA.org.
There are several key distinctions in the Code versus the rules and procedures in court, or even other arbitration forums. For example:
Time Limit – Rule 12206 of the Code sets out what you might consider the statute of limitations; however, the Code refers to it as the eligibility rule. The Rule states that you have 6 years from the occurrence or event that gives rise to the claim to file. There is no discovery rule to extend that time.
Pleading Standard – Rule 12302(a)(2) states that the Statement of Claim must specify the relevant facts and the remedy requested. As FINRA Arbitration is a forum of equity, not law, the claim does not have to be tied to any particular law or statute.
The majority of claims brought center around the concepts of suitability and the firm’s failure to supervise. That is, the broker has a duty to only recommend investments that are suitable for the investor, the broker breached that duty and his brokerage firm failed in its duty to supervise the actions of its broker.
Respondents cannot answer with a general denial—they must address each of the facts laid out in the Statement of Claim, and state the relevant defenses.
Selection of Arbitrator(s) – Depending upon the size of your case, it will be determined by either a single arbitrator, or a panel of three arbitrators. The arbitrators are not employed by FINRA, but are men and women in the community that have met the educational and business criteria set out by FINRA. You will be provided one to three lists of potential arbitrators from which you are to rank and/or strike. For each potential arbitrator you will be provided an Arbitrator Disclosure Form. This form will give you educational and employment history and prior arbitration service and award history. You will not have an opportunity to voir dire them.
Hearing Location - The pools from which the potential arbitrator lists will be generated are located in designated hearing location cities in each state. In Texas, those cities are Dallas and Houston. All cases to be heard in Texas will be in either Dallas or Houston, depending upon which city is closest to the Claimant at the time the alleged bad act took place.
Discovery – Discovery is extremely limited in FINRA Arbitration. There are lists of presumptively discoverable documents that both sides are required to produce. Not included in the Respondent’s list is the whether or not the Respondent carries any type of insurance that might cover the claim. Most people are surprised to find out that the overwhelming majority of brokerage firms do not carry any type of E&O or D&O insurance. You can ask, but brokerage firms do not have to answer.
Additionally, under Rule 12507(a)(1) standard interrogatories are generally not permitted, and under Rule 12510 depositions are strongly discouraged and rarely allowed except to preserve testimony of an ill or dying witness.
The Hearing – Hearings are typically conducted in hotel conference rooms or office building conference rooms that have an arrangement with FINRA. The Rules of Evidence do not apply. The arbitrator(s) typically err on the side of inclusion of evidence and testimony, including hearsay and past misdeeds of either the Claimant or Respondent.
As you can see, FINRA arbitration is not for the faint of heart. But if you want to try and recover for the misdeeds of someone you, or someone you know, trusted with hard earned investment dollars, it may well be the only game in town.
Richard A. Lewins is the owner of LewinsLaw, PC and can be reached at firstname.lastname@example.org.