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”).

What is FINRA?

The Financial Industry Regulatory Authority (“FINRA”) is a government-authorized not-for-profit organization that oversees U.S. broker-dealers.  FINRA is funded primarily by assessments of member firms’ registered representatives and applicants, annual fees paid by members, and by fines that it levies.

Working under the supervision of the Securities and Exchange Commission, FINRA:

  • Writes and enforces rules governing the ethical activities of all registered broker-dealer firms and registered brokers in the U.S.;
  • Examines firms for compliance with those rules;
  • Fosters market transparency; and
  • Educates investors.

In addition, FINRA operates the largest securities dispute resolution forum in the United States.

Who must be a member of FINRA?

To conduct securities transactions and business with the investing public in the United States, both firms and individuals must be registered with FINRA. Firms must apply and meet certain membership standards to become a FINRA-registered broker-dealer.

How can I determine if my brokerage firm is a FINRA member? 

You can use FINRA’s BrokerCheck to search by name and determine whether your financial advisor and/or brokerage firm is a FINRA member.

Why is FINRA arbitration required?

If the brokerage firm is a member of FINRA, then the chosen arbitration forum with be FINRA.  FINRA operates the largest securities dispute resolution forum in the United States.  For investor claims to be eligible for FINRA arbitration or mediation, the following criteria must be met:

  • The cases involve an investor and an individual or entity registered with FINRA, such as cases between investors and brokers, between investors and brokerage firms, and between investors and brokers and brokerage firms; and
  • The claim is filed within 6 years from the time the events giving rise to the dispute occurred.

FINRA Rule 12200 of the FINRA Code of Arbitration Procedure for Customer Disputes (Customer Code), titled “Arbitration Under an Arbitration Agreement or the Rules of FINRA,” requires parties to arbitrate a dispute under the Customer Code in certain circumstances, as follows:

  1. Arbitration under the Code is:
  • Required by a written agreement, or
  • Requested by the customer;
  1. The dispute is between a customer and a member or associated person of a member; and
  2. The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.

What if the entity through which I invested is not a member of FINRA?

If the entity through which you invested is not a FINRA member firm, then it might be an investment advisor.  An investment advisor is an individual or company that is registered as such with either the Securities and Exchange Commission or a state securities regulator.  In particular, advisors with less than $100 million in assets under management (“AUM”) must register with the state regulator for the state where the adviser has its/his/her principal place of business. When a state-registered adviser’s AUM reach the $100 million threshold, the adviser may elect to register with the SEC—but when the adviser’s AUM exceeds $110 million, it generally must register with the SEC.

Although the term investment adviser may sound like the term “broker” or “financial adviser,” the terms are not synonymous.  A broker is a registered representative of FINRA; that is, the broker is licensed and regulated by FINRA.  “Financial advisor” is a generic term that typically refers to a broker.

Investment advisers also may be known as asset managers, investment counselors, investment managers, portfolio managers, and wealth managers. Investment adviser representatives are individuals who work for and give advice on behalf of registered investment advisers.

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.  As a result, 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”).

How can I determine whether the entity through which I invested is an investment advisor?

Visit Investor.gov, which will direct you to the SEC’s Investment Adviser Public Disclosure website (IAPD website) or visit the IAPD website directly to search by name. Alternatively, you can search by name using FINRA’s BrokerCheck program, and/or your state securities regulator website. Both the IAPD and BrokerCheck databases will automatically redirect you to the other, as needed. Searching is free, and the investment professionals or firms receive no notice or information regarding searches conducted about them.

What if the entity through which I invested is neither an investment advisor or a FINRA member firm?

Red flag.  Legitimate investment professionals, including brokers, investment advisers, and insurance agents, must be licensed with FINRA, the SEC, or your state securities or insurance regulator before they can sell you anything. If you appear to have dealt with an unlicensed entity, seek legal help.

Jennifer Farrar

Jennifer is the proprietor of Farrar Law, PLLC.  She attended Rollins College in Winter Park, Florida, where she received her Bachelor of Arts, summa cum laude.  Jennifer received her Juris Doctor, cum laude, from DePaul University College of Law in Chicago, Illinois.  She…

Jennifer is the proprietor of Farrar Law, PLLC.  She attended Rollins College in Winter Park, Florida, where she received her Bachelor of Arts, summa cum laude.  Jennifer received her Juris Doctor, cum laude, from DePaul University College of Law in Chicago, Illinois.  She is licensed to practice in Florida and Texas.

Jennifer’s experience includes large firm civil litigation and employment defense as well as boutique firm civil litigation and arbitration representing both claimants and defendants.  Notably, Jennifer was privileged to serve as a term law clerk to U.S. District Judge Jose E. Martinez in the Southern District of Florida.