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What is FINRA's Litigation Process?

Plus, legal advice from an attorney who’s been through it

If you find yourself in a dispute involving alleged wrongdoing in an investment, it may fall under the umbrella of the Financial Industry Regulatory Authority. FINRA is a private self-regulatory organization (SRO) tasked with overseeing brokers and broker-dealers. If you’re facing legal action, “The first determination that needs to be made is whether you have a choice in the matter or not,” says Aimée D. Dayhoff, a business litigator at Winthrop & Weinstine in Minneapolis.

“Does it have to go through FINRA versus can it be in a district court, state court or federal court? This is typically a cut-and-dry process, but there are nuances to every situation where you potentially could make the argument that you fall outside of the purview or domain of FINRA and can initiate litigation in a court of law.”

As the FINRA rules explain, “FINRA is authorized by Congress to protect America’s investors by making sure the broker-dealer industry operates fairly and honestly.” An investor who has a dispute with their broker or brokerage firm may go through FINRA’s dispute resolution process.

“If you are required to go through FINRA’s dispute resolution process, then there’s not a whole lot of wiggle room on next steps,” Dayhoff adds. “There’s the procedure that governs that whole process, and that differs than being just in a courtroom with one judge.”

FINRA Dispute Resolution: Arbitration and Mediation

FINRA operates the single largest forum for securities-related dispute resolution in the United States. The self-regulatory organization has 19 offices across the country, with its Chicago office being the closest to Minnesota. Under the oversight of FINRA, securities disputes are generally not resolved in litigation. Instead, the organization provides two types of non-judicial proceedings for investors and brokers/brokerage firms involved in a dispute: arbitration and mediation.

FINRA Arbitration Hearings

As described by FINRA, arbitration proceedings are similar to a trial, “but is usually faster, cheaper and less complex.”

“Generally speaking, if you’re doing an arbitration through an entity outside of FINRA—the most common one tends to be AAA—there can be a specific agreement that says, ‘In the case of an arbitration, it’s going to be a three-judge panel, plaintiff gets to choose one arbitrator, defendant chooses the second arbitrator, and then those two arbitrators that are chosen by the respective parties choose the third,’” explains Dayhoff. “They provide you a list of arbitrators, and the parties have to come to some type of agreement on who they’re going to choose and who has the availability. Whereas in FINRA, it is a single arbitrator or a three-judge panel.”

In FINRA’s arbitration process, parties to a dispute will be permitted to present documentary evidence and provide witness testimony. The single arbitrator or arbitration panel will hear the case and render a decision. Parties do have the right to challenge an arbitrator’s decision in a Minnesota court, but judges give wide deference to the arbitration process and will only overturn a FINRA arbitration award in very limited circumstances.

FINRA Mediation

FINRA’s mediation process is very similar to any other, Dayhoff says. It just depends on the parties involved and details of the case. “But if you know that you have a FINRA component to your dispute, it’s important to engage someone with experience, because there’s the determination on whether or not you want to engage in mediation versus arbitration out of the gates,” she says.

Parties can request mediation at the beginning of a dispute or they can request it at any time during the arbitration process. A mediator is a facilitator—their role in the process is not to make a decision. Instead, it is to help the parties work towards a potential settlement of their dispute. Unlike arbitration, mediation is non-binding. If the two sides are unable to come to a resolution in mediation, they still retain their other legal options.

Note: Most investors are required to resolve disputes against their broker/brokerage firm through FINRA’s process because they signed a customer agreement stipulating mandatory arbitration. A mandatory arbitration provision will (generally) be enforced by state and federal courts. However, if no such agreement was signed, an investor could pursue securities litigation as an alternative.

Lawyering Up

FINRA has many unique rules, regulations, and procedures in place regarding its arbitration process and mediation.

“FINRA is a very specific, nuanced area, so I think that it’s incredibly important to have someone who has experience in that area, and not just reach out to anybody who just does litigation and may have engaged in the arbitration process in the course of their years of practice,” Dayhoff says of legal advice.

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