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FINRA Code of Arbitration Procedure for Customer Disputes

The law firm of Lubiner, Schmidt and Palumbo specializes in broker-dealer law under the Financial Industry Regulatory Authority (FINRA) Code of Arbitration Procedure for Customer Disputes (FINRA Customer Rules). Investors seeking damages from market losses will have to file an arbitration claim under the FINRA rules to recover for damages. FINRA is a not-for-profit, private, nongovernmental organization that monitors all securities firms in the US engaging in business with the general public. FINRA maintains a roster of arbitrators, selected by the parties who hear cases and decide whether to award damages for investment losses. Claims of investment losses less than $50,000 or between $50,000 and $100,000 are known as “Simplified Arbitrations” and are handled by a single arbitrator For claims of over $100,000, a panel of three arbitrations presides and resolves the case, in addition to deciding whether to award damages for investment losses.

The Code of Arbitration Procedure for Customer Disputes and the rules for conducting a FINRA hearing are complex and challenging for the average individual. However, the law firm of Lubiner, Schmidt, and Palumbo has handled hundreds of FINRA arbitrations concerning customer and industry disputes. In order to begin the FINRA hearing process, a claimant seeking to recover their investment losses in connection with securities fraud or any other theory must draft out a statement of claim seeking recovery for investment losses. The statement of Claim must offer a theory for recovery connecting the facts of the cases to the specific FINRA rules that were violated by the broker-dealer, who is referred to in this case as the Respondent.

After a panel of arbitrators is selected, the parties conduct an initial prehearing conference which creates a scheduling order setting for the hearing dates. This is followed by the exchange of discovery requests. As stated in the FINRA rules for conduct, parties should comply with discovery requests in good faith and with ample cooperation. Whatever FINRA rules as “presumptively discoverable” under the FINRA Discovery Guide is then listed. In the event parties can’t resolve discovery disputes, a party seeking production of documents file a motion to compel, which is decided by the arbitrator.

FINRA Rules grant parties the right to submit dispositive and non-dispositive motions. Dispositive motions seek to resolve the claim or specific allegations addressed in the claim prior to a hearing on the merits, such as a motion to dismiss. a motion to dismiss asks the arbitrators to dismiss a claim for failure to state a claim requires a full panel must agree, and is rarely granted. If the panel grants the motion, a unanimous written explanation must be issued (FINRA R. 12504(a)(4), (7) and 13504(a)(4), (7)). The panel may grant a motion to dismiss only after it has conducted an in-person or telephonic conference with the parties on the motion unless the parties waive a conference (FINRA R. 12504(a)(5) and 13504(a)(5)).

After motions and discovery practice is resolved, a hearing is conducted to address the merits of the party’s dispute. During the substantive hearing, each party presents its case to the arbitrators, and the claimant seeking to recover investment losses delivers their opening statement first, followed by the respondent. After opening statements are delivered, Claimant and Respondent witnesses are cross-examined and questioned, with the claimant’s witnesses delivering first. Arbitrators may seek questions from witnesses, but generally wait until after counsel for Claimant and Respondent has finished direct and cross examination. FINRA arbitrators are not bound by the federal or state rules of evidence, but they must honor the applicable privileges such as Attorney Client work product prepared in anticipation of a hearing (FINRA R. 12604(a) and 13604(a)). Attorneys still follow and couch their objections during a hearing in the federal and state rules of evidence. Objections at hearing referencing rules of evidence are considered by arbitrators. When objections are made to admissibility of documents the FINRA Arbitrator Handbook states arbitrators should generally:

  1. Listen to the admissibility argument
  2. Allow the document in evidence if it appears to be authentic and bears relevancy to the case

FINRA rules mandate production of all documents that are going to be used at the hearing at 20 days before the start of the hearing. The arbitrator may exclude any document the party did not produce or witness the party did not identify at least 20 days before the start of the hearing (FINRA R. 12514(c) and 13514(c)).

The FINRA hearing closes after the Claimant and Respondent have both proffered all witnesses, evidence and arguments to the arbitrators. At the closing, the arbitrator may ask the parties to restate their damages as sometimes parties’ damages theories become modified since filing their claim. The arbitrators generally issue an award well within 30 days after the close of the hearing. If there is a panel of arbitrators as opposed to a single arbitrator the award is by majority vote.

This is a very brief overview of the steps in conducting a FINRA arbitration. If you have sustained investment losses and are seeking to file a claim to seek recovery you should absolutely consult with a broker dealer well versed in the FINRA Code of Arbitration procedure. Since 1984, the attorneys of Lubiner, Schmidt & Palumbo have built a hard-earned reputation of success as broker dealer attorneys in FINRA arbitrations having tried hundreds of customer and industry disputes. Please contact our firm for a free consultation.

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