Code of Arbitration

Code of Arbitration
When broker-dealers are arguing over money, they must take it to arbitration. Under the Code of Arbitration members of FINRA must resolve disputes with an arbi¬trator or arbitration panel, which cuts to the chase and makes their decision quickly. There are no appeals to arbitration. If they say your firm owes the other side one mil¬lion dollars, your firm must cut a check for one million dollars. End of story.
A customer is free to sue a firm or registered rep in civil court unless the customer signs the arbitration agreement. Once that's signed, the customer is also bound by the Code of Arbitration, which means they can't sue their agent of broker-dealer in civil court. Which is why most firms get their customers to sign arbitration agreements when the new account is opened. Civil court is too costly and time-consuming. Arbi¬tration can be very painful, but at least it's quick.
If the arbitration claim is for a small amount of money, Simplified Industry Arbitra¬tion is used. Here there is just one "chair-qualified" arbitrator and no hearing. The claims are submitted in writing, and the arbitrator reaches a decision.
Larger amounts of money are handled by three or five arbitrators, some from the industry and some from outside the industry. Evidence and testimony is examined, and the arbitration panel makes a final determination. Maybe they say the lead underwriter owes your firm $1 million. Maybe they say they owe nothing. Either way, all decisions are final and binding in arbitration, unlike civil court where the appeal process can go on and on.
So, if the arbitration panel says a firm owes somebody $250,000, they must pay them, promptly. Failure to comply with the arbitration decision could lead to disciplinary proceedings under Code of Procedure, which is always bad.
The bylaw doesn't specifically mention the word "money" The precise wording is:
•    • • • • • • • • • • • • •
•    any dispute, claim, or controversy arising out of or in connection •

with the business of any member of the Association, or arising out

of the employment or termination of employment of associated
•    person(s) with any member    •
•    • • • • • • • • • • • • •
While arbitrators generally don't explain their decision, FINRA requires arbitrators to explain their decision if both parties make a joint request. The parties to the arbitration are required to submit any joint request for an explained decision at least 20 days before the first scheduled hearing date. The chairperson of the arbitration panel writes the explained decision and receives an additional honorarium of $400 for doing so.
An alternative method for resolving disputes is called mediation. Let's see how FINRA describes the difference between the two processes at ArbitrationMediation/Parties/Overview/Overview0fDisputeResolutionProcess/:
•    • • • • • • • • • • • • •
•    Dispute resolution methods, including mediation and arbitration, •
•    are non judicial processes for settling disputes between two or more •
•    parties. In mediation, an impartial person, called a mediator,
assists the parties in reaching their own solution by helping to
•    diffuse emotions and keeping the parties focused on the issues. In •
•    arbitration, an impartial judge, called an arbitrator, hears all sides •
of the issue, studies the evidence, and then decides how the matter
•    •
should be resolved. The arbitrator's decision is final.
•    •
•    The mediator's role is to guide you and the other party toward    •

your own solution by helping you to define the issues clearly and

understand each other's position. Unlike an arbitrator or a judge,
•    •the mediator has no authority to decide the settlement or even    •
•    compel you to settle. The mediator's "key to success" is to focus    •
•    everyone involved on the real issues of settling--or the consequences •
•    of not settling. While the mediator may referee the negotiations--
defining the terms and rules of where, when, and how negotiations
•    •will occur--he or she never determines the outcome of the settle-

•    ment itself    •
•    • • • • • • • • • • • • •
Okay, so what if the parties try to mediate the issue but can't come to a resolution?
• • • • • • • • • • • • • •
•    When it seems that other efforts to resolve your dispute are not    •
•    working, it is then time to decide whether you will file a claim to •
arbitrate. Even if you choose, or are required to use, arbitration
•    rather than a lawsuit as a means of resolvingyour dispute, you    •
•    should consider hiring an attorney who will provide valuable in- •

struction and advice.

•    Arbitrators are people from all walks of life and all parts of    •
the country. After being trained and approved, they serve as
•    •
arbitrators when selected to hear a case. Some arbitrators work

in the securities industry; others may be teachers, homemakers,    11111
•    investors, business people, medical professionals, or lawyers. What •
•    is most important is that arbitrators are impartial to the case and • sufficiently knowledgeable in the area of controversy. Potential

arbitrators submit personal profiles to FINRA; the profiles detail •
•    their knowledge of the securities industry and investment concerns. •
•    If accepted, their names and backgrounds go into a pool from    •
which arbitrators are selected for any given case. Arbitrators do    •

not work for FINRA, though they receive an honorarium from
•    FINRA in recognition of their service.    •
•    • • • • • • • • • • • • •
FINRA also warns investors:
•    • • • • • • • • • • • • •
•    Caution. When deciding whether to arbitrate, bear in mind    •
•    that if your broker or brokerage firm goes out of business or    •

declares bankruptcy, you might not be able to recover your money-

(Tot if the arbitrator or a court rules in your favor. Over 80
•    percent of all unpaid awards involve a firm or •
•    individual that is no longer in business.    •
•    •(That is one of the reasons why it is so important to investigate    •
•    the disciplinary history of your broker or brokerage firm before you •
•    invest. For tips on how to do this please read the SEC publication • entitled Check Out Your Broker located on the SEC Investor
•    •
Education Web site. Through FINRA's BrokerCheck Program,
•    •investors, and others, can find out background information about •
•    brokers and brokerage firms.)    •
•    • • • • • • • • • • • • •
If a registered representative violates sales practice rules, and a customer makes an arbitration claim after losing money, the firm must report it on the registered (or formerly registered) representative's U4/U5 forms. As mentioned, if the amount of the award is $15,000 or more, the public will be able to find out about it, even if the plaintiff (customer) names the firm and not the registered rep specifically.
The exam could also mention that broker-dealer customers are not prevented from joining a class of plaintiffs in a class-action lawsuit. Meaning, if a large broker-dealer with offices all over the nation is found to be gouging customers on mutual fund sales through hidden charges, there could be a class-action lawsuit filed that all customers could join. Also, if an agent has a sexual harassment or civil rights case to file, that is also outside the scope of arbitration.


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