FINRA stands for the Financial Industry Regulatory Authority. It is an independent, non-profit program that is dedicated to investor protection by regulating the securities industry. Congress authorized this organization to ensure the securities market is operate fairly. FINRA can bring actions against investors and firms, and can also refer fraud and insider trading cases to the Securities and Exchange Commission.
FINRA begins formal proceedings by issuing a disciplinary complaint. The complaints are merely allegations, and do not hold any findings or decisions. It is the equivalent of the filing of a petition in regular civil proceedings. Once a complaint is filed, the case will typically proceed to either mediation or arbitration. Mediation Mediation is less formal than arbitration, although it is a different sort of dispute resolution process than a courtroom procedure.
A third party, the mediator, will have both joint and separate sessions with each party in order to encourage communication and negotiation to settle a case in a mutually agreeable fashion. The mediators will be experts in the subject matter of each FINRA complaint, so they can be called upon to give their opinion or offer advice during the mediation to each party. Although the mediator’s ultimate goal is to settle the case, they cannot force a settlement. In the event the mediator is unsuccessful, the next step is to pursue arbitration.
The basic process of mediation is first, the parties should file a Request for Mediation, unless the matter is already in arbitration. If so, the parties can contact the local arbitration administrator for a referral to mediation. The parties can select the mediator next, and proceed to mediation. Only two outcomes are possible with mediation: settlement, wherein the agreement becomes a binding resolution, or an impasse, wherein the parties cannot settle and proceed to arbitration.
Arbitration
The hearing will take place either at a regional FINRA office or other location as agreed to by the parties or selected by the FINRA director. Arbitration is a binding process wherein a third party acts as a ‘judge’ (or arbiter), listens to testimony, examines evidence, and makes a ruling on the FINRA complaint. During the hearing, the claimant will try to prove the allegations contained in the original complaint.
The respondent will establish defenses and prove any counterclaims. Similar to courtroom procedure, parties must disclose who they will call as witnesses to testify, and these witnesses will be examined under oath. These witnesses can also be expert witnesses. The party can question their own witness through a process called direct examination.
The party can also ask questions of witnesses that are not their own through a process called ‘cross-examination.’ The case proceeds very similarly to a trial, where the complainant presents their case in chief first, including the examination of witnesses, and the respondent then gets to present their own evidence and claims.
Finally, the arbitrator is also able to question each witness as they testify. Once each party has presented all their evidence and witnesses, they may make a ‘closing statement’, summarizing the evidence presented and giving their argument as to what they believe they have proven (or what the other side has not).
The arbitrator will then issue a decision based on what they have heard and reviewed. In many cases, investors (or complainants) will receive some form of relief, either through the arbitration award of via settlement of the parties.
If you are involved in a FINRA complaint, you should consider hiring a licensed, reputable attorney to represent you, particularly if the process goes into arbitration. Most likely, the other parties will have counsel to represent them through the process. Most brokerage firms keep an attorney on retainer just for these issues.
