FINRA Makes Arbitration Forum Available To Registered Investment Advisers

Friday, December 21, 2012 12:42
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FINRA Makes Arbitration Forum Available To Registered Investment Advisers

For many years, the vast majority of disputes between retail investors and their securities brokers have been resolved in arbitrations administered by the Financial Industry Regulatory Authority (FINRA). But, FINRA-administered arbitrations were not available to investors, or their financial advisors, where the client’s relationship was with a Registered Investment Adviser (RIA) not affiliated with a securities broker/dealer firm, as FINRA does not have authority over RIA firms.  

This is changing.  

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FINRA has recently adopted a new policy permitting RIA firms and their clients to utilize the SRO’s arbitration forum to resolve their disputes, even where the RIA is not affiliated with a FINRA Member Firm.  Where parties meet the required conditions, FINRA will now accept jurisdiction over such cases that are filed.  Specifically, under the guidance posted on FINRA’s website, in order for Investor-RIA disputes to be resolved through the organization’s arbitration arm, the following conditions must be satisfied:

  • The RIA must agree to pay all FINRA arbitration fees and surcharges;

 

  • The RIA, the investment advisor representatives involved, and the investor must each sign a special form of FINRA’s standard Submission Agreement that was executed after the dispute arises (pre-dispute arbitration clauses are not valid);

 

  • The parties must all affirmatively acknowledge and agree on the RIA dispute Submission Agreement form that:

 

    • FINRA cannot enforce awards entered against non-member RIA firms and/or their employees that are not associated with a FINRA Broker/Dealer member firm;

 

    • Investors who prevail at arbitration may only enforce awards entered against non-member RIAs and their personnel through a court action in the event of non-payment of the Award;

 

    • FINRA may bar the RIA from using FINRA Dispute Resolution in future cases if the firm fails to pay any award, settlement agreement, or FINRA fees;

 

    • FINRA and its arbitrators will be held harmless from liability arising in connection with the resolution of the parties’ dispute;

 

    • Disputes involving RIA firms will be administered in accordance with the FINRA Codes of Arbitration Procedure.

 

  • The parties must also affirmatively acknowledge that the final arbitration Award will be made publicly available.

 

Strategic Considerations for RIAs and Investment Adviser Representatives

While the RIA industry has generally expressed opposition to FINRA’s attempts to exert regulatory authority over it, there are substantial benefits for individual RIA firms and their personnel to avail themselves of FINRA’s arbitration system.  Some of the advantages include:

·         Faster resolution

·         More limited and predictable fact discovery (such as the lack of depositions);

·         Greater certainty in budgeting litigation costs;

·         Having disputes decided by arbitrators with securities industry experience;

However, RIA firms are not without risk if they opt to have their dispute decided through a FINRA arbitration.  In particular, if the facts of the case are very problematic for the firm, it may not want to have seasoned securities professionals deciding their case, and applying the higher “fiduciary” standard of care applicable to RIAs and Investment Adviser Representatives. Additionally, if RIA firms choose to arbitrate through FINRA, the decisions will be publically available on the FINRA website.  By contrast, an arbitration conducted by AAA will be private because the decisions in such cases are not posted publicly. 

Conclusion

FINRA’s decision to make its arbitration arm available to RIA firms for resolving disputes with their customers (as well as their departing personnel) offers an intriguing new option for these firms and their professionals.  But RIA firms should retain qualified legal counsel as soon as any customer dispute arises--and before any litigation actually ensues--in order to assess whether it makes sense to propose using FINRA’s arbitration forum given the facts and circumstances of the particular dispute.

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