​FINRA Arbitration 

What is FINRA Arbitration?​​​​

Arbitration is similar to going to court, but is generally faster, cheaper and less complex than litigation. It is a formal alternative to litigation in which two or more parties select a neutral third party, called an arbitrator, to resolve a dispute. The arbitrator's decision, called an award, is final and binding. By arbitrating a claim, you cannot have the same matter decided by a court of law, except in limited circumstances. In resolving disputes through arbitration, a FINRA arbitrator or panel (consisting of three arbitrators) will listen to the arguments set forth by the parties, study the testimonial and/or documentary evidence, and then render a decision. When an arbitration case goes to a hearing, it can take up to 16 months for an award to be determined.

The size of the claim will determine how the arbitration process works. Claims involving more than $100,000 require an in-person hearing decided by a panel of three arbitrators, with one chairing the hearing. Smaller claims are decided by one arbitrator and the smallest—claims of up to $50,000—may be decided through a Simplified Arbitration Process, with the arbitrator deciding the case by reviewing all the materials presented by the parties without an in-person hearing.

FINRA Arbitration has long been used as an alternative to the courts because it is devised as a prompt and inexpensive means of resolving complicated securities related issues. There are certain laws governing the conduct of an arbitration proceeding that must be considered by those planning to use arbitration to resolve the dispute.

Following the Supreme Courts holding in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987), pre-dispute contracts to arbitrate securities claims are strictly enforceable. Any such claims against brokerage firms or their agents, including claims for punitive damages available under state law, are subject to arbitration in accordance with the Code of Arbitration Procedure.
Since nearly all broker/client contracts contain arbitration provisions, FINRA Arbitration is often defrauded investors only recourse against broker misconduct.

What is Broker-Dealer Misconduct?

Broker-Dealer misconduct is an umbrella term that refers to a range of ways a broker can betray the trust of his or her clients. Broker are regulated by FINRA, the SEC (Securities and Exchange Commission), and Federal & State Law. Brokers are obligated to follow professional conduct rules and owe certain duties to their clients. The basic duty that brokers owe to their clients is a “duty of fair dealing.”
The duty of fair dealing is essentially a duty to disclose all facts relating to an investment and conflicts of interest, ensure investments are suitable relative to a client risk tolerance, and charge fair market rates. Brokers have many professional duties imposed on the broker-client relationship, including:

  • Making suitable recommendations
  • Making fair and balanced risk disclosures
  • Managing a client’s investment portfolio
  • Disclosing conflicts of interest
  • Researching financial markets
  • Monitoring clients’ investments
  • Reporting information to clients

Types of Broker Misconduct

  • Excessive Trading
  • Unsuitable Investments
  • Churning
  • Fraud, Misrepresentation, or Omissions
  • Unauthorized Trading
  • Over-Concentration
  • Excessive Use of Margin
  • Broker Negligence
  • Failure to Supervise
  • Violations of The Securities Act of 1933, The Exchange Act of 1934, The Investment Company Act of 1940, The Investment Advisers Act of 1940, Pennsylvania’s Blue Sky Laws, FINRA and SEC Regulations

Types of Investments

Investments may help you achieve your long-term financial goals. Investing your money opens the possibility of a benefit in the future, called a return. Most people have heard of stocks and bonds, but these are just two of many different ways you can invest your money.
Most first-time investors work with a financial adviser or stockbroker to understand what types of investments are suitable for their objectives, risk tolerance, and financial needs. Understanding which investments are available will help you choose the correct ones for your account and develop a healthy, diversified portfolio.

When you invest in a stock, you share ownership with a corporation. The success or failure of the company determines whether you lose or make money on a stock. Other factors also affect your stock investment, such as what type of stock you own and the stock market’s performance as a whole. There are two kinds of stock: common and preferred. Publicly traded companies issue common stock, where stockholders’ share prices rise and fall with the company. Some companies issue preferred stock, which exposes clients to less risk of loss but also less potential for returns.

Bonds are loans that investors make to a government or corporation in exchange for interest payments plus repayment of the principle over time. The investor agrees to loan an organization money in exchange for compensation in the form of interest. By the bonds’ maturity date, the organization must pay the principle amount plus interest. Bonds may be short-, medium-, or long-term, depending on the maturity date. There are many types of bonds, but the most common are:

  • Treasury securities
  • Savings bonds
  • Agency securities
  • Mortgage-backed securities
  • Municipal bonds
  • Corporate bonds
  • International market bonds
  • Investment Funds

Investment funds use money from many investors to invest according to a strategy. Investment funds brokerage firms offer to the public include mutual funds, closed-ends funds, exchange-traded funds, and unit investment trusts. These publicly offered funds must register with the Securities and Exchange Commission. Private investment funds, or hedge funds, do not have to register and thus aren’t subject to the same regulations. Investment funds offer diversification, but they also involve risk.
Structured Products
Generally, a structured product is a pre-packaged investment that incorporates indices, bundled securities, foreign currencies, or other derivatives. Derivatives are investments that take their value based on how an underlying entity performs in the market. They may offer investors a “principal guarantee” – meaning they will protect your principal on the condition that you hold the securities until maturity.
There are different types of structured products, and they have many risks for investors. Because they’re not considered special assets, they are not protected if the issuer becomes insolvent. If you are considering investing in a structured product, it’s important that your broker provide you with comprehensive information on the issuer’s credit and financial situation. Your financial advisor should also keep you well informed of the risks around liquidity, market risks, and currency risks for any structured product investment.

Investment Fraud
Even if you do your due diligence, it is still possible to fall prey to fraudulent investment practices. Investment fraud can also include:

  • Hedge Fund Fraud
  • Private Placement Fraud
  • Oil and Gas Fraudulent Investments
  • Preferred Stock Shares Fraud
  • Junk Bonds Fraud
  • Ponzi Schemes Fraud
  • Puerto Rico Bond Fraud
  • Variable Annuity Investment Fraud

If you have suffered investment losses as a result of your broker’s misconduct, then you may have a claim to recover those losses through FINRA Securities Arbitration. Attorney Chad Ostrosky can help investors recover investment losses anywhere across the nation.

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