Securities dispute resolution: Deciding whether to file an arbitration claim

 

Most retail investors must sign arbitration agreements when they open investment accounts with their brokers.  Consequently, they are required to submit any disputes with their broker to arbitration.  This page offers factors to consider for investors who must arbitrate.

Arbitration decisions are final and binding, subject to review by a court only on a very limited basis.  Deciding whether to file an arbitration claim can be complex.  Before filing an arbitration claim, one should consider various factors and perform a cost-benefit analysis.  This page outlines four important factors.  These factors are not exhaustive and should be used for informational purposes only.

 

1. Costs
Costs alone can make the process prohibitive for small claims.  The Financial Industry Regulatory Authority (FINRA) imposes the following fees that must be paid to start and continue the arbitration process:

  • Filing fees for filing claims (Filing fees for small claims range from $50 to $600).
  • Injunctive claim fees for claimants seeking injunctive orders to prevent the other parties from engaging in certain conduct
  • Hearing session fees for meetings, such as a prehearing conference and hearing, between the parties and arbitrator
  • Adjournment fees for postponement of hearings after the appointment of arbitrators
  • Amended claim fees for increasing the claimed amount in dispute
  • Hearing process fees for the allocation of a time and place of the first hearing
  • Respondent fees for filing counterclaims, cross claims, and third party claims
  • Arbitrator compensation fees “for issuing decisions on discovery-related motions on the papers” and “for deciding contested subpoena requests.”

There are also other FINRA fees related to various steps of the arbitration process.  FINRA offers a calculator to help the filing parties estimate their filing fees and hearing session fees.  Some fees may be waived for people with financial difficulties. Claimants may submit a written request for a fee waiver.

At the end of the arbitration process, the arbitrators have the authority to decide on the allocation of the costs of fees between the parties.  For example, they may split the costs in half, or have one party bear the burden of the entire process.

In addition, the parties should to consider costs related to legal assistance by their attorneys and the hiring of experts to substantiate the claims.  They will further incur costs in the discovery process, securing witnesses, and many other tasks that are required to support their claims and defenses.

In deciding to arbitrate, parties should conduct this cost analysis before filing any claims.  If the costs far exceed the relief sought, the party may choose to use negotiation or mediation processes for the settlement of the dispute.

2. Privacy
A party may decide against arbitrating merely because of the nature of the process.  While arbitration is a confidential process, parties may be forced to reveal private information to the other side.  This information may not only relate to the finances of the parties or the disputed event, but also to criminal records, family relations and many other issues that may be disputed in front of the arbitrators.

3. Duration
Parties must decide whether they are willing to wait through the arbitration process.  Arbitration cases vary in their length.  When a case settles, it commonly takes just over a year.  When parties proceed to a hearing, their case typically takes about sixteen (16) months.  Simplified decisions are often reached in less than a year.  The arbitration process, however, is generally quicker than litigating the case in court.

4. Likelihood of Recovery
A party should consider the ability of the other party to pay if relief is granted.  If the broker or brokerage firm goes out of business or declares bankruptcy, the claimant may not be able to recover even if they received a favorable award. 


While costs associated with the aforementioned factors may be high, parties should understand that about 80% of arbitration cases end with a settlement between the parties either through direct negotiation or through mediation.  Settlement is not guaranteed.  Before arbitrators decided on cases, about 10% of the cases are withdrawn or closed without settlement by the parties or through mediation.  Customers were awarded damages in about 43% of cases, though it is unknown what percentage of their losses are recovered.  These statistics are based on cases that occurred between 2014 and 2018.  FINRA provides a summary of dispute resolution statistics.

 

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