For brokers, a clean disciplinary is imperative to ensure continued employment as well as retention of clients. What do you do when an allegation of wrongdoing has been made against you? It is important to remember that just because a claim has been filed, it does not guarantee action will be taken or that it will appear on one’s disciplinary history. There are multiple ways that allegations are adjudicated.
FINRA is the Financial Industry Regulation Authority. All brokers and firms that sell securities in the United States must register with FINRA. FINRA monitors and supervises broker-dealer risk management as well as investigates allegations of customer harm. Based on the outcome of their investigation, FINRA has the power to fine, suspend, or bar brokers from the industry. As a general rule, FINRA tailors each instance of discipline to the particular misconduct alleged. Additionally, FINRA will consider approximately twenty other factors in determining sanctions, including but not limited to: (1) a broker’s disciplinary history; (2) whether responsibility was acknowledged and/or if corrective measures were taken; (3) whether the respondent participated in numerous acts or has a pattern of misconduct; (4) whether the respondent attempted to conceal the misconduct; (5) whether the respondent cooperated with FINRA’s investigation; (6) whether there were prior warnings from FINRA; (7) whether there was a monetary gain; (8) whether the respondent exercised undue influence over the customer; and (9) the number, size, and character of the transactions at the time.
FINRA publishes Sanction Guidelines which categorizes various acts of misconduct, monetary sanctions based on whether it is a first or repeat offense, as well as other possible sanctions. The sanction guidelines are not mandatory and can be adjusted upward or downward depending on the circumstances surrounding the allegation. Additionally, violations may be aggregated or “batched”. This means that multiple violations will be treated as just one violation. Violations are aggregated when: (1) the violation or conduct was unintentional or negligent; (2) the conduct did not result in injury to the public or investors, or if there was an injury to the public and restitution was made; or (3) the violation resulted from a single, systemic problem that has since been corrected.
Complaints can be adjudicated in several ways, including mediation, arbitration, or hearing. Mediation is the fastest and least costly options. On average disputes are resolved within three months with the mediation session itself lasting only one day. To institute a mediation, a party simply needs to reach out to FINRA to request a mediation. This can be done at any time before or after a claim has been filed. If a claim has already been filed, it will be placed on hold until after the mediation has been completed or upon request from a party. FINRA will then reach out to the other party to ascertain if they are amenable to mediation. If they are, FINRA will provide a list of mediators with their credentials for the parties to select from. These mediators are neutral third parties and are not employees of FINRA. Once the parties select a mediator, FINRA will send a Medication Submission Agreement which outlines the terms for mediation, including the payment of fees. These terms are negotiable. After, the parties submit written statements and inform the mediator of their goals and bottom lines for resolving the matter. After that, the mediation is scheduled. The mediation itself consists of (1) introductions and opening remarks by the mediator; (2) statement by the Claimant’s as to his or her position; (3) statement by the Respondent as to his or her position; and (4) private meetings between the mediator and the parties. If the mediation is successful, then the parties will draft and sign a settlement agreement. If it is unsuccessful, the parties can file an arbitration case or a formal complaint.
Another avenue for adjudication is arbitration. Arbitrations are final and binding and the right to appeal is reserved for very discrete circumstances. To participate in an arbitration, the Claimant first must submit (1) a statement of claim describing the disputes, parties, and amount of money at issue; (2) FINRA Submission Agreement listing the parties and confirming that FINRA will administer the claim; and (3) filing fee. FINRA will then notify the Respondent of the claim. The Respondent must submit a response and defenses to the claim within forty-five days of notice. Next, the parties select the arbitrator(s). If a claim is for less than $50,000, it qualifies for the Simplified Arbitration Process. In the Simplified Arbitration Process, decisions are rendered based on the written submissions of the parties and no formal hearing is required. If a claim is for more than $50,000, but less than $100,000, one arbitrator will preside over the hearing. For claims over $100,000, a panel of three arbitrators will be appointed and the parties will have the option of choosing whether the arbitrators will be non-public arbitrators. Non-public arbitrators are arbitrators who have no connection to the securities industry. After the arbitrators are selected, a prehearing conference will occur. At the prehearing conference, the arbitrators, attorneys, and any self-represented parties discuss potential procedural issues, the possibility of participating in a mediation, and scheduling. Following the prehearing conference, the parties will engage in the discovery process, whereby the parties will exchange documents relevant to the issue. FINRA provides a discovery guide describing the types of discovery to request depending on the issue. The last step in the process is to have a hearing. The arbitration hearing follows the same format as a court hearing: (1) the parties present opening statements; (2) evidence is presented; (3) closing arguments are held; (4) rebuttal arguments are made, if needed. The average length of a hearing is four days. After the conclusion of the hearing, the arbitrator will issue a written statement within thirty days.
FINRA does not have an appeals process to challenge an arbitration award. Thus, arbitration decisions are not appealable, except in limited, discrete circumstances. The only time arbitration awards are appealable is if circumstances arose which would make the award governed by state or Federal law. Such circumstances include: (1) the award was procured through fraud, corruption, or undue means; (2) there was partiality or corruption of the arbitrators; (3) the arbitrators were guilty of misconduct in refusing to postpone a hearing in light of sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or any other misbehavior of the arbitrators resulting in the rights of a party being prejudiced; (4) the arbitrators exceeded their powers or so poorly executed them that a mutual, final, and definite award of the subject matter was not made; (5) the arbitrators disregarded a clearly defined law or legal principal; or (6) there is no factual or reasonable basis for the award.
If you believe that the hearing panel’s decision was erroneous, you have the option of filing an appeal to the National Adjudicator Council to challenge the decision. The National Adjudicator Council will review the file to determine if the findings are legal correct, factually supported, and consistent with FINRA’s Sanction Guidelines. While the appeal is pending, the sanctions will not be enforced. The National Adjudicator Council’s decision can also be appealed. It can first be appealed to the Securities and Exchange Commission and then to Federal Court.
Whether you should proceed with a mediation, arbitration, or hearing or if you have grounds to appeal a decision, largely depend on the specific facts and circumstances of your case. The attorneys at Maya Murphy will provide you with zealous representation as your case proceeds through each stage of the process. For a free consultation, please do not hesitate to call the experienced attorneys at Maya Murphy, P.C. in Westport, CT at 203-221-3100.