By Montgomery G. Griffin and Theodore S. Avery
In court, judges are subject to a vast network of state and federal rules and laws that provide instructions on how to conduct—and ultimately decide—the cases before them. If the trial judge misapplies one of these rules or laws (or provides a jury with flawed jury instructions related to the applicable laws), the judge’s action can be appealed to a higher (appellate) court and potentially overturned. Thus, judges are keen to strictly follow and enforce laws, and they have robust guidance—often directly contained in state and federal statutes—on how to go about doing that.
FINRA arbitrators, on the other hand, are far less shackled to state and federal rules and laws. Instead, they are generally bound only to abide by FINRA’s Code of Arbitration Procedure (the Code), which is far less comprehensive and far more open ended than the laws and rules applicable in court. The plain text of FINRA’s Code leaves much to the arbitrators’ and parties’ discretion and provides limited guidance on how to address many issues that regularly arise in FINRA arbitrations.
Fortunately, FINRA does not leave arbitrators with just the Code: FINRA also maintains and distributes the FINRA Arbitrator’s Guide, a nearly 100-page long supplemental guide for arbitrators that provides them counsel on how to interpret and abide by the provisions of the Code, as well as guidance on how to address many issues that frequently come up during FINRA arbitrations.
Arbitration parties routinely cite the FINRA Arbitrator’s Guide, and arbitrators often consult it. Indeed, as counsel to FINRA arbitration parties, Montgomery G. Griffin and Theodore S. Avery reference the Arbitrator’s Guide with regularity. And as a member of FINRA’s Board of Arbitrators since 1996, Montgomery Griffin has sat as an arbitrator at FINRA in various states on approximately 40 arbitration cases, including having served as a Panel Chairperson. In that capacity, Monty himself has treated the Arbitrator’s Guide as authoritative guidance. FINRA itself states to arbitrators, “We encourage you to review the Arbitrator’s Guide, and refer to it frequently during your service in our forum.”
Below are 10 of the most significant things the Law Offices of Montgomery G. Griffin believes investors should know about the directions of the Arbitrator’s Guide:
- Equity should prevail. The Arbitrator’s Guide opens with a quote from Domke on Artistotle, stating, “Equity is justice in that it goes beyond the written law . . . and the reason why arbitrators were appointed was that equity might prevail.” FINRA’s decision to open its guide with this quote reflects both an important truth about arbitration, as well as a key insight into FINRA’s vision for the arbitration process. Arbitrators are far less bound to follow dry principles of law than judges. They are given broad leeway to do as they see fit in arbitrations before them, even if a judge could not act similarly or render equivalent awards. Individual arbitrators vary in how far they go with this discretion—indeed, some follow the law very closely and attempt to recreate court outcomes while others have a reputation of creatively deciding cases. In either event, the flexibility afforded to FINRA arbitrators is a significant difference compared to that afforded to judges in a court of law.
- Various Damages Theories: Arbitrators may consider a variety of remedies, including market-adjusted damages. Brokerage firms frequently argue that customers are entitled to recovery of only the investor’s so-called “net out of pocket losses” (the actual depreciation of the customer’s account) (sometimes called the “NOP”). The Arbitrator’s Guide, however, makes clear that FINRA arbitrators are entitled to consider a variety of remedies, including market-adjusted damages (or what the Arbitrator’s Guide calls “well-managed” damages), which is the difference between how the customer’s account performed and how it would have performed had it been properly managed consistent with the investor’s investment objectives and risk tolerance. Additionally, the Arbitrator’s Guide further provides that FINRA arbitrators can include other types of damages in their Awards, including attorneys’ fees, costs, punitive damages, and financial elder abuse damages.
- FINRA’s eligibility rule is subject to tolling. FINRA Rule 12206 states that where six years have elapsed from the occurrence or event giving rise to an investor’s claim, that claim is not eligible for submission to FINRA arbitration. Brokerage firms routinely argue that this means that claims related to investments purchased over six years prior to the filing of the arbitration are not eligible for arbitration. FINRA’s Arbitrator’s Guide, however, states the contrary. Specifically, the Arbitrator’s Guide states that the “panel determines whether a claim meets the six-year eligibility requirement,” and it gives the panel unfettered discretion in this regard. The Arbitrator’s Guide also specifically explains that the arbitrators “may find that there is a continuing occurrence or event giving rise to the dispute,” giving the example of a stock that was purchased 10 years ago but that was subject to continuing fraud to a time within 6 years of the claim being filed. The Law Offices of Montgomery G. Griffin has frequently been successful—including in a multimillion dollar case against a large Wall Street firm—in arguing that this example applies to churning fact pattern which reach back 10 (or more) years. Thus, the Arbitrator’s Guide plainly demonstrates that disputes related to investments purchased long before six years prior to filing may be subject to FINRA arbitration.
- Senior citizens and seriously ill parties should receive expedited arbitrations. FINRA reminds arbitrators that where a party is a senior (a person 65 years old or older) or seriously ill, special efforts should be made to expedite the arbitration process. Part of this is handled by the FINRA staff, who ventures to expedite their administration of the case (such as by promptly commencing the arbitrator selection process and promptly serving the final award).
- Arbitrators must be neutral and should avoid and disclose conflicts of interest. For arbitration to provide a fair means of dispute resolution, it is critical that arbitrators be neutral and avoid and disclose any conflicts of interest. FINRA embraces this principle wholeheartedly and reminds arbitrators of it in the Arbitrator’s Guide. Failure to abide by this mandate may lead to the removal of an arbitrator, and it can even result in vacatur of an arbitration award.
- Discovery is important, and parties are required to cooperate to the fullest extent practicable in the exchange of documents and information. Exchanging relevant (or potentially relevant) documents and information is an important part of any litigation process, including FINRA arbitration. FINRA reminds arbitrators that the parties are expected to cooperate fully in discovery. In application, parties are expected to conduct diligent searches for required documents and information and timely provide to the opposing party a complete set of copies of those documents and information. Failure to do this or otherwise cooperate in discovery can be a violation of FINRA rules. Indeed, in 2019, Morgan Stanley was ordered by a FINRA arbitration panel to pay an investor a whopping $3 million as a discovery sanction for what the arbitration Panel determined was a purposeful refusal to provide relevant documents to the investor.
- Depositions are permitted under only extraordinary circumstances. Depositions are a mainstay of court litigation, but they are exceedingly rare in FINRA arbitrations. In FINRA arbitration, they are available only in extraordinary circumstances, such as a dying witness, as an accommodation to distant witnesses who are unwilling to travel for the hearing, or the like. From a cost perspective, this is an advantage of FINRA arbitration over court litigation since deposing a witness can be a very expensive event. But it also means that the first time a customer will get to question most witnesses will be at the arbitration hearing. This “one bite at the apple” opportunity to cross examine dishonest financial advisors and their supervisors places a high premium on effective hearing preparation and the need to be represented by counsel familiar with the nuances of the securities industry and FINRA rules which govern the conduct of financial advisors and their supervisors. Attorney Monty Griffin is a former financial advisor, having worked at two of Wall Street’s largest firms for approximately 10 years before completing law school in 1995.
- Permissible information requests are limited. Another marked difference between FINRA arbitrations and court litigation is that requests for information are substantially limited in FINRA arbitrations. In court litigation, parties often serve and field a litany of interrogatories and requests for admission. The only similar discovery device permitted under FINRA arbitration rules are an investor’s ability to make requests for information on the brokerage firm and financial advisor. Such requests for information, however, are generally limited to relevant dates and identities; open-ended requests that seek to probe details behind an opponent’s contentions are prohibited. Again, this has the advantage of saving costs versus court litigation discovery rules, but the relative lack of prehearing information available also complicates hearing preparation—which, once again, amplifies an investor’s need to be represented by skilled lawyers with years of experience working in the securities industry.
- Failure to comply in discovery can lead to (severe) sanctions. The Arbitrator’s Guide reminds arbitrators that they can impose sanctions on parties who fail to comply with their discovery obligations. And, depending on the degree of the party’s lack of cooperation, FINRA arbitrators can invoke severe sanctions. As mentioned above, in 2019, Morgan Stanley was ordered by a FINRA arbitration panel to pay an investor a whopping $3 million as a discovery sanction for its purposeful refusal to provide relevant documents to the investor.
- Arbitration awards are final and binding. Finally, and importantly, FINRA reminds arbitrators that their awards are final and binding. FINRA arbitration parties have no right to appeal arbitrators’ decisions. The closest thing they can do is try to have the arbitrators’ award vacated by an appropriate court, but that is rarely successful and can be based on only very limited grounds. For this reason, it is paramount that parties to FINRA arbitrations put on as compelling a case as possible during the “one bite at the apple” arbitration hearing, as they will not get a second chance with appeal or otherwise. The first, and perhaps most important, step to achieving that is choosing your representation wisely—an issue discussed by Montgomery Griffin in this video
The Law Offices of Montgomery G. Griffin focuses its practice almost exclusively on FINRA arbitrations and has deep expertise, decades of experience, a devoted work ethic, and results that speak for themselves. If you need assistance with a potential FINRA arbitration, you can contact the Law Offices of Montgomery G. Griffin at the link below for a free consultation.