FINRA Rule 13000 Series: Arbitration Procedure for Industry Disputes

Instructor: LeRoy Rands

Bill has taught college undergraduate and MBA classes in finance, economics & management, 40 years of finance experience and has a MBA degree.

Investment firms who are members of the Financial Industry Regulatory Authority (FINRA) often have disputes with each other. FINRA Rule 13000 provides rules and regulations requiring members to arbitrate disputes through FINRA.

FINRA Rule 13000

Mark is a partner at Ultra Financial. Representing the firm, he just filed a claim with FINRA against XYZ Investments who he felt reneged on an agreement to pay Ultra $200,000 on a investment transaction they shared.

The Financial Industry Regulatory Authority (FINRA) is a non-profit agency organized by the investment industry to oversee all the dealings of U.S. investment firms. All U.S. firms have to be members of FINRA. Part of FINRA's activities are to make rules that govern how members are to act.

FINRA Rule 13000 governs all arbitration proceedings between members of FINRA and associated persons or entities of those members. The rule stipulates what disputes are required to be arbitrated and how that arbitration will proceed.

Mark decides to read up on Rule 13000 to make sure that he does everything as he is required.

Arbitration Oversight

The Financial Industry Regulatory Authority is charged with the responsibility of resolving claims between members of FINRA. Two groups have been appointed to assist in carrying out this task.

The FINRA board is responsible for appointing the National Arbitration and Mediation Committee. The National Arbitration and Mediation Committee is made up of 10-25 members of which over 50% have to be non-investment industry persons. The committee reviews and updates the rules and processes for arbitration proceedings.

The Director of the Office of Dispute Resolution is responsible with his staff for accepting claims, managing lists of potential arbitrators and overseeing the whole process of arbitrating claims.

Arbitration Required

FINRA Rule 13000 mandates that all disputes and claims between members of FINRA including associated entities must be settled through arbitration. This means that Mark just can't sue XYZ Investments in court. He has to file a claim with FINRA.

The Rule applies to all disputes except for:

  • Whistleblower suits.
  • Class action suits.
  • Collective actions suits under FLSA, Age Discrimination, etc.
  • Shareholder derivative suits.

In addition, insurance companies who are members of FINRA only need to arbitrate investment disputes, not insurance business disputes. Employment discrimination cases including sexual harassment are not to be arbitrated unless both parties agree to arbitration.

Mark realized that what FINRA intended under Rule 13000 is that arbitration is mostly for action between members and members cannot push workplace discrimination and other types of cases into arbitration to avoid civil action.

Public versus Non-Public Arbitrators

Mark was fairly familiar with FINRA regulations under Rule 12000 for arbitration proceedings that concerned claims by public investors. However, he found it interesting that there were differences in who could act as an arbitrator in institutional arbitration proceedings.

What Mark found was that non-public arbitrators were allowed to arbitrate industry claims, whereas they would be precluded for arbitrating in cases involving claims from the investment public. This distinction between public and non-public arbitrators became important to understand.

Public arbitrators are qualified individuals such as lawyers or accountants who have links to the investment community. You can't qualify as a public arbitrator but can qualify as non-public arbitrators if you are:

  1. associated with a member of FINRA or associated companies.
  2. a lawyer, accountant or other professional who, for over 15 years, has devoted more than 20% of your practice to representing investment firms or representing parties in claims disputes.
  3. involved in securities transactions at a bank or financial institution for over 15 years.

Some people might be temporarily disqualified as public arbitrators because of limited recent work in the investment industry. Vetting by the Director's office ensures that no arbitrator is appointed to a case where there is a conflict of interest.

Procedures of Arbitration

Mark has to follow some procedures under Rule 13000 to file his claim against XYZ Investments. First, he must file a claim on the FINRA Public Portal website by signing a submission agreement, providing the details of Ultra's claim and paying the appropriate fees. All information on the case is available on the Public Portal for all parties involved.

The Director then informs XYZ Investments of Ultra's claim by letter. The Director sets a place for the hearing at a location convenient to the party filing the claim. XYZ has 45 days to respond to Mark's claim with a signed submission agreement and XYZ's response and defense to the claim filed.

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