A more thorough explanation:
When investors open investment accounts with brokers, they are often required to sign arbitration agreements. This means that any disputes with their broker must be submitted to arbitration. Before filing an arbitration claim, investors should consider various factors and perform a cost-benefit analysis.
There are four important factors to consider before filing an arbitration claim:
- Costs: The costs of arbitration can be prohibitive for small claims. The Financial Industry Regulatory Authority (FINRA) imposes various fees that must be paid to start and continue the arbitration process. These fees include filing fees, injunctive claim fees, hearing session fees, adjournment fees, amended claim fees, hearing process fees, respondent fees, and arbitrator compensation fees. Parties should also consider costs related to legal assistance by their attorneys and the hiring of experts to substantiate their 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.
- Privacy: 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.
- 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.
- 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 these 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 Before arbitrators decide on cases, about 10% of the cases are withdrawn or closed without settlement by the parties or through mediation.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.
For example, if an investor believes that their broker has engaged in fraudulent activity, they may consider filing an arbitration claim. However, they should first consider the costs of the arbitration process, the privacy implications of revealing private information, the duration of the process, and the likelihood of recovery if they win the case.