Mediation and Arbitration

Arbitration, a form of alternative dispute resolution, is a technique for the resolution of disputes outside the court system.  The parties to a dispute refer it to arbitration by one or more persons and agree to be bound by the arbitration decision.

Most account agreements between broker-dealers and their customers have arbitration clauses.  The arbitration clauses usually require customers to arbitrate any disputes with the broker-dealer.  They also usually prevent customers from suing broker-dealers in court.  If no agreement to arbitrate exists, a broker-dealer may not compel its customer to arbitrate.  However, FINRA’s Code of Arbitration Procedure allows a customer to compel a broker-dealer or person associated with a broker-dealer to arbitrate a dispute at the customer’s request. 

Arbitration, like a lawsuit in court (litigation), offers a final means of resolving a dispute.  However, it is different from litigation in significant ways.  For instance: 

  • Instead of a judge or jury, the parties select a neutral arbitrator or panel of arbitrators to decide if wrongdoing occurred and, if so, how to compensate the wronged party for it. 
  • As in litigation, an arbitration decision is binding on the parties.  Unlike in litigation, however, arbitration decisions can only be appealed on limited grounds.  Thus, arbitration decisions are unlikely to be overturned.
  • Arbitrators are not bound by legal precedent, and are not required to follow state or federal rules of evidence.  However, FINRA arbitrators must follow FINRA’s Code of Arbitration Procedure.
  • In contrast to litigation, the documents and evidence submitted in arbitration are not publicly available. 
  • The tools used to gather evidence in arbitration are more limited than in litigation. 
  • Arbitration may be cheaper and quicker than litigating a dispute in court. 

Mediation, another form of alternative dispute resolution, is a voluntary, non-binding process that allows parties to work with a neutral mediator to try to quickly resolve differences.  Prior to the outset of mediation, the parties must consent to mediate by written agreement, such as the FINRA Mediation Submission Agreement, and to be bound by a specific procedural code, such as the FINRA Code of Mediation Procedure.  The mediator may either be selected by the parties or by the Director of Arbitration for FINRA.

 

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