Arbitration
The securities arbitration framework has served investors and firms effectively for more than five decades. Established in 1972, this system provides an accessible, efficient, and fair mechanism for resolving disputes, supported by robust oversight and continual improvement.
The Financial Industry Regulatory Authority (FINRA) administers nearly all securities arbitration cases in the U.S. — a system built on investor protection, transparency, and due process.
Arbitration is overseen by FINRA, the SEC, and state regulators, with rules designed to ensure fairness and accessibility for investors.
As affirmed by the U.S. Supreme Court in Shearson/American Express v. McMahon (1987), securities arbitration is generally less costly, more expedient, and just as fair as litigation in the courts.
FINRA’s rules and processes have evolved continually to enhance investor protections and modernize procedures, from discovery practices to panel selection and motion rules.
Key Focus Areas
Ensuring Investor Protections
FINRA’s arbitration forum incorporates safeguards comparable to court-based litigation:
- Hearings are held where the investor lived when the events occurred.
- Claim filing fees and processes favor investors, saving time and cost.
- Investors can choose an all-public arbitration panel.
- Strict limits apply to motions to dismiss, and frivolous motions may be sanctioned.
- All awards are public and enforceable, with searchable data available online.
Maintaining a Fair and Accessible Process
Most broker-dealers include arbitration clauses in customer agreements to:
- Provide clarity and certainty about how disputes will be resolved.
- Offer a lower-cost, faster, and fairer forum than traditional courts.
- Manage costs to maintain affordable access to financial services.
This framework ensures both firms and customers understand the process before disputes arise, providing stability and predictability for all parties.
Continuous Improvement and Oversight
FINRA, in coordination with the SEC, state regulators, and industry stakeholders, regularly reviews and enhances arbitration procedures. Reforms over time have strengthened fairness and accessibility in areas such as:
- Punitive damages
- Discovery and motion practice
- Arbitrator selection and bias standards
- Panel composition and award enforcement
The Risks of Eliminating Arbitration
Proposals to ban mandatory arbitration overlook the benefits investors currently enjoy. Eliminating arbitration clauses would effectively dismantle this well-functioning system, forcing disputes into lengthier, more expensive litigation — contrary to the interests of retail investors.
The Bottom Line
FINRA-administered arbitration provides an efficient, fair, and investor-friendly alternative to the courts. It remains subject to multiple layers of oversight, transparency, and continual improvement.
Preserving the enforceability of arbitration agreements is essential to maintaining timely, affordable, and equitable dispute resolution for millions of investors and the firms that serve them.