The Financial Industry Regulatory Authority (FINRA), which is the largest independent securities regulator in the United States, arbitrates securities-related cases that meet the following criteria: For disputes with investors, the dispute involves an investor and an individual or corporate entity registered with FINRA. Examples include cases between investors and brokers or brokerage firms. For disputes between business parties, the dispute is between individuals or corporate entities registered with FINRA, such as cases between brokers or brokerage firms.
The claim must be filed within six years of the dispute arising. Brokerage firms usually have legal representation during the arbitration proceedings, and individuals should consider hiring an attorney to provide both direction and advice.
FINRA will arbitrate disputes involving claims of insider trading, fraud, market manipulation, record-keeping violations, and related offenses. If a broker raises a dispute involving employment discrimination or sexual harassment, FINRA will only arbitrate it if both parties agree.
FINRA observes and enforces a series of trade-related practice rules to ensure that business professionals act in the interest of their customers. FINRA members are prohibited from the following activities and practices:
● Insider trading: passing on nonpublic information
● Trading ahead of customer limit orders
● Front-running (buying or selling a security while in possession of nonpublic information about an imminent block transaction)
● Coordinating prices, trades, or trade reports with other members
● Influencing another member to adjust a price or quotation
● Mishandling customer funds
● Selling securities without processing the order through one’s firm
Penalties imposed by FINRA include fines, suspension of one’s registration, and a permanent ban from holding a job in the industry. If member misconduct also breaches state and federal laws, the appropriate authorities will be notified.
Successful defense in an FINRA violation / arbitration case varies depending on the alleged offense. Examples include proving that a securities sale met the investment objectives of the customer, that customer losses were market-related, or a brokerage firm exercised a reasonable level of supervision over a dishonest employee.
The Investor Protection Bureau enforces the New York State securities law, commonly known as the Martin Act. Unlike federal regulatory schemes, proof of intent to deceive is not required for a conviction. On the federal level, the Securities Exchange Commission and National Association of Securities Dealers may find individuals or corporations found guilty of securities fraud and instigate proceedings that can result in prison sentences of up to 20 years.
In February 2013 FINRA fined LPL Financial LLC $400,000 for failing to maintain a mandatory supervisory system over the timely delivery of mutual fund prospectuses to customers. LPL was required to provide mutual fund clients with a prospectus no later than three business days after the fund’s purchase. FINRA found that LPL did not have a proper supervisory system in place to confirm that the prospectuses were actually delivered to customers as required by Section 5 of the Securities Act of 1933.