• Tips for Successful Mediation of Broker-Dealer/Customer Claims
  • June 13, 2008 | Author: Holly Stein Sollod
  • Law Firm: Holland & Hart LLP - Denver Office
  • Early on in the arbitration process, the parties will be asked by the Financial Industry Regulation Authority (“FINRA”) if they want to mediate the dispute.  This article discusses the factors to consider in deciding whether to mediate and the steps to take towards a successful mediation.

    Should You Mediate?

    Mediation is a non-binding negotiation in which a trained experienced and independent neutral helps the parties reach a mutually acceptable resolution of their dispute.  The mediator does not impose his or her ruling on the case.  Mediation can reduce lawyer fees and minimize the risk of an adverse judgment in an arbitration.  Most mediations last only a day, with possible follow-up by telephone if needed.  A trained mediator meets with one side and then the other, trying to reach a compromise.  In the process, the mediator often shares his or her view of the parties’ potential exposure.  The actual process varies from case to case and with the mediator’s style.

    Both brokerage firms and investors have a common incentive to mediate—uncertainty.  The arbitration panel usually consists of three arbitrators.  Predicting whether the arbitration panel will find that 100% of the fault lies with the broker or the customer is impossible.  And even if the customer has a strong case, the amount of recoverable damages is unpredictable.  The parties often bring widely differing ideas to the table about the “value” of the case.  A mediator can bring some reality to the mix, creating doubt in both parties’ minds.

    Most importantly, mediation is voluntary and neither side must accept an unwanted resolution.  The FINRA arbitration process proceeds during the mediation, unless the parties agree otherwise and is only terminated if a settlement is reached.  The mediator focuses the parties on the consequences of not settling, diffuses hostility, and helps the parties assess the strengths and weaknesses of their positions.

    Finally, there is something about the process that works far better than conducting settlement negotiations without a neutral mediator.  It may be the sense of control that mediation affords the parties, as they control the process, scheduling, costs and the outcome of the dispute.
    At What Stage Should You Mediate?

    Parties can mediate before a formal filing of a claim or pleading in arbitration.  Mediation can also be started at any stage of the arbitration process.  FINRA encourages mediation by allowing the parties to choose whether to mediate concurrently with the arbitration process.  If no hearing dates have been scheduled, the parties can agree to make their arbitration inactive pending mediation.  Parties can agree to adjourn an arbitration date with no hearing adjournment fee if they mediate using FINRA. 

    Many lawyers and their clients take the position that mediation should occur as close to the date of the arbitration as possible to create the most pressure on the parties.  However, there are many circumstances in which this approach fails.  Brokerage firms are keenly aware of the cost of fighting a serious arbitration claim.  The ability to save expert and legal fees by settling early factors into the amount firms will ultimately offer in settlement.  Therefore, mediating early in the process may increase the funds available for settlement.

    How to Choose the Right Mediator

    FINRA provides its own mediation program to public customers, member firms and associated persons.  The FINRA mediators are independent neutrals, not employees of FINRA.  At FINRA, the parties will receive a list of mediators available in the area with summaries of each person’s background, experience and prices.  All parties must agree to the selection of the mediator before he or she is assigned to a case.  The parties may agree to use a non-FINRA mediator.  There are private mediators who charge $1,000 a day and those that charge $250 a day.  The amount a mediator charges does not always reflect his or her skills as a mediator.  The best mediators make the parties feel heard; do not rush things; and show respect for the participants.  Mediators have different styles.  Ask to talk to their references and ask other lawyers for recommendations.  Finding a mediator that specializes in securities law and industry practices is worth the effort.

    How to Prepare for the Mediation

    The mediator will ask for information to help him or her understand the issues and the positions and interests of the parties.  A confidential mediation letter is usually also requested by the mediator.  This mediation letter is an important document for the mediator.  Some mediators even ask the parties to set forth the major case strengths and weaknesses in the letter, clearly focusing the parties on the facts, not just their advocacy skills.  The letter should also set forth any prior settlement negotiations between the parties.  Materials are kept confidential by the mediator unless the parties instruct otherwise.  Mediators can also contact the parties to learn more about the case prior to the session. 

    What to Expect at the Mediation

    The mediator will usually ask to see all the parties and counsel in one room at the start of the mediation, where he or she will provide introductory remarks that may include items such as the mediator’s style of mediating, and a brief explanation of the process he or she intends to follow throughout the day.  Practitioners disagree on the value of opening statements.  Some claim you should never waive opening statements since it allows you to talk to the other party directly.  Since often this is the first time the clients hear the opposing side’s arguments, it serves to educate the parties as to the other side of the story.  Others argue that opening statements only serve to harden the positions of the parties and make compromise more difficult.  If opening statements are pursued, each party’s attorney will briefly describe the facts, liability and damages from his or her own perspective.  The customer’s counsel usually goes first, followed by counsel for the broker or brokerage firm.  The parties usually do not comment during the opening statement, although they are free to do so if both sides agree.  There is no sworn testimony and no cross-examination.  No record is made of the mediation sessions and the mediator may not disclose anything said during the mediation in any other proceeding, unless authorized by all parties or compelled by law.

    In customer dispute mediations, the mediator will then ask the brokerage firm, the broker and their counsel to go to a separate room while the mediator remains with the customer and counsel.  One technique that experienced mediators employ is to “interview’ the customer about his or her claim, asking him or her to tell his or her story in his or her own words, without a lawyer’s interruptions.  In this way, the mediator develops a feel for the credibility, likeability and honesty of the customer.  But more importantly, a good mediator spends time getting to know the customer, so that in the end, the customer feels that his or her factual allegations were fully heard and understood by the mediator.  Counsel for the customer will then apply the law to the facts in response to follow-up questions by the mediator.

    Once the mediator finishes this initial meeting with the customer and counsel, he or she will engage the brokerage firm, the broker and their counsel.  Most brokerage firms also bring a “business person” to the mediation.  The branch manager may also attend to discuss any issues of supervision that may be involved in the case.  Once again the mediator will “interview” the broker or branch manager involved about the firm’s version of the facts and then discuss the law with counsel.

    From that session on, the mediator will conduct “shuttle diplomacy” between the rooms engaging each side in a confidential discussion regarding the issues and the strengths and weaknesses in both sides’ positions.  At some point the mediator will seek a demand or offer to start the negotiation of a settlement figure to be communicated to the other side.  The mediator will bring the offers and counter-offers to the parties, usually along with some rationale provided by the parties.  While it often seems impossible to bridge the gap between offer and demand, especially at the beginning of a mediation day, the process works remarkably well.

    At some point in the day, if negotiations stall, the mediator may suggest a direct meeting between the principals.  The mediator’s job is to facilitate the negotiation, reminding the parties of the risk of pursuing the case to hearing and award.  The process takes time and often lasts into the late afternoon or evening.  If a settlement is not reached during the mediation, the mediator may agree to continue to work with counsel after the mediation.

    If a settlement is reached, a written settlement agreement will be drafted.  One tip I learned a while ago is to remember is to bring a draft settlement agreement to the mediation on my laptop.  Drafting the document can take some time and if the parties are too tired at the end of the day, it may lead to buyer’s remorse.  If that is not possible, the parties may sign a memorandum of understanding of essential terms at the close of the mediation.  The settlement is only final and binding once the agreement is signed.


    Statistics from FINRA claim that 80% of the cases submitted to their mediation program settle.  Experts attribute this success rate to the parties’ control over the process, costs and outcome.  When the parties are motivated and the mediator is skilled, the process works brilliantly.