What Is an Adjudication?

An adjudication is a legal ruling or judgment, usually final, but can also refer to the process of settling a legal case or claim through the court or justice system, such as a decree in the bankruptcy process between the defendant and the creditors.

Normally, an adjudication represents the final judgment or pronouncement in a case that will determine the course of action taken regarding the issue presented. Outside of a legal process, adjudication can also more generally refer to other formal processes of judgment or ruling that render a final decision, such as the process of validating an insurance claim.

Understanding Adjudication

Adjudication describes the legal process that helps expedite and deliver a court’s resolution regarding an issue between two parties. The result of the process is a judgment and court opinion that is legally binding. Most adjudication hearings center on disputes that involve money or nonviolent infractions and result in the distribution of rights and obligations for all parties involved.

This legal process differs from other justice-seeking or evidence-based court cases. It is instead used to settle disputes between private parties, political officials and a private party, and public bodies and public officials. In the healthcare industry, for example, adjudication can determine a carrier’s liability for monetary claims submitted by an insured person.

Adjudication Disputes

The types of disputes handled or resolved through adjudication include the following:

• Disagreements between private parties, such as single-persons, individual entities, or corporations
• Disagreements between private parties and public officials
• Disagreements between public officials and/or public bodies

Requirements for full adjudication include requisite notice to all interested parties (all legally-interested parties or those with a legal right affected by the disagreements) and an opportunity for all parties to have their evidence and arguments heard.

The Adjudication Process

Formal rules of evidence and procedure govern the process where the initiating party, or trier, gives a notice establishing the facts in controversy and defines any applicable laws. The notice also sometimes outlines the nature of the dispute between the parties and recounts where and when the dispute occurred, and the desired result based on law. However, there are no specific requirements regarding the notice of adjudication.

An adjudicator is then appointed and a notice is sent to the defending party, who responds by submitting a defense to the claim of adjudication by the plaintiff. The adjudicator gives the plaintiff and defendant a chance to present their arguments at a hearing and makes a final ruling. This is not too dissimilar from an arbitrator in an arbitration hearing settling a business dispute.

What Is Arbitration?

Arbitration is a mechanism for resolving disputes between investors and brokers, or between brokers. It is overseen by the Financial Industry Regulatory Authority (FINRA), and the decisions are final and binding. Arbitration is distinct from mediation, in which parties negotiate to reach a voluntary settlement, and decisions are not binding unless all parties agree to them.

Arbitration is not the same as filing an investor complaint, in which an investor alleges wrongdoing on the part of a broker, but has no specific dispute with that broker, for which the investor seeks damages.

How Arbitration Works

In practical terms, arbitration is similar to a lawsuit but may be preferable for all parties due to the lower costs and time commitments involved.

When an investor or broker has a specific dispute with a broker that is registered with FINRA, they may file a claim with FINRA that states the alleged misconduct and the amount of money they are seeking in damages.

FINRA will appoint a panel of three financial industry professionals who, unless the injured party requests otherwise, will not be employed in the securities industry. This is intended to eliminate bias, but if one of the parties suspects that a member of the panel is biased, they may request a change.

Arbitration Hearings

For disputes involving less than $50,000, in-person hearings are not considered necessary; rather, both parties submit written materials to a single arbitrator who decides the case. For disputes ranging from $50,000 to $100,000, in-person hearings with a single arbitrator are the most common.

For disputes over $100,000, in-person hearings with three arbitrators are standard. A majority of the three-arbitrator panel (that is, two people) is necessary for a decision. Arbitrators are not required to explain their decision.

Parties filing for arbitration may represent themselves, or they may hire an attorney. In general, arbitration panels are less formalistic than the court system, so investors have a reasonable chance of being successful even when representing themselves.

Special Considerations

Arbitration panels do not necessarily award the full amount sought in a dispute. For example, if an investor files a claim against his or her broker for $38,000, the panel may decide in the investor’s favor, but only award $10,000.

Arbitration decisions are binding and not subject to appeal, except under very limited circumstances. FINRA’s mediation process, on the other hand, is not binding unless both parties agree to the settlement.

The Public Investors Arbitration Bar Association has criticized FINRA for lack of diversity on its arbitration panels and lax safeguards against bias and conflicts of interest. The regulator has argued that these criticisms are misplaced, particularly the focus on arbitrators’ age.

In their terms of service, most brokers require investors to agree to mandatory arbitration to settle potential disputes, rather than going to court. Since FINRA has a near-monopoly on arbitration, the organization’s panels are many investors’ only recourse.

What Is Agency Theory?

Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents.

Understanding Agency Theory

An agency, in broad terms, is any relationship between two parties in which one, the agent, represents the other, the principal, in day-to-day transactions. The principal or principals have hired the agent to perform a service on their behalf.

Principals delegate decision-making authority to agents. Because many decisions that affect the principal financially are made by the agent, differences of opinion, and even differences in priorities and interests, can arise. Agency theory assumes that the interests of a principal and an agent are not always in alignment. This is sometimes referred to as the principal-agent problem.

By definition, an agent is using the resources of a principal. The principal has entrusted money but has little or no day-to-day input. The agent is the decision-maker but is incurring little or no risk because any losses will be borne by the principal.

Financial planners and portfolio managers are agents on behalf of their principals and are given responsibility for the principals’ assets. A lessee may be in charge of protecting and safeguarding assets that do not belong to them. Even though the lessee is tasked with the job of taking care of the assets, the lessee has less interest in protecting the goods than the actual owners.

Areas of Dispute in Agency Theory

Agency theory addresses disputes that arise primarily in two key areas: A difference in goals or a difference in risk aversion.

For example, company executives, with an eye toward short-term profitability and elevated compensation, may desire to expand a business into new, high-risk markets. However, this could pose an unjustified risk to shareholders, who are most concerned with the long-term growth of earnings and share price appreciation.

Another central issue often addressed by agency theory involves incompatible levels of risk tolerance between a principal and an agent. For example, shareholders in a bank may object that management has set the bar too low on loan approvals, thus taking on too great a risk of defaults.

Reducing Agency Loss

Various proponents of agency theory have proposed ways to resolve disputes between agents and principals. This is termed “reducing agency loss.” Agency loss is the amount that the principal contends was lost due to the agent acting contrary to the principal’s interests.

Chief among these strategies is the offering of incentives to corporate managers to maximize the profits of their principals. The stock options awarded to company executives have their origin in agency theory. These incentives seek a way to optimize the relationship between principals and agents. Other practices include tying executive compensation in part to shareholder returns. These are examples of how agency theory is used in corporate governance.

These practices have led to concerns that management will endanger long-term company growth in order to boost short-term profits and their own pay. This can often be seen in budget planning, where management reduces estimates in annual budgets so that they are guaranteed to meet performance goals. These concerns have led to yet another compensation scheme in which executive pay is partially deferred and to be determined according to long-term goals.

These solutions have their parallels in other agency relationships. Performance-based compensation is one example. Another is requiring that a bond is posted to guarantee delivery of the desired result. And then there is the last resort, which is simply firing the agent.