Arbitration is the most often used forum to settle securities disputes between investors and their stockbrokers. Arbitration, an alternative dispute resolution process, uses impartial and knowledgeable arbitrators to settle a dispute outside of the court system.

Arbitration Agreements

While investors cannot be forced to arbitrate their securities claims unless they are contractually bound to do so, most customer agreements in the brokerage industry do contain pre-dispute arbitration agreements that require the investors to arbitrate their disputes with their stockbrokers. Once a securities dispute is resolved through an arbitration proceeding, an arbitration award is final and binding, and the grounds for appealing the award are very limited.

Types Security Claims

Arbitration can cover all types of investments, and some of the typical securities claims that are handled in proceedings include:

• Claims for bad advice
• Misrepresentation
• Stockbroker misconduct
• Churning (excessive trading to generate stockbroker commissions)
• Unauthorized trading
• Investment fraud
• Failure to follow an investor's instructions

Efficient and Cost Effective

Arbitration is usually more efficient and cost-effective than a court proceeding. Securities arbitration claims typically take about one year to complete and are decided at a hearing, while securities claims decided by a court may take years to be resolved. Although securities arbitration takes place outside of the courts, it is a formalized and specialized procedure, and there are rules that govern the arbitration proceeding and hearing.

National and State Regulation

The Security and Exchange Commission (SEC) is the federal agency charged with enforcing federal securities laws. One of the main goals of the SEC is to protect investors from fraud and sales abuses, and it also maintains fair and efficient markets and facilitates capital formation. However, the SEC does not usually seek to obtain recovery of losses for individual investors. Rather, it recommends that investors obtain their own private counsel to advise them regarding their possible rights to resolve disputes and recover losses in court or through arbitration.

The North American Securities Administrators Association (NASAA) and the securities regulators of individual states work together to share records of disciplinary actions taken against securities industry firms and their personnel, and to ensure overall enforcement of both state and federal regulations against fraud and other misconduct in connection with the solicitation and sale of securities. Like the SEC, the state regulators do not generally seek to resolve the investment disputes of individual investors.

The American securities industry is "self-regulated," under the indirect regulation of the SEC. The SEC reviews the activities of various Self-Regulatory Organizations (SROs) such as the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) to ensure that these SROs enforce their members' compliance with the federal securities laws.

Arbitration Forums

The NASD maintains the largest system for arbitration of customer disputes and claims against securities broker-dealers and their associated persons. Virtually all securities firms and registered persons are members of the NASD. As an industry association, the organization investigates complaints and imposes discipline upon its members, but does not usually attempt to recover individual investors' losses. The NYSE provides a forum for arbitration of customer disputes against NYSE member firms and their associated persons. The NYSE investigates complaints and imposes discipline upon its members, but does not usually attempt to recover individual investors' losses.

Other organizations also provide arbitration forums for customer complaints against their member firms, and some customer agreements allow arbitration before the American Arbitration Association (AAA).