Securities

Securities Arbitration

Do you have a dispute with a stockbroker? You may find that arbitration will help you. Arbitration is commonly used to settle securities disputes between investors and their stockbrokers. It's an alternative dispute resolution process outside of the court system. This method uses impartial and knowledgeable arbitrators to settle a dispute.

Arbitration Agreements

Most customer agreements contain arbitration agreements. These agreements require investors to arbitrate their disputes. An arbitration award is normally final and binding. The grounds for appealing the award are very limited.

Arbitration agreements can also be written as nonbinding. This means that either party may reject the decision. The dispute will then go to the court system. Some parties will use nonbinding arbitration as a means to reach a settlement.

Types of Security Claims

Arbitration can cover all types of investments. Some of the typical securities claims 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 than a court proceeding. It's also more cost-effective. Securities arbitration claims typically take about one year to complete. Securities claims decided by a court may take years to be resolved.

Arbitration is a formalized and specialized procedure even though it takes place outside of the courts. There are rules that govern the arbitration proceeding and hearing.

Disadvantages of Arbitration

There are certain disadvantages to using arbitration instead of the court. The main disadvantage is that there's fewer safeguards. Arbitrators don't have to give any reason why they ruled a certain way. There's a chance an arbitrator was leaning towards one side before the proceedings even started. Many people consider arbitration unfair to investors.

Mandatory Versus Voluntary Arbitration

Arbitration may be either mandatory or voluntary. Mandatory means that the consumer must resolve any dispute with arbitration. Voluntary means that both sides must agree to use arbitration.

Some courts have used the doctrine of implied consent to enforce arbitration provisions. This means that a party that didn't sign an arbitration agreement must still follow the agreement. Courts usually examine the party's conduct to determine whether there's been an implied consent to arbitrate.

National and State Regulation

The US 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. It also maintains fair and efficient markets and facilitates capital formation.

The SEC doesn't usually seek to obtain recovery of losses for individual investors. It recommends investors obtain their own private counsel. Their counsel will advise them regarding their possible rights to resolve disputes and recover losses. This can be accomplished in court or through arbitration.

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). Brokers are required to register with an SRO. They must submit to its rules as a condition for doing business. An example of a SRO is the Financial Industry Regulatory Authority (FINRA). The SEC checks to make sure SROs enforce their members' compliance with the federal securities laws.

Brokers must comply with SRO rules to enter into the securities business. It's illegal for a broker to not comply. The SRO rules require arbitration from brokers if a customer asks for it. Therefore, securities firms are required to arbitrate under the law. Investors aren't required under SRO rules to arbitrate. It's based purely on the contractual agreement.

Questions for Your Attorney

  • Is there a difference between an investment adviser and a broker-dealer?
  • I believe that a company sent out false information to get investors to purchase stock. Do I go through arbitration or do I file a lawsuit?
  • Where can I go to examine the financial records of a company to prepare for an arbitration proceeding?
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