What is Securities Arbitration?

C. Mitchell
C. Mitchell
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Disputes between stock and bond investors and brokerage firms can be costly, and due to the volatility of the securities market, can often be time-sensitive as well. One of the most popular ways parties resolve securities-related disputes is through securities arbitration. Securities arbitration is a dispute resolution process that obviates the need to file a lawsuit, but that promises a fair and formal adjudication of conflicts. Participants in most U.S.-based stock markets, including the New York Stock Exchange, are required by law to arbitrate the majority of the disputes that could arise. Even absent legal mandates, however, many parties choose arbitration because of its time- and money-saving attributes.

Securities disputes are typically very complicated, both in facts and technicalities. The term “securities” in this context covers most all stocks, bonds, and publicly traded corporate assets. Each country sets its own laws and regulations governing proper dealing in securities. These laws are universally complicated, but in many ways they need to be in order to cover the range of things at stake when large amounts of money are translated into intangible, yet highly valuable, assets that fluctuate in response to international happenings and trades.

No litigation is fast, but things tend to be even slower where complicated laws and regulations are concerned. Arbitration is often considered a favorable alternative to trial, particularly for securities disputes. In arbitration, the parties meet before a panel of dispute resolution professionals to present their grievances. The panel will usually try to help the parties come to a settlement or other agreement, and will ultimately issue a binding decision. This decision often includes damage awards, and is not typically subject to appeal.

Most securities arbitration actions are initiated by an aggrieved shareholder against a securities brokerage. The subject of an arbitration action can range from accusations of unfair dealings to claims that the brokerage violated laws pertaining to information or pricing availability. Any claim brought to an arbitration could also be litigated. Litigation would most often benefit the broker more than the client, however, as brokers are typically in better positions to wait for long amounts of time, as well as to pay for court processes and appeals.

It is the inequality between the parties’ bargaining power that has led many jurisdictions to stipulate arbitration for securities disputes. Most of the time, arbitration is written into securities contracts, as well. Sometimes this comes at a cost — many arbitration agreements prohibit class actions, for instance — but the overarching benefits are usually well worth the payoff.

The precise rules of securities arbitration and the process and form of the arbitration process vary by jurisdiction, and within each jurisdiction, often by arbitration provider, too. Most laws stop at requiring arbitration for securities disputes, and do not regulate what that arbitration must look like. That is usually up to the arbitration provider. Some follow the rules of alternative dispute resolution, or ADR, a standardized mediation protocol. Others follow nationalized rules, such as the United States-developed Securities Industry Conference of Arbitration rules.

Arbitrations yield binding results at law, but they are always handled by independent providers, not courts. In the United States, the largest providers include the Financial Industry Regulatory Authority, the National Futures Association, and Judicial Arbitration and Mediation Services. Each authority has its own rules on filing time lines, costs, and other details.

Most of the time, parties elect to hire securities arbitration attorneys to guide them through the arbitration and mediation process. A lawyer familiar with securities issues will be able to tell a client if he has a strong case, and if so, will be able to help shepherd that case through arbitration and can often help negotiate a more favorable end result than the client could have achieved alone. Attorneys are not a required part of arbitration, however, and parties are typically free to initiate cases and represent themselves throughout.

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