Securities dispute resolution

Originally prepared by Lucia Benabentos of the Cornell Law School Securities Law Clinic.

While in the securities industry business is mostly conducted efficiently and without many problems, there are cases where disputes may arise. One common example is where the private investor disagrees on how the broker handled a transaction. The investor will usually first report the matter to the broker’s manager. Management has the authority and duty to supervise the brokers and will most likely attempt to rectify the problem. However, if the problem continues, the investor should seek legal advice and attempt to use one of the common methods for settling the disputes.

Dispute resolution methods, including mediation and arbitration, are non-judicial processes for settling disputes between two or more parties. In the securities industry, mediation and arbitration are the most common processes. Litigation is extremely uncommon. This is due to the court decision in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332 (1987), where the court authorized the use of arbitration for the settlement of disputes relating to the securities industry. Additionally, SEC Rule 12 provides for arbitration of “any dispute, claim or controversy between parties … arising in connection with the securities business of such parties.” Since then, most New Account Agreements include an arbitration clause that refers the matter to arbitration.

Mediation 

Mediation is a negotiation carried out with the assistance of a third party. The mediator, in contrast to the arbitrator or a judge, has no power to impose a solution on the parties. The mediator merely aids in the resolution of the dispute by guiding the parties, encouraging exchanges of information, promoting a productive level of emotional expression and dealing with different perceptions and interests between the parties. While the strategies used by mediators vary with the mediator, the overall process remains very informal and conversational.

In the securities industry, mediators can provide unbiased expertise needed to solve the dispute. Historically, business disputes submitted to professional mediation services have had a settlement rate of about 80 percent. FINRA provides a mediation process for the settlement of disputes. Parties may file a request for mediation with FINRA in order to begin the process. See, FINRA Arbitration and Mediation.

Arbitration

While arbitration was first intended to provide a flexible, cost-efficient alternative to litigation, it has developed into a semi-formal, semi-complex process for resolving disputes. A party going into arbitration should seek legal advice to help them navigate the system. In the past, securities arbitration could be managed by specific institutions, such as the American Arbitration Association or by the specific stock exchanges. For example, the New York Stock Exchange provided for arbitration of disputes that arose relating to securities and issues within the exchange. However, the securities industry arbitration practice consolidated its efforts in FINRA (the Financial Industry Regulatory Authority). Almost no securities arbitration takes place outside of FINRA. Specific exchanges now even refer cases to FINRA arbitration and mediation procedures, one such example is the New York Stock Exchange. When deciding whether to arbitrate, an investor should bear in mind that if the broker or brokerage firm goes out of business or declares bankruptcy, the party might not be able to recover any of the award granted in arbitration.

The arbitration process can be summarized into the following steps:

  1. Deciding whether to file a claim 
  2. Filing a complaint and fee 
  3. Opposing party files a response 
  4. Selection of Arbitrators 
  5. Pre-hearing 
  6. Discovery 
  7. Finding an expert 
  8. Hearings
  9. Arbitrators Deliberate and Grant an Award, Fees are assessed 
  10. Enforcing the Award

At any point of the process, the claims may be settled outside of the process. In such a case, the arbitrators and FINRA will be notified and the case suspended until further notice.

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