Securities Dispute Resolution

 

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 very common. Formal litigation in court is rarely available to investors. The Court’s decision in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332 (1987), 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. The strategies used by mediators vary somewhat, but the process is informal and conversational. While mediation is informal relative to arbitration or litigation, investors should still seek counsel whenever possible.

In the securities industry, mediators can provide unbiased expertise that may help to resolve disputes. Historically, business disputes submitted to professional mediation services have had a settlement rate of about 80 percent. The Financial Industry Regulatory Authority (“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-effective alternative to litigation, it has developed into a semi-formal, semi-complex process for resolving disputes. A party going to arbitration should seek legal advice to help them navigate the system. Historically, securities arbitration was managed by institutions such as the American Arbitration Association (AAA) or by a stock exchangesuch as the the New York Stock Exchange (NYSE). The securities industry arbitration practice, however, has consolidated within FINRA. Almost no securities arbitration takes place outside of FINRA. Specific exchanges now even refer cases to FINRA arbitration and mediation procedures.

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 claimant might not be able to recover any of the award granted in arbitration.

The arbitration process can be divided 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. Prehearing 
  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 in the process, claims may be settled, concluding the arbitration process. In such a case, the arbitrators and FINRA will be notified and the case will be suspended until further notice.

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