Most new account forms include an "arbitration clause" that requires arbitration if you have a dispute over your rights or liabilities under the agreement.
Arbitration is a process of dispute resolution in which a neutral third person(s) - the arbitrator(s) makes a decision after a hearing at which both parties have an opportunity to present their case. The Financial Industry Regulatory Authority (FINRA) offers the largest arbitration forum in the securities industry, but there are several other arbitration forums available to investors.
Arbitration is not part of the court system, and may be a faster and less-expensive alternative to filing a lawsuit. Because arbitration is binding and is subject to review by a court on a very limited basis, an investor should seek legal advice before agreeing to arbitration.
Filing an Arbitration
The arbitration process begins when you file a claim and pay a filing fee with an arbitration service. Among the documents you'll be asked to complete is a statement of claim that sets forth the nature of the dispute, the amount to the claim involved, and the damages that you are seeking.
Your statement of claim should be focused and 100 percent accurate. Exaggerated claims or inaccuracies can destroy your credibility and any chance of recovery. The damages you seek should be reasonable and based on the actual losses attributable to the broker misconduct.
Investors are not required to be represented by legal counsel in arbitration. However, those who are unfamiliar with securities laws and the process of arbitration often choose to hire an attorney to represent them. Don't be misled into thinking arbitration is informal, like small claims court. Brokerage firms will always be represented by attorneys.
If you intend to seek legal representation, it is important that you find an attorney familiar with securities law and how investor arbitration works. Be sure to do your homework by thoroughly checking out attorneys who are unknown to you. Determine the potential cost of legal help and the fee options available to you. Your state or local bar association may be able to assist you in finding a qualified lawyer.
Inside the Arbitration Process
When you agree to arbitration, you agree to accept the outcome of the arbitration. For this reason, it is important that you fully understand how the arbitration process works.
The methods of selecting arbitrators vary among organizations, but most investor arbitration panels consist of three members: a chairperson, one panelist from outside the securities industry, and one from within the industry. There are instances where there will only be one arbitrator, however.
Prior to your hearing you will be given an opportunity to object to potential arbitrators if there is a legitimate reason for doing so.
Once you have filed the necessary documents and fees, you (the claimant) will be notified of any requests by the respondent (the broker/brokerage firm) for additional information. It is important that you respond in a timely manner to these requests.
You will be informed of the proposed date, place, and time of the hearing. Arbitration hearings are not conducted in courtrooms, but in conference rooms or hotel meeting facilities.
The hearing, while more informal than a courtroom proceeding, will follow guidelines for the presentation of evidence and testimony, rebuttal, opening statements, and closing arguments. The arbitrators will make a decision based on the testimony and supporting evidence you and the respondent submit.
At the end of the hearing, all parties to the claim will be excused while the arbitrators discuss their findings. You will be notified by mail of the decision, normally within 30 days. The decision will not give a reason; it will merely state whether or not your claim has resulted in an award of damages.
If the decision is in your favor, the notice you will receive will specify the amount awarded and the terms of payment. The respondent will be required to pay your claim within a specific period of time, in most cases within 30 days of the award. Awards not paid within the specified time frame will bear interest charges.
There are four organizations that conduct most securities arbitration hearings. They are:
FINRA
Arbitration Department
33 Whitehall Street
New York City, NY 10004
American Arbitration Association
140 W 51st Street, 9th Floor
New York City, NY 10020
212-484-4000
212-480-4881
Municipal Securities Rulemaking Board
1818 N Street, NW Suite 800
Washington, DC 20036
202-223-9347
New York Stock Exchange – Department of Arbitration
20 Broad Street
New York City, NY 10005
212-656-2772