UNDERSTANDING THE ARBITRATION PROCESS BEFORE THE NASD IN SECURITIES CASES
An Alternative Dispute Resolution Process
Although most business in the securities industry is completed without a problem, disputes and controversies will occasionally arise. Such disputes and controversies can be resolved by arbitration, usually through the National Association of Securities Dealers, American Stock Exchange, New York Stock Exchange or the American Arbitration Association. Arbitration is simply a method of having a dispute between two or more parties resolved by impartial persons who are knowledgeable in the areas of the controversy. All arbitrations are conducted in accordance with the Uniform Code of Arbitration as developed by the Securities Industry Conference on Arbitration and the rules of the sponsoring organization where the claim is filed. Subsequent to a series of arbitration agreement cases decided by the United States Supreme Court in the late 1980's, most, if not all, brokerage firms now have binding arbitration clauses in their customer agreements. It is important to note, by signing an agreement containing a binding arbitration clause, customers give up their right to litigate any disputes with their broker in a court of law.
Recommendations And Suitability
Most arbitrations involve customer complaints stemming from suitability and inappropriate recommendations to customers by their broker. For instance, the National Association of Security Dealers Rule of Fair Practice sets forth the guidelines that brokers, must follow In making recommendations to customers. Rule 2310 of the NASD Business Conduct Code provides that in recommending to a customer the purchase of sale of any, security, the member shall have reasonable grounds for believing the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his or her other security holdings and as to his or her financial situation and needs.
In addition, prior to the execution of a transaction recommended to a non-institutional customer, the broker is required to make a reasonable effort to obtain information concerning the customer's financial status, tax status, investment objectives and other such information used or considered to be reasonable in making recommendations. Other sponsoring organizations and exchanges also have their own rules concerning broker recommendations and suitability.
Statute of Limitations
One important factor to be noted is that a customer/broker controversy is not eligible for submission to arbitration if six or more years have elapsed from the event giving rise to the dispute. Claims may also be barred by shorter applicable state or federal statutes of limitations" For instance, in Arkansas, allegations of securities fraud must be brought within three years from the date of the alleged fraudulent act. Actions brought under Rule 10(b)5 of the Securities Act of 1934 must be brought within one year from the date of discovery of the fraud, but in no event, more than three years after the date of the alleged fraudulent act. When considering arbitration, if there is question about the statute of limitations, the customer should consult an attorney.
Impartial Panel Selection
Disputes involving less than $25,000 are heard by a single arbitrator, whereas complex claims or those involving more than $25,000 are usually heard by a panel of three arbitrators. Each sponsoring organization, (e.g. NASD, NYSE, AMEX), maintains a roster of qualified individuals whose professional credentials and experience qualify them for service as arbitrators. The arbitrators are not employees of the sponsoring organization and they, not the sponsoring organization, will decide the dispute. The arbitrators do, however, receive an honorarium from the sponsoring organization. Unless the customer elects otherwise, the majority of the members of the arbitration panels are public arbitrators, that is, arbitrators who are neither associated with nor employed by a broker/dealer of a securities industry organization. There will usually be one industry arbitrator on each panel.
Filing And Responding To Claims
To begin arbitration, the customer must first file a statement of claim with the director of arbitration of the selected sponsoring organization. The claim should set forth the details of the dispute in a clear, concise and chronological fashion and indicate what relief is requested. Thereafter, pleadings are served by the director of arbitration on the opposing party. Customers have an absolute right to be represented by an attorney at any stage of the arbitration although the customer may proceed without an attorney. The place of the arbitration hearing is also decided by the director of arbitration. Generally, in customer cases, the hearing location is close to where the customer resided when the dispute arose, regardless of a pre-dispute agreement to the contrary. A non-refundable filing fee and a hearing session deposit is required along with the filing of a claim. These fees vary according to the organization and the amount in controversy and should be obtained from the sponsoring organization prior to filing the claim.
Following the receipt of the claim, the respondent has 45 days in which to file a response unless time to respond is extended by the director of arbitration. The director of arbitration of the sponsoring organization will submit a list of arbitrators for consideration by the parties. Prior to the selection of the arbitrators, the parties are informed of the names and business affiliations of the proposed arbitrators, their employment histories for the last ten years and any conflicts of information disclosed pursuant to the Uniform Code of Arbitration. Previous awards issued by prospective arbitrators are available through a public information request from each sponsoring organization. If an arbitrator determines that he or she cannot render a fair and impartial award, or a customer challenges an arbitrator for cause, the director of arbitration will appoint a substitute arbitrator. Once the arbitrators are empanelled, neither the arbitrators nor customers may communicate directly with one another and may only communicate through the director of arbitration.
While the rules of discovery in arbitration are not as comprehensive as the rules of discovery in a regular court of law, the rules of evidence are somewhat more relaxed which usually benefits the customer. Under current discovery rules, the parties are not required to exchange documents until 20 days prior to the hearing, thus limiting time for preparation. The NASD, however, has issued a Notice to Members setting forth the type of information generally discoverable as it pertains to various claims to be decided by the arbitration panel. Parties to arbitration may subpoena witnesses to appear at the hearing just as in courts of law and a verbatim transcript of the hearing is made. The order of the arbitration hearing is similar to a court trial from opening statement to closing statement.
Final and Binding
At the end of the arbitration hearing, the arbitrators usually meet to discuss their decision and endeavor to render an award within thirty days. Once the award is signed by the arbitrators, copies will be mailed to the parties. THE DECISION OF THE ARBITRATORS IS FINAL AND BINDING ON THE PARTIES, AND MAY ONLY BE APPEALED TO A COURT OF LAW UNDER VERY SPECIAL OR UNUSUAL CIRCUMSTANCES. Since the arbitrator's decision is based solely and exclusively on the documents presented, testimony of the parties and their witnesses and any other relevant material, it is extremely important that a customer's case be carefully and thoroughly prepared. Therefore, assistance of counsel, while not necessary, should be considered if a customer has any reservations about proceeding alone in an arbitration matter.
An Alternative Dispute Resolution Process
Although most business in the securities industry is completed without a problem, disputes and controversies will occasionally arise. Such disputes and controversies can be resolved by arbitration, usually through the National Association of Securities Dealers, American Stock Exchange, New York Stock Exchange or the American Arbitration Association. Arbitration is simply a method of having a dispute between two or more parties resolved by impartial persons who are knowledgeable in the areas of the controversy. All arbitrations are conducted in accordance with the Uniform Code of Arbitration as developed by the Securities Industry Conference on Arbitration and the rules of the sponsoring organization where the claim is filed. Subsequent to a series of arbitration agreement cases decided by the United States Supreme Court in the late 1980's, most, if not all, brokerage firms now have binding arbitration clauses in their customer agreements. It is important to note, by signing an agreement containing a binding arbitration clause, customers give up their right to litigate any disputes with their broker in a court of law.
Recommendations And Suitability
Most arbitrations involve customer complaints stemming from suitability and inappropriate recommendations to customers by their broker. For instance, the National Association of Security Dealers Rule of Fair Practice sets forth the guidelines that brokers, must follow In making recommendations to customers. Rule 2310 of the NASD Business Conduct Code provides that in recommending to a customer the purchase of sale of any, security, the member shall have reasonable grounds for believing the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his or her other security holdings and as to his or her financial situation and needs.
In addition, prior to the execution of a transaction recommended to a non-institutional customer, the broker is required to make a reasonable effort to obtain information concerning the customer's financial status, tax status, investment objectives and other such information used or considered to be reasonable in making recommendations. Other sponsoring organizations and exchanges also have their own rules concerning broker recommendations and suitability.
Statute of Limitations
One important factor to be noted is that a customer/broker controversy is not eligible for submission to arbitration if six or more years have elapsed from the event giving rise to the dispute. Claims may also be barred by shorter applicable state or federal statutes of limitations" For instance, in Arkansas, allegations of securities fraud must be brought within three years from the date of the alleged fraudulent act. Actions brought under Rule 10(b)5 of the Securities Act of 1934 must be brought within one year from the date of discovery of the fraud, but in no event, more than three years after the date of the alleged fraudulent act. When considering arbitration, if there is question about the statute of limitations, the customer should consult an attorney.
Impartial Panel Selection
Disputes involving less than $25,000 are heard by a single arbitrator, whereas complex claims or those involving more than $25,000 are usually heard by a panel of three arbitrators. Each sponsoring organization, (e.g. NASD, NYSE, AMEX), maintains a roster of qualified individuals whose professional credentials and experience qualify them for service as arbitrators. The arbitrators are not employees of the sponsoring organization and they, not the sponsoring organization, will decide the dispute. The arbitrators do, however, receive an honorarium from the sponsoring organization. Unless the customer elects otherwise, the majority of the members of the arbitration panels are public arbitrators, that is, arbitrators who are neither associated with nor employed by a broker/dealer of a securities industry organization. There will usually be one industry arbitrator on each panel.
Filing And Responding To Claims
To begin arbitration, the customer must first file a statement of claim with the director of arbitration of the selected sponsoring organization. The claim should set forth the details of the dispute in a clear, concise and chronological fashion and indicate what relief is requested. Thereafter, pleadings are served by the director of arbitration on the opposing party. Customers have an absolute right to be represented by an attorney at any stage of the arbitration although the customer may proceed without an attorney. The place of the arbitration hearing is also decided by the director of arbitration. Generally, in customer cases, the hearing location is close to where the customer resided when the dispute arose, regardless of a pre-dispute agreement to the contrary. A non-refundable filing fee and a hearing session deposit is required along with the filing of a claim. These fees vary according to the organization and the amount in controversy and should be obtained from the sponsoring organization prior to filing the claim.
Following the receipt of the claim, the respondent has 45 days in which to file a response unless time to respond is extended by the director of arbitration. The director of arbitration of the sponsoring organization will submit a list of arbitrators for consideration by the parties. Prior to the selection of the arbitrators, the parties are informed of the names and business affiliations of the proposed arbitrators, their employment histories for the last ten years and any conflicts of information disclosed pursuant to the Uniform Code of Arbitration. Previous awards issued by prospective arbitrators are available through a public information request from each sponsoring organization. If an arbitrator determines that he or she cannot render a fair and impartial award, or a customer challenges an arbitrator for cause, the director of arbitration will appoint a substitute arbitrator. Once the arbitrators are empanelled, neither the arbitrators nor customers may communicate directly with one another and may only communicate through the director of arbitration.
While the rules of discovery in arbitration are not as comprehensive as the rules of discovery in a regular court of law, the rules of evidence are somewhat more relaxed which usually benefits the customer. Under current discovery rules, the parties are not required to exchange documents until 20 days prior to the hearing, thus limiting time for preparation. The NASD, however, has issued a Notice to Members setting forth the type of information generally discoverable as it pertains to various claims to be decided by the arbitration panel. Parties to arbitration may subpoena witnesses to appear at the hearing just as in courts of law and a verbatim transcript of the hearing is made. The order of the arbitration hearing is similar to a court trial from opening statement to closing statement.
Final and Binding
At the end of the arbitration hearing, the arbitrators usually meet to discuss their decision and endeavor to render an award within thirty days. Once the award is signed by the arbitrators, copies will be mailed to the parties. THE DECISION OF THE ARBITRATORS IS FINAL AND BINDING ON THE PARTIES, AND MAY ONLY BE APPEALED TO A COURT OF LAW UNDER VERY SPECIAL OR UNUSUAL CIRCUMSTANCES. Since the arbitrator's decision is based solely and exclusively on the documents presented, testimony of the parties and their witnesses and any other relevant material, it is extremely important that a customer's case be carefully and thoroughly prepared. Therefore, assistance of counsel, while not necessary, should be considered if a customer has any reservations about proceeding alone in an arbitration matter.