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Securities Arbitration

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Securities Arbitration

Arbitration is a form of alternative dispute resolution (ADR). Instead of your case being heard by a judge or jury in court, it is heard by between one and three neutral arbitrators. The arbitrators will hear all the evidence and render a decision. In 1987, in Shearson v. McMahon, the U.S. Supreme Court held that agreements to submit securities disputes to arbitration were enforceable under the Federal Arbitration Act. Today, disputes between customers and broker-dealers are largely resolved in arbitration rather than in courts. Arbitration for these disputes is overseen by a self-regulatory organization such as the Financial Industry Regulatory Authority (FINRA) (formerly the National Association of Securities Dealers (NASD)). An attorney at Kaufmann Gildin & Robbins LLP in New York, NY who has experience handling securities arbitration can review your situation and explain arbitration procedures to you.

Rules Regarding Arbitration Clauses

FINRA and other self-regulatory organizations have rules requiring that agreements between customers and broker-dealers that include arbitration clauses include introductory language before the arbitration clause that states that the customer is waiving the right to seek remedies in court, that arbitration is final, that discovery is more limited that in court proceedings, that the award is not required to include factual findings and legal reasoning and that the arbitration panel will include a minority of arbitrators who are associated with the securities industry. This disclosure must be in distinguishable type and in outline form so it is clear to the reader. Before the signature line, there must be a highlighted statement that the agreement contains a pre-dispute arbitration clause. A copy of the agreement must be given to the customer, who must acknowledge receipt of it.

Financial Industry Regulatory Authority (FINRA)

FINRA was created by consolidating the National Association of Securities Dealers (NASD) and the New York Stock Exchange's member regulation, enforcement and arbitration operations. The consolidation became effective on July 30, 2007. FINRA conducts regulatory oversight of more than 5,000 securities firms and 666,000 registered representatives. The organization is in charge of rule writing, enforcement of those rules and the securities laws, firm examination and arbitration and mediation. In addition, FINRA handles all tasks that were previously the responsibility of NASD, including market regulation under contract for NASDAQ, the American Stock Exchange, the International Securities Exchange and the Chicago Climate Exchange. FINRA is dedicated to protecting investors and the integrity of the market. The organization provides information and education for investors and provides trade reporting.

FINRA oversees arbitration between customers and member firms in cases involving securities claims such as unauthorized trading, churning, failure to supervise, breach of fiduciary duty, misrepresentation and negligence. FINRA also provides arbitration services in cases between associated persons employed by member firms and their employers and between member firms. Cases involving member firms typically relate to employment issues.

FINRA arbitration is governed by the Code of Arbitration Procedure (the "Code"). The Code was recently revised to include additional rules and better organization, and the Revised Code applies to all claims filed on or after April 16, 2007. The Revised Code details discovery procedures for customer and member firm disputes and discovery sanctions. Under the Revised Code, the parties must comply with "Document Production Lists" from the organization's Discovery Guide, which identify documents that are presumed to be discoverable for certain claims. The Revised Code also modifies the exchange of documents the parties must undertake 20 days before the hearing. In this "Twenty-Day Exchange," the parties must produce documents they intend to use at the hearing that have not been produced yet and identify all witnesses. The Revised Code also contains provisions related to amended pleadings and selecting arbitrators.


Most disputes over securities and investments between customers and broker-dealers are resolved through arbitration rather than litigation. If you have questions about arbitration procedures or whether this type of alternative dispute resolution may be a good fit for your situation, talk to a lawyer at Kaufmann Gildin & Robbins LLP in New York, NY who has experience with securities arbitration.

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