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Understanding Securities Arbitration

You may find yourself in arbitration for recovery of investment losses caused by stockbroker or brokerage firm misconduct. Arbitration is an alternative dispute resolution process. Instead of a judge and jury, a panel of one to three impartial people hears the evidence and reaches a decision regarding your claim for losses. Securities arbitration is a common way to resolve disputes.

For more information pertaining to securities protections and rules for consumers, see Proving Securities Fraud,  The ABCs of Securities Litigation Claims, and Securities Law: Links

Arbitration of securities related claims has dramatically increased since a United States Supreme Court decision in 1987 cleared the way for industry drafted arbitration agreements. While investors were initially concerned that these arbitrations would be unfair to them, recent statistical surveys have shown that investors often see surprisingly good results in arbitrations arising from securities related losses. Those same statistics show that investors who go into an arbitration represented by an attorney are 1.6 times more likely to receive at least 60% of their arbitration claim. Accordingly, if it appears that your investment losses are putting you on the road to arbitration, it makes sense for you to contact an attorney with experience handling securities claims.

Securities Arbitration Basics

As a general rule, arbitrations may only be used as an alternative to litigation if the parties agree to arbitration or if they have a contract requiring them to arbitrate. Most securities arbitrations take place under the control of the National Association of Securities Dealers (NASD) because it has rules requiring members to arbitrate customer complaints upon request. All stockbrokers and brokerage firms should be NASD members and most securities arbitration claims involve allegations of broker-dealer wrongdoing. Because of NASD, as a customer, you may require your broker to resolve any dispute you have with them in arbitration even if you do not have a specific agreement regarding arbitration.

However, chances are that you have already agreed to arbitrate claims against your broker and their brokerage firm, and you may be bound to do so. Most members of the brokerage industry commonly put language regarding mandatory arbitration of claims in the paperwork they have customers sign. Without knowing it, you may have agreed to arbitrate any claim against your broker in your initial customer agreement or in a subsequent margin agreement. Depending on the language used, your claim may be arbitrated under NASD rules or under the rules of another arbitration provider, like the American Arbitration Association. Review of the paperwork you signed with your broker will let you know the specific arbitration terms to which you have agreed.

Whether you choose arbitration or are required to participate in it, most arbitrations generally use lawsuit-like rules and procedures to resolve claims. NASD securities arbitrations usually involve a panel of three decision makers or arbitrators. One arbitrator will be a member of the securities industry and the other two will be professionals like lawyers or accountants. During the arbitration, the arbitrators will determine what evidence is heard and then will consider all evidence presented to reach a decision. Because the decision makers already understand the securities industry, most arbitrations usually don't last as long as jury trial. Most arbitration can be completed in about four days because the parties do not have to spend time educating a jury on securities terminology and regular industry practices. An investor usually receives a decision regarding their arbitration claim from the arbitration panel within thirty days of the arbitration proceeding. Most arbitration awards are promptly paid because of NASD rules and requirements.

Typical Securities Arbitration Claims

Customers may bring a wide variety of claims against brokers and brokerage firms in arbitration including:

  • Churning
  • Unsuitability
  • Negligence
  • Misappropriation
  • Failure to Diversify
  • Unauthorized Trading
  • Material Misrepresentation or Omission
  • Breach of Fiduciary Duty

Depending on the claim and the place where it is brought, there may be different statutes of limitations or time limits that a customer has to bring a claim, even in arbitration. If you suspect broker wrongdoing has contributed to investment losses, you should promptly contact an attorney in order to protect your rights.


Depending on the circumstances, arbitration of claims arising from investment related losses may actually be in an investor's interest. Weighing the risks and benefits of securities arbitration requires the advice and assistance of a knowledgeable securities litigation attorney. An attorney with experience handling securities related litigation will help you determine which of the forums available to you for your claim offers the best chance of righting the investment losses you have suffered.

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