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What is Securities Arbitration?

Securities arbitration is the legal process by which most disputes between customers and brokerage firms are resolved.  Arbitration is an alternative to traditional litigation, which takes place in a courthouse before a judge and jury.

When a person goes to arbitration, he or she is giving up, or surrendering, the right to have a dispute heard by normal court or jury. For this reason, arbitration can only happen by agreement of the parties, usually by way of a signed arbitration agreement.

Many businesses today insert an arbitration clause into the boilerplate language of their agreements with customers. The brokerage firm industry is no exception. The new account paperwork for almost every brokerage firm in the United States contains a mandatory arbitration clause.

This means that, if a customer ever wants to sue the brokerage firm, the dispute must take place in arbitration, not a courthouse.  Securities arbitration takes place before the Financial Industry Regulatory Authority, also known as FINRA.  FINRA operates one of the largest arbitration forums in the world, processing thousands of cases each year.

Arbitration differs from traditional court-filed lawsuits in several ways including the following:

  • The case is decided by arbitrators, not judges or juries;
  • The trial is not called a “trial,” but rather a “final hearing.” It looks similar to a trial, except that it takes place in a conference room.
  • The rules of evidence are more flexible in arbitration. Evidence that might not be admissible in court is usually considered in arbitration.
  • The right to appeal is very limited in arbitration. As a practical matter, there are almost no appeals.

Is arbitration better or worse for customers?  Most lawyers who practice securities arbitration would say worse.  After all, if arbitration is so good for customers, why do brokerage firms have to make it mandatory?  Make it optional and see how many customers choose it voluntarily.

Historically, arbitrators in FINRA arbitration tend to rule for the brokerage firm approximately 50% of the time.  This means half of the investors recover nothing. When investors recover something, it is typically about one-half of what the investor asked for.  These statistics lend support to the reputation many arbitrators have for “splitting the baby.”

In short, arbitration can be an unfair and unorthodox process, especially for parties and lawyers who have never been through the process.  If you are considering hiring a lawyer for a securities claim, make sure you hire a lawyer who is familiar with FINRA and its rules, regulations and procedures.

Our lawyers have handled hundreds of cases before FINRA, and our staff includes a former FINRA administrator. Call us at 877-915-4040 for a free consultation.