SECURITIES & COMMODITIES ARBITRATION
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What is Arbitration?
Arbitration is a method of having a dispute between two or more parties resolved by impartial persons who are knowledgeable in the areas in controversy. Those persons are called arbitrators. Arbitration of broker-dealer disputes has long been used as an alternative to the courts because it is a relatively fast and cost effective means of resolving complicated issues. There are laws governing the conduct of an arbitration proceeding that must be considered by those planning to use arbitration to resolve the dispute. Most importantly is the fact that an arbitration award is final and binding, subject to review by a court only on a very limited basis. Parties should recognize, too, that in choosing arbitration as a means of resolving a dispute they generally give up their right to pursue the matter through the courts.
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What Disputes are Eligible for Arbitration?
In
considering whether to initiate arbitration it is important to keep in
mind that, generally, a public customer has a right to require a
broker-dealer to submit to arbitration only those disputes relating to
or arising out of the business activities of the broker-dealer.
An
additional factor to be noted is that a controversy is not eligible for
submission to arbitration if more that six years have elapsed from the
date of the event that gives rise to the dispute. The arbitrators also
may dismiss a claim barred by shorter applicable state or federal
statutes of limitation.
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Who are the Arbitrators?
Arbitrators are impartial
persons who are knowledgeable in the areas in controversy. Each
sponsoring organization such as the NASD or NYSE maintains a roster of
individuals whose professional qualifications 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 your dispute. The arbitrators do, however, receive an
honorarium from the SROs (Self-Regulatory Organizations).
The
Director of Arbitration will inform the parties of the names and
business affiliations of the selected arbitrators, their employment
histories as well as any conflict information disclosed pursuant to the
Uniform Code of Arbitration.
Some parties may be interested in
previous awards issued by prospective arbitrators. Each sponsoring
organization has developed procedures to make information available on
public customer awards issued since May of 1989.
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What Happens After the Claim is Filed?
Once the Statement
of Claim has been received the Director of Arbitration will send it to
the opposing party (the "Respondent"). Any member of an organization
listed in the services directory may be a party in an arbitration
proceeding. Similarly, an employee and/or representative of any such
member also may be named as a party.
Following the receipt of
the Claim the Respondent has 45 calendar days to serve each party with
an Answer and an executed Submission Agreement. Respondent's executed
Submission Agreement and Answer shall also be filed with the Director
of Arbitration with sufficient additional copies for the arbitrator(s)
along with the required deposit.
The Respondent may assert a
related counterclaim as part of its Answer, or may file a claim against
a third party; that is, a claim against another person who may bear
responsibility for any of the alleged damages. Generally, a claim is
considered related if it pertains to the customer's account at the
broker-dealer. In support of its defense or counterclaim the
Respondent should attach copies of documents and supporting materials
to its Answer.
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What is Discovery?
The discovery process is the method by
which the parties obtain facts, information and documentation while a
case is pending. The information obtained through discovery is used to
prepare for the arbitration hearing. The arbitration associations
define the information and documents that a party can request by the
other party or any third party. In the event any party does not comply
fully with discovery requests, counsel is required to meet and confer
to resolve any disputes. Failure to resolve at that point results in
the dispute being submitted to the arbitration Panel Chairman for
resolution during a pre-hearing conference. Discovery is an integral
part of the arbitration process and must be completed prior to the
arbitration hearing.
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How Are The Hearings Conducted?
At the hearing the
parties must present their respective cases by testimony and
documentary evidence to the arbitrators. Claimants should carefully
document the issues involved and their proof of damages and explain to
the arbitrators how much in money damages are being claimed and how
they arrived at that figure.
Generally, the following procedures will be observed:
1. The arbitrators and the witnesses will be sworn.
2. The arbitrators may proceed with a case even if a party does not appear and/or answer.
3. Each party will be given an opportunity to make a
brief opening statement, that is, a brief outline of the issues
involved and what facts that party intends to prove.
4. The Claimant will present facts to the arbitrators including relevant documents and testimony to establish and prove his claim.
5. The Respondent will present its case in the same
manner as the Claimant. Witnesses and parties who testify will be
sworn and are subject to cross-examination by the opposing side as well
as questioning by the arbitrators. The opposing party may object to
any evidence prior to its receipt by the arbitrators. Parties should
bring sufficient copies of documents for each of the arbitrators, other
parties, and the representatives of the sponsoring organization. It is
inappropriate to testify when questioning a witness, and a party may
object if another party does that. A party may offer an affidavit in
lieu of the live testimony of a witness. This may or may not be
allowed by the arbitrators. Parties should be prepared to explain why a
witness cannot come to the hearing and to explain whether the other
party had an opportunity to examine the witness. A party should be
prepared to bring the witness if the affidavit is not allowed.
6. Any counterclaim or other matter may be presented in the same way.
7. Parties may present rebuttal evidence if appropriate.
8. Closing statements may be presented and consist
generally of final arguments by the parties and brief summations of the
testimony and other evidence introduced at the hearing. A party should
refer only to evidence already in the record and not use the closing
statement as an opportunity to present new evidence.
9. The parties are to leave together at the end of the hearing. The arbitrators will typically render a decision within 30 days.
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Arbitration Versus Litigation
Most brokerage firms
require customers to go to arbitration as part of the signed customer
agreement. Rather than a jury of their peers, the customer's case is
decided by an experienced panel of either one or three arbitrators.
Typically, an arbitration case will be resolved faster and more cost
effectively than a court case. Another potential advantage is that the
rule of equity (fairness) rather than the rule of law applies in
arbitration. The arbitrators are also not constrained by the formal
rules of evidence and are permitted to hear testimony and review
evidence which might otherwise not be allowed in court.
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