Resolving Investment Disputes by Arbitration

Arbitration is a form of alternative dispute resolution, meaning that the process of arbitration takes place outside of the court system. Typically, an arbitration will be decided by an individual (or a panel of individuals) who is both knowledgeable about the subject being arbitrated, and is considered to be impartial by the parties to the arbitration proceeding. When it works as intended, arbitration will normally be faster and cheaper than litigation.

It is normally very difficult overturn the decision of an arbitrator on appeal, so the results of the arbitration are usually final.

Your Investment Contract and Binding Arbitration

When you sign up with an investment broker or dealer, you will almost invariably be asked to sign a contract which includes a binding arbitration clause. That is, except as limited by law, you will agree by contract to resolve any disputes between yourself and the broker or dealer through an arbitration proceeding that will result in a final resolution of the dispute.

Except in extraordinary circumstances, if you sign an investment contract containing such a clause you will be giving up your right to pursue a remedy through the courts.

Litigation versus Arbitration

While there were initial concerns about the burdens on investors and the cost and objectivity of the arbitration process, many lawyers who represent investors in investment disputes concede that the arbitration process can be superior to litigation in terms of cost and expediency.

  • As arbitrators are experienced in the field of securities trading, it is not necessary to educate them as to the basics of trading, or to simplify arguments in the manner that might be necessary in presenting a case to a jury.
  • It may be easier to collect an arbitration award than it is to collect a judgment issued by a court.

These benefits must be weighed against the benefits of the traditional system, such as the right to engage in extensive discovery of information from the other side, the right to a jury trial, and the right to appeal an adverse judgment.

Obtaining Legal Counsel

Due to the complexity of investment disputes and of securities law and regulation, and the potential need for expert opinion in establishing a claim against a securities dealer, individual investors will ordinarily benefit from consulting with a lawyer before initiating an arbitration proceeding, and from obtaining the assistance of a lawyer in preparing and presenting his case at an arbitration.

The Rules of Arbitration

Arbitration between investors and securities brokers and dealers usually takes place under rules and procedures promulgated by the FINRA, the New York Stock Exchange , or the American Arbitration Association, or a similar organization. Details on those rules and procedures can be found on the websites of those organizations.

Copyright © 2004 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on Apr 6, 2018.