Skip to main content

Dear Dagen: Navigating the Securities Industry's Arbitration Process

It's quicker than the courts in resolving disputes, but it's not cost-effective unless you have a large claim.

Lots of people think the securities industry's arbitration process stinks.

So what?

It's not going away. Instead of whining about it, let's look at how to deal with an admittedly imperfect system.

In the securities industry, complaints are usually heard in arbitration, a private legal proceeding that's legally binding on both parties, rather than in a court of law. When you open a brokerage account, you are asked to agree to arbitration in the event of a dispute. You have the right to refuse, but if you do, the firm may not allow you to open the account.

Arbitration is usually a last resort for an investor with a complaint. In a best-case scenario, an investor would able to

settle a dispute directly with a brokerage firm. Mediation, a formalized negotiation, is another option. Indeed,

NASD Regulation

, an arm of the

National Association of Securities Dealers

that runs the largest forum for securities arbitration, is on a campaign to promote mediation as an arbitration alternative.

But this push for everyone to make nice-nice hasn't obliterated arbitration. Roughly 7,000 cases are brought before arbitration every year, a number that has more or less plateaued in the past four or five years, says Rick Ryder, editor of the

Securities Arbitration Commentator

, a newsletter in Maplewood, N.J. About 70% of claims filed with NASD Regulation are settled before they go to hearings, says Linda Fienberg, executive vice president of the NASDR's office of dispute resolution.

Cases that aren't settled are heard by an arbitrator, or a panel of three, and the process can be a legal minefield.

Do You Need a Lawyer?

If you're headed toward arbitration, first you'll have to decide whether to hire a lawyer.

A lawyer will certainly be able to guide you through the process, which can be tricky even if you are familiar with securities regulations. Often, an investor may not understand the problem from a legal standpoint, says Mitchell Perlstein of the

Investors' Law Center

in Boca Raton, Fla. For example, you may think your broker is "churning" your account, but you need to understand the legal definition of that term.

The brokerage firm surely will be represented by an experienced lawyer, putting an unrepresented investor at a significant disadvantage.

Money is the pivotal point in deciding whether to seek representation. "If you have lost $30,000 or more, it's probably cost-effective enough to use an attorney," says Mark Maddox, a lawyer in Indianapolis and president of Norman, Okla.-based

Public Investors Arbitration Bar Association

. A lawyer's fee could range from $150 to $250 an hour or a lawyer could bill you based on a contingency fee running from 25% to 40% on any amount awarded, Maddox estimates.

If your arbitration claim is $25,000 or less, you can use what's called simplified arbitration, which involves only one arbitrator and does not require a hearing. (The standard arbitration proceeding involves a hearing before a panel of three arbitrators, one of whom must be from the securities industry.)

But simplified arbitration really means smaller, not easier. And it can be a no-win situation for an investor. In simplified arbitration, it's even more important to know what you are doing because the process is done entirely through documents without a hearing. But for a claim of $25,000 or less, it might not make economic sense to hire an attorney.

Finding a Lawyer

If you decide you need a lawyer, you can start by asking friends, relatives and acquaintances to recommend a good securities attorney. If that doesn't work, there are a number of resources available on the Internet.


Public Investors Arbitration Bar Association

, or PIABA, includes a roster of lawyers around the country on its Web site at The

Securities and Exchange Commission

offers information on finding an attorney on its site at

Investors with small claims or limited income can also take advantage of securities arbitration clinics run by several law schools in New York. That same area of the SEC's Web site includes a list of these clinics and their requirements.

You can also contact NASD Regulation or the

New York Stock Exchange

, the two primary arbitration forums, for help in finding an attorney.

Choosing a Forum

Next, you will have to choose the forum for your arbitration. Generally speaking, you've got two choices, NASD Regulation or the New York Stock Exchange. In March, NASDR raised its filing fees, so it's cheaper to file with the NYSE. But cost is just one consideration. (Filing fees vary, depending on size of the claim and could wind up costing well more than $1,000.)

The reputation and quality of the arbitration panels in the region where your case will be heard are important. But this may be difficult to ascertain on your own. "The NASDR has a lot more arbitrators in most venues than the NYSE," says Maddox. "I'm inclined to pick the NASDR in most areas. The bigger the pool, the greater the chance for fairness."

Naming the Culprit

After that's decided, you'll have to determine who you're going to name in your complaint: the broker, a supervisor, the firm, one, two or all. In some instances, you'll go all the way up to the principals of the company.

This decision is more important today than ever. One of the oft-cited benefits of arbitration is the high rate of payment on awards. NASD Regulation will suspend a broker or a firm -- temporarily take away the right to do business -- if it doesn't pay. But if a firm has gone out of business, an investor might not see that money.

"I think for the last two years, we have seen a huge increase in firms and brokers not paying arbitration awards," says Maddox. And these unpaid awards primarily involve bucket-shop operations, or small firms selling super-small stocks to unwitting investors.

If there's a chance the firm will be shut down or go out of business, you may want to name everybody in the chain of command in your arbitration claim.

On the other hand, you won't have the same problems with a big firm like

Merrill Lynch


. If you're taking on one of the big boys, you might just name the company itself, unless there is some personal involvement at issue.

Some of the remaining steps will be filing the claim, selecting arbitrators and going through the discovery process and the final hearing. "The hearing tends to take place in a conference-room type atmosphere and doesn't have the strict formality of a courtroom," says Investors' Law Center's Perlstein.

Then you will have to wait for a decision from the panel and payment of the award, if there is one. The percentage of investors who win fluctuates between a little over 50% and just over 60%, says Ryder.

Therein lies arguably the biggest benefit to arbitration: time. The entire process, from start to finish, typically takes 12 to 15 months. Compare that with the years you could spend tied up in a court, and arbitration looks pretty good.

For more information on arbitration, you can use the NASD Regulation Web site at or send your complaints and experiences to me and I'll share them in a future column.

Send your questions and comments to, and please include your full name.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.