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Business Law Newsletter

Arbitration of Securities Disputes

Although persons may not be required to arbitrate rather than litigate their claims, they may by contract agree to arbitrate any claims that arise under the contract.

In the securities industry, registered representatives and their firms that are members of self-regulated organizations such as the New York and American Stock Exchanges and Nasdaq are required by the contract establishing their membership to arbitrate any securities disputes with their customers if the customers demand arbitration. On the other hand, customers are not bound to arbitrate their disputes regarding securities trading unless they have agreed in their contract for securities trading to submit any dispute to arbitration.

The arbitration process normally is used to resolve customer-dealer securities disputes because an arbitration clause has become a standard feature of securities dealer contracts and the U.S. Supreme Court has considered such pre-dispute arbitration clauses enforceable.

Most states include rules for arbitration in their civil procedure that will be used in a typical securities dispute arbitration. Usually, arbitration is begun by filing a submission agreement with a statement of claim and any required fees. There is a Uniform Submission Agreement for use in the arbitration of securities claims. The statement of claim does not have a prescribed form, but it usually will be similar in form to a standard civil complaint given the involvement of lawyers for securities firms in arbitrations.

Staff of the affected exchange or Nasdaq will serve the arbitration documents with instructions to the respondent named in the claim. The respondent in turn may then provide an answer to the statement of claim and add any cross-claims, counterclaims, or third party claims to the dispute. The rules for arbitration in most jurisdictions do not allow a simple general denial of claims. If claims are not responded to specifically, the responding party may be barred from offering evidence on those claims.

Once all claims in the dispute have been filed, a location for the hearing will be set. In the case of disputes with members of the New York and American Stock Exchanges and Nasdaq, the hearing normally will take place where the customer was located when the dispute arose. All parties are entitled to receive documents before the hearing and to seek rulings from the arbitrator over any discovery disputes that may arise. However, it is expected that discovery in arbitration will be much less extensive than discovery that takes place in litigation, and depositions are not permitted in arbitration.

Arbitration hearings are similar in several respects to trials. Each side makes an opening statement and a closing argument. The claimant and the respondents introduce evidence during the hearing through their own testimony and through witnesses, and all witnesses are subject to cross-examination.

Rules concerning evidence and the scope of examination of witnesses are applied in arbitration as in litigation but without the same strictness that is usual in litigation.

Within thirty days after the hearing or submission of any post-hearing briefs, an award should be made by the arbitrator under rules of the exchanges and Nasdaq. There are limited grounds for appeal of an arbitrator's award.