Securities dispute resolution refers to the processes and mechanisms used to resolve conflicts and disputes arising from securities transactions, investments, and related activities. These disputes often involve issues such as fraud, misrepresentation, breach of fiduciary duty, or violations of securities laws. The primary methods of resolving securities disputes include arbitration, mediation, and litigation.
Dispute Resolution Methods
Dispute resolution methods, including mediation and arbitration, are non-judicial processes for settling disputes between two or more parties. In the securities industry, mediation and arbitration are very common, whereas formal litigation in court is rarely available to investors. The Court’s decision in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332 (1987), authorized the use of arbitration for the settlement of disputes relating to the securities industry. Additionally, SEC Rule 12 provides for arbitration of “any dispute, claim or controversy between parties … arising in connection with the securities business of such parties.” Since then, most new account agreements include an arbitration clause that refers the matter to arbitration.
Mediation
Mediation is a negotiation carried out with the assistance of a third party. Unlike an arbitrator or a judge, the mediator has no power to impose a solution on the parties. The mediator aids in resolving the dispute by guiding the parties, encouraging exchanges of information, promoting a productive level of emotional expression, and addressing different perceptions and interests between the parties. The strategies used by mediators vary, but the process is generally informal and conversational. Although mediation is less formal than arbitration or litigation, investors should still seek legal counsel whenever possible.
In the securities industry, mediators can provide unbiased expertise that may help to resolve disputes. Historically, business disputes submitted to professional mediation services have had a settlement rate of about 80 percent. The Financial Industry Regulatory Authority (FINRA) provides a mediation process for the settlement of disputes. Parties may file a request for mediation with FINRA in order to begin the process. See FINRA Arbitration and Mediation.
Arbitration
While arbitration was first intended to provide a flexible, cost-effective alternative to litigation, it has developed into a semi-formal, semi-complex process for resolving disputes. A party going to arbitration should seek legal advice to help them navigate the system. Historically, securities arbitration was managed by institutions such as the American Arbitration Association (AAA) or by a stock exchange such as the the New York Stock Exchange (NYSE). However, the securities industry arbitration practice has consolidated within FINRA. Almost no securities arbitration takes place outside of FINRA. Specific exchanges now even refer cases to FINRA arbitration and mediation procedures.
When deciding whether to arbitrate, an investor should consider that if the broker or brokerage firm goes out of business or declares bankruptcy, the claimant might not be able to recover any of the award granted in arbitration.
The arbitration process can be divided into the following steps:
- Deciding whether to file a claim
- Filing a complaint and fee
- Opposing party files a response
- Selection of arbitrators
- Prehearing
- Discovery
- Finding an expert
- Hearings
- Arbitrators deliberate and grant an award, fees are assessed
- Enforcing the award
At any point in the process, claims may be settled, concluding the arbitration process. In such a case, the arbitrators and FINRA will be notified, and the case will be suspended until further notice.
[Last updated in June of 2024 by the Wex Definitions Team]
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