In a general sense, arbitration is a type of alternative dispute resolution where the parties’ legal dispute is handled outside of the formal court system. Arbitration usually involves the intervention of an arbitrator. This is an individual or a panel of persons who have knowledge about the subject matter being disputed.
The arbitrator may conclude that one party should take action in order to remedy the situation. The arbitrator’s decision is usually final and is legally binding on both parties.
In a securities context, arbitration is used to resolve a wide spectrum of disputes and legal issues. Securities law covers many different types of violations, such as those involving insider trading, stock distributions, investments, and corporate decisions. Many securities organizations use arbitration as a cost-efficient means of settling disputes.
What’s an Arbitration Clause?
In most cases, when you deal with a securities investment dealer or broker, they will ask you to sign a contract for their services. Part of the contract may include an arbitration clause. An arbitration clause states that the parties agree to resolve any disputes through arbitration rather than litigation. Basically, the parties agree to forfeit their right to file a lawsuit over any investment disputes.
Arbitration clauses are generally allowed by law. However, they may be subject to various limitations depending on the jurisdiction. Thus, you may wish to research your rights or consult with a lawyer before you sign any contract or agree to an arbitration clause.
What Types of Securities Disputes Are Subject to Arbitration?
Arbitration can be used for many types of securities violations, including:
- Breach of fiduciary duty
- Insider trading
- Unauthorized trading
- Unethical corporate practices
- Investment malpractice
Arbitration is usually reserved for disputes between two private parties. Securities violations that involve federal violations or disputes with the government (such as tax violations) are usually resolved through traditional litigation methods or through governmental investigations.
Is Arbitration Better Than Litigation?
Arbitration has several advantages as well as disadvantages in comparison to litigation. Some of the advantages of mandatory securities arbitration include:
- Less time-consuming than litigation
- Can be more cost efficient
- Allows parties to resolve conflicts in a non-confrontational manner
- Decisions may be binding and enforceable under law
- May be helpful in promoting a continued relationship between the parties
Some disadvantages of securities arbitration include:
- May limit the amount that a party can recover for damages
- The parties usually forfeit their right to litigation in exchange for arbitration
- May sometimes be difficult to compel a party to comply with arbitration decisions
- The ability to arbitrate may be limited by local or state laws
Thus, you should weigh the pros and cons of arbitration before you sign any arbitration clauses or engage in arbitration. In most states, you can’t file a lawsuit if there is ongoing arbitration for the same dispute (even if you haven’t signed an arbitration clause).
Do I Need a Lawyer for Securities Arbitration?
Even though arbitration is conducted out of court, you will almost always need the advice and counsel of a lawyer during arbitration. Arbitration may revolve around key legal issues and concepts, which can be difficult to understand at times. A lawyer can assist you and provide you with expert knowledge of the securities laws in your area. This can help you obtain a favorable decision during securities arbitration.