Securities Arbitration

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 What Are Securities?

“Securities” is the term that refers to assets of any kind that can be traded. Securities are essentially financial instruments that represent some amount of financial value and typically take the form of a certificate that grants the holder rights associated with the profit distributions of a business. Security may also refer to a variety of interests involving an investment, with the return on the investment primarily or exclusively dependent upon the efforts of someone other than the investor.

In simple terms, securities refer to stocks, bonds, and notes. However, securities can also refer to other types of assets and investments. The defining categories for securities include:

  • Debt-based securities, including bonds and bank notes;
  • Equity-based securities, including common stock; and
  • Derivative contract securities, including futures and options.

What Does Security Law Address?

Securities law addresses a wide range of different assets that individuals and businesses can own. Additionally, securities law is often included under the broader category of finance law, which is the set of laws that address all kinds of assets, loans, and other valuables. Securities law includes the many federal laws and regulations that govern the sale, purchase, and creation of security interests.

These rules and laws assert that all investors, whether large institutions or private individuals, should have access to specific basic facts about an investment before buying it. This is only accomplished through the steady flow of timely, comprehensive, and accurate information that can help people make sound investment decisions.

Securities are generally exchanged through markets known as securities markets. Trading markets are especially vulnerable to unfair or manipulative business practices, such as insider trading and securities fraud. Because of this risk to investors, securities markets are heavily regulated by federal and state laws intended to protect investors from such practices.

The federal agency that has the sole responsibility of enforcing securities law throughout the United States is the Securities and Exchange Commission, or “SEC.” The SEC is primarily tasked with protecting investors and maintaining the securities markets’ integrity by requiring public companies to disclose meaningful financial information to the public.

What Is Arbitration? When Is Arbitration Used?

Arbitration is a legal term that refers to a specific type of Alternative Dispute Resolution (“ADR”). Dispute resolution is the legal process of resolving a dispute between parties. Dispute resolution is also commonly referred to as conflict resolution. Several different processes can be utilized to resolve conflicts, claims, and disputes. ADR refers to addressing and settling disputes outside of the court system.

As mentioned above, arbitration is a legal resolution process that two or more disputing parties use. In some cases, the disputing parties may voluntarily agree to submit to arbitration. In other cases, arbitration is mandatory whether or not the disputing parties agree to the process. Certain agreements, such as employment agreements or other contractual agreements, may also contain language requiring disputes to be arbitrated.

Generally speaking, arbitration is conducted by a person who is known as an arbitrator. An arbitrator is a neutral third party who listens to the parties’ claims and decides based on those claims. The arbitrator’s decision takes the form of an arbitration award and is typically final and cannot be appealed.

If the disputing parties voluntarily agree to arbitration, they may select a mutually agreed-upon arbitrator from an arbitration organization. One such organization would be the American Arbitration Association. The arbitration organization provides rules regarding how various matters, such as securities arbitration, will be arbitrated. It is common for the credentials of arbitrators, as well as their fees, to be listed on the organization’s website.

In situations involving mandatory arbitration, the arbitration clause generally names the arbitration organization to be used. The clause also describes the required procedure to initiate arbitration proceedings. A typical arbitration clause will consist of the party who wishes to arbitrate serving a notice to arbitrate to the other party, who then responds. Once both parties have been notified of a request for arbitration, the arbitrator is chosen, and the arbitration hearing is held.

Certain legal disputes cannot be arbitrated because the state or federal law requires litigation of those matters. For example, disputes over whether a crime was committed must be addressed through litigation. However, most legal disputes between two or more private parties can be arbitrated. Examples of disputes that can be arbitrated include contract disputes and commercial disputes.

Certain disputes must be submitted to arbitration. This would be because the agreement the parties entered into mandates arbitration. Examples of mandatory arbitration would be a contract or an employment agreement.

What Happens When Securities Are Disputed?

The process of arbitration usually decides securities disputes. Parties to arbitration typically agree to have their case heard out of court to get a fast and legally binding decision. Once again, arbitration is essentially a trimmed-down version of a trial that involves minimal discovery, a limited right to appeal, and no jury.

If both parties to securities arbitration are companies, corporations, or firms, they are contractually bound to arbitration. This obligation arises from their membership in the National Association of Securities Dealers, the New York Stock Exchange, or other monitored exchanges. In addition, companies usually want their affairs kept private in arbitration so that they will participate in the arbitration process.

If one of the parties to the arbitration is an individual, mandatory arbitration can be considered unfair. For example, the client may have signed an agreement containing an arbitration clause that required them to travel to a certain location for the arbitration to occur or to pay an arbitration fee. As such, an individual can contest an arbitration clause in many cases.

What Is an Arbitration Agreement In a Contract?

Arbitration agreements are an alternative means of resolving any disputes arising from a contract between two parties. Several things about arbitration make it different from settling a matter in court. In addition to examples mentioned briefly above, additional examples of the differences between arbitration and court include:

  • Less Formal: While there are complex rules regarding a lawsuit and courtroom procedures, arbitration matters can bypass all of these aspects;
  • Less Time Consuming: Arbitration tends to resolve disputes in significantly less time than litigation. This is because traditional legal procedures that generally take several months do not apply;
  • Greater Privacy: Unlike litigation in a court of law, arbitration does not require the creation of a public record. As such, arbitration may be the better option for those who wish for increased privacy; or
  • Less Expensive: Because arbitration is generally less formal and quicker, not as much money is needed to complete the legal process.

Are Securities Arbitration Clauses Enforceable?

In the past, courts found securities arbitration clauses unenforceable due to the unfair nature of the clauses. However, a Supreme Court decision in the 1980s supported the enforceability of arbitration clauses in all securities contracts.

As such, even individual investors are often forced into arbitration. However, an individual may contest a clause if it is significantly unfair. In fact, some skilled arbitration attorneys specialize in recovering for individual clients who have been victims of securities fraud, coercion into arbitration, or bad faith.

Do I Need an Attorney for Help With Securities Arbitration?

As can be seen, securities are an extremely complicated area of the law. As such, if you are involved in a dispute over securities or have questions regarding the enforceability of a securities arbitration clause, you should seek the advice of an experienced securities lawyer immediately.

An experienced securities lawyer can review any arbitration agreement or contract you have entered into. Additionally, an attorney can represent you at any in-person arbitration proceedings, as necessary.


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