How The Securities Arbitration Process Works

Getting Started With Arbitration

As a claimant, your initial pleading is called a Statement of Claim, which is a description of the events in which you feel you have been wronged. If you are working with a lawyer, he or she can help you prepare this extremely important document. Be rational in your statement and don't claim things you can't back up. The Respondent will have a chance to read your claim and prepare a defense before the hearing. If the Respondent can discredit an part of your claim, it will look bad in the arbitration process so do not overreach your claims. Only claim what you can back up.

The NASD process considers claims under $25,000 to be "small claims"; these are typically decided by one arbitrator based on written material that is submitted. There is typically no hearing, although the arbitrator may request one and individuals can request hearings.

Claims over $25,000 involve hearings. Most hearing last 2 to 3 days. Some complicated cases may continue over one a longer period.

The arbitration process is like a court case in that the parties are responsible for delivering the evidence, including witnesses. You are obliged to inform the other party of the witnesses you will call and provide copies of the evidence at least 20 days before the hearing.

Like a case argued before a court, arbitration cases tend to be more successful if they are concise, complete, and well organized. Here's where an experienced securities lawyer can be invaluable. Someone with experience structuring a case can make sure adequate and thorough preparation is done.

Parties can make opening statements if they so choose. The claimant presents his or her case, with witness testimony and documentary evidence. The respondent then makes his or her case. Both parties are allowed to provide rebuttal evidence and cross-examine witnesses. At the end, parties are allowed to make closing statements.

Making Awards

Arbitrators typically render a decision within 30 days, but there is no set time. They are not obligated to provide reasons for their decisions although they sometimes do; you can request a written opinion, but be sure to do so before the hearing.

All parties to the arbitration receive a written document announcing the decision. In the terminology of the business, this document is called an "award" whether or not any money is directed to be paid. The award is mailed or delivered in person and the award is made public. If the decision calls for one party to pay another, the payment is made directly between the two parties within 30 days. No escrow process is involved.

The importance of preparation

Preparation for the arbitration hearing is of paramount importance. You have to get it right the first time. No new evidence can be introduced after the decision is issued, even if there were legitimate reasons it was not available before the decision and even if the arbitrator wants to reconsider.

Decisions made in SRO arbitrations are final. Arbitrators cannot reconsider their decisions, once issued, even if new evidence surfaces later. It is possible to challenge an arbitration ruling in a court, but only a small percentage of cases are even heard by the courts, much less changed or negated. Your lawyer can advise you on whether a suit is worth pursuing in court. But the poor odds of having a court overturn an arbitration ruling means that you must prepare and do your best at the arbitration hearing.

After the Award

Under the NASD rules, awards must be paid within 30 days of judgement. If one party files a motion in court to vacate the award, the payment does not have to be made in 30 days. Beyond 30 days, interest charges accrue.

If the respondent doesn't pay in accordance with the arbitration award, you can complain to the SRO, who can suspend members from trading.

Governments can also enforce arbitration awards. The Federal Arbitration Act and state laws compel the parties to abide by the arbitrator's award. So if they don't pay, you can pursue them in state or federal court. Your lawyer can advise you what procedure to take in these situations.

If the broker goes bankrupt, you have little leverage in recovering your award and are a creditor in the eyes on the bankruptcy court. You may or may not get your award. This is one more reason to check out the financial stability and past record of the brokers you work with before you become involved with them.

Length of Arbitration Process

The whole process usually takes six to 12 months. Factors that affect the time include the size and complexity of the case and how busy the arbitrators are.

Click to read about problems with the securities arbitration process.