What does an arbitration clause mean to me?
Most, if not all, customer account forms used by brokerage houses contain arbitration clauses. An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside of the courts, and is therefore considered a kind of forum selection clause. The vast majority of the clauses state that arbitration must take place before either the New York Stock Exchange (NYSE) or the National Association of Securities Dealers (NASD). However, in 2007, the NASD and the NYSE combined their dispute resolution divisions into one body, known as the Financial Industry Regulatory Authority (FINRA). (www.finra.org)
Arbitration before a FINRA panel is similar to going to court, but it is usually faster, cheaper and less complex. FINRA has established discovery procedures that assist in simplifying the process. In arbitration, the parties present their dispute through witness testimony and documentary evidence much as they would in court. However, rather than a judge presiding over the proceedings, a panel of three arbitrators, two public and one industry, preside over the hearing. The arbitrators study the evidence and render a decision just like a judge. These decisions are binding upon the parties except in very limited circumstances where a court may overturn the decision; however, a reversal of an arbitration decision is rare.
This is part of an ongoing series of postings related to claims related to your investment accounts. For more information on securities arbitration and claims against your investment professionals please contact us.