If you have a sticky dispute with a broker that can’t be settled amicably, there is a viable and fairly low-cost way to settle it: binding arbitration.
Securities arbitration, which allows an impartial third party to resolve broker-client disputes, is the mandatory form of settlement procedure when brokers and their clients get into a rift. That’s because most brokerage firms require customers to sign arbitration agreements when they open accounts.
The benefits of arbitration are clear: Cases are heard fairly quickly--usually within a year, compared to up to five years in civil courts--and the cost is reasonable.
The bad news is that there is little, if any, chance to appeal an adverse decision. Unless the arbitrator is biased or had a clear conflict of interest, the decision is legal and binding.
Arbitration filing fees range from about $30 for a small case in which the amount in dispute is less than $1,000, to $1,800 for cases where the amount is more than $5 million.
Plaintiffs can represent themselves or be represented by anyone they choose. They do not need to hire a lawyer or an arbitration specialist.
Most experts recommend hiring a professional when the dispute involves a lot of money. That’s because the brokerage is almost always represented by an attorney; big-money disputes are usually stickier and more hotly contested, and a General Accounting Office study found that customers were much more likely to win when they were professionally represented.
If you have a fairly small claim--anything less than $10,000--you can take it to “simplified arbitration,” which is the arbitration industry’s counterpart to small claims court. Simplified arbitration is faster, simpler, cheaper and more fruitful for investors.
Where the average securities arbitration case takes roughly 10 months to complete, simplified arbitration procedures are generally finished in five.
In-person hearings, technical motions and attorneys are generally unnecessary. Frequently, the only cost to the investor is the filing fee, which varies depending on the size of the case and whether the investor requests an in-person hearing or is content to handle the matter by mail.
An investor is also more likely to win a simplified arbitration case than an ordinary securities arbitration case, says Samantha Rabin, managing editor of the Securities Arbitration Commentator, a New Jersey-based newsletter that tracks securities arbitration statistics. Investors who go through simplified arbitration win roughly 70% of the time, compared to about 50% of the time in ordinary arbitration hearings.
How do you file an arbitration claim?
The first step is to find out which regulatory organization has jurisdiction and the requisite expertise to handle your dispute.
There are several organizations that handle securities arbitration hearings, including the New York, American, Pacific, Cincinnati and Philadelphia stock exchanges, as well as the Chicago Board Options Exchange and the Municipal Securities Rulemaking Board. In many cases, you can choose the forum you prefer.
However, about 80% of the securities cases are heard by the National Assn. of Securities Dealers, which can arbitrate any dispute that arises out of the business of a member firm. In other words, disputed trades with NASD member companies can be taken to the NASD, regardless of what type of security the broker was selling.
If the dispute involves municipal bonds or options, the NASD may recommend taking the dispute to the Municipal Securities Rulemaking Board or Chicago Board Options Exchange, where arbitrators presumably have more experience dealing with problems specific to these investments.
Your next step is to call the sponsoring organization and ask for information and any forms necessary to file your claim.
After that, if your claim is for a substantial amount, you’d want to hire an attorney or arbitration specialist. State bar associations can usually refer you to securities litigators in your area. Arbitration firms, which are usually staffed by former securities brokers, are listed in the phone book.
Make sure to discuss fees and charges before you hire a professional. There is a wide variation in what experts charge to take your case to arbitration. Many attorneys work on an hourly basis, with rates ranging from $125 to $450. Some are also willing to charge a flat rate to prepare arbitration documents, if you want to represent yourself.
Arbitration firms, on the other hand, typically charge an up-front fee of about 5% of the amount you are claiming, plus filing fees. If you win, the firm will take between 15% and 30% of the amount you recovered.
For example, if you filed suit to recover $100,000, the arbitration firm would require a $5,000 deposit, plus filing fees of roughly $1,000. If you won $50,000, the firm that charged the 15% contingent fee would take an additional $7,500--for a total of $13,500. The firm that charges 30% would take a $15,000 contingent fee, resulting in a total cost of $21,000.
Also ask for references. The firm should be able to give you names and numbers of other individuals they have successfully represented.
If you have a relatively small claim and opt to handle it yourself, be sure to carefully follow the instructions provided by the sponsoring organization. Also make sure you provide the arbitrator with all the documents necessary to prove your claim, as well as a detailed narrative--including dates and times--of what happened.
Arbitrators are less likely than judges to throw a case out on a technicality, but it can still happen. And, because these decisions are so difficult to appeal, you want to make sure to present the most complete and compelling case possible.
Tips From the Experts
Want to increase your chances of winning a brokerage dispute? Here are some suggestions from the experts.
* Write it down: When you opened your account, you told the broker that you have very little tolerance for principal risk and you need access to your cash. He put you in an illiquid limited partnership and maintained that you told him you were a speculator looking for a good tax shelter.
If it’s your word against the broker’s, your chances of winning a dispute are 50-50. But if you confirmed your conversation in writing shortly after you opened the account--and you saved a copy of the letter--your chance of winning an “unsuitable recommendation” dispute are much improved, says Samantha Rabin, managing editor of the Securities Arbitration Commentator.
* Check account statements: You say you failed to read your account statements, so you didn’t notice that your broker bought the wrong stock until a year later. He says you authorized the purchase. If there was a mistake, he would have corrected it if you told him promptly.
Even if the arbitrator believes you, he may rule against you because a reasonable person should have discovered the error far sooner.
* Complain: If you find or suspect problems--improper trading, misrepresentation, unsuitable recommendations--ask a trusted financial adviser to review your account. If the suspicions are warranted, complain to the broker, the brokerage firm’s branch manager and the firm’s compliance department immediately. Make sure you clearly state what the problem is, how you discovered it and what you want the firm to do about it. Make these statements in writing. And be sure to keep copies for your records.
* Arbitrate promptly: One of the biggest mistakes investors make is not filing arbitration claims until years after a problem occurred, experts say. That presents two problems: First, there are federal and state statutes of limitations that could nullify your claim before it’s ever heard. Second, arbitrators may question the credibility of investors who allow illegal or improper activity to continue for years before objecting, says William Levine, chief executive of Investors Arbitration Services in Woodland Hills.
* Need more information? Here are the names and numbers of organizations that sponsor securities arbitration hearings.
American Stock Exchange: (212) 306-1000
Boston Stock Exchange: (617) 723-9500
Chicago Board Options Exchange: (312) 786-5600
Chicago Stock Exchange: (312) 663-2354
Cincinnati Stock Exchange: (513) 621-1410
Municipal Securities Rulemaking Board: (202) 223-9347
National Assn. of Securities Dealers: (212) 858-4400
New York Stock Exchange: (212) 656-2772
Pacific Stock Exchange: (415) 393-4000
Philadelphia Stock Exchange: (215) 496-5000