SEC Offers Guidance on Use of Arbitration in Broker-Dealer Disputes
Commentary by Steven Lofchie
In an Investor Bulletin, the SEC Office of Investor Education and Advocacy ("OIEA") offered guidance to customers on the use of arbitration to resolve disputes with their broker-dealers.
The OIEA reminded investors that most disputes are resolved through arbitration as opposed to mediation or litigation because most contracts entered into between broker-dealers and their customers require disputes to be settled through arbitration. The OIEA noted that if no such agreement exists, broker-dealers cannot force their customers to arbitrate.
The OIEA described the arbitration process, explaining (i) how to file an arbitration claim, (ii) the different types of arbitration available, (iii) the process for selecting an arbitrator and (iv) how an award is determined and the restrictions on contesting the decision.
The OIEA reaffirmed the benefits of mediation and reminded investors that if mediation does not produce an agreement, parties may still submit an arbitration claim.
Commentary
This is a useful description of the arbitration process, but it contains a glaring omission. The FINRA rules give customers an absolute right to arbitrate in all events. Thus, even in the absence of an agreement to arbitrate, the customer can force the broker-dealer to arbitrate rather than go to court.
The SEC's description of arbitration agreements reads as if broker-dealers have an unfair advantage over customers in forcing customers to arbitrate. In fact, the FINRA rules give the advantage, such as it is, to the customers, by always allowing a customer to force arbitration even if a broker-dealer would prefer to go to court. In order to level the playing field by allowing either party to force arbitration, the broker-dealer must obtain an agreement from the customer.