Securities Arbitration Overview

Since a Supreme Court ruling in 1973, brokerage firms, brokers, and other financial entities have been legally allowed to place an arbitration clause in their new customer agreements.  Today, virtually every brokerage firm and broker utilizes the arbitration clauses in a new investor contract, which essentially mandates that any disputes or claims between an investor and their broker immediately enter into arbitration, in lieu of other more costly and time-consuming legal methods.  If you want to file a securities fraud claim against the entity managing your securities account, a securities arbitration lawyer will most likely be required, except in rare circumstances where an initial customer agreement did not require claims and disputes to be resolved through arbitration. 

Grounds for Securities Arbitration Cases

Successful dispute claims made by investors require one or multiple grounds under which to file the broker misconduct claim.  The grounds for filing a successful claim must include three key elements.  First, a negligent, illegal, or unethical act must have occurred.  Second, damages were incurred by an investor, which are typically financial losses.  Third, this act specifically caused in part, or completely, the damages suffered by an investor.  Investor is a loose term here; however, plaintiffs in securities fraud cases by arbitration can range from one individual, or a retail investor, too large corporations and other institutional investors.  Defendants in securities arbitration cases may be banks, brokers, brokerage firms, and virtually any other financial entity involved with the management of your securities portfolio.  The most commonly cited grounds against defendants in cases of securities arbitration, include:

  • Misrepresentation or omission of facts and information, which had the investor known the truth about, would have influenced their decision regarding a given investment action or entire strategy
  • Unsuitability, which occurs when an investor has their assets placed in securities by their broker that do not suit their overall investment strategy, including the amount of risk absorbed, the age of the individual, the income status of the investor, and the overall financial goals of the individual investor
  • Churning, or excessive trading of assets in order for a given broker or firm to obtain higher fees and commissions on trades
  • Unauthorized trading, which involves brokers essentially going rogue, making trades without prior consent from investors, or not adhering to the pre-established protocols for reporting activity to investors with both discretionary or non-discretionary accounts
  • Unregistered or unlicensed employees, which occurs when a financial entity has unregistered individuals selling, or as part of the sales process, of securities to the public
  • Failure to execute trades, which may occur when an investor provides a specific set of directions to brokers for buy, sell, and trade orders given certain market conditions and the broker fails to do so promptly or at all
  • Breach of fiduciary duty, which includes all of the aforementioned items, but also, can include any other instance where a trusted financial professional does not work exclusively in the best interest of their investor clients

How Securities Arbitration Works

The Financial Industry Regulatory Authority, or FINRA, hears claims regarding securities investment fraud disputes regarding assets on both major exchanges.  During a typical arbitration, each side can present evidence, call witnesses, and produce expert testimony regarding an issue, which is done before a three-arbitrator panel for cases involving more than $50,000.  These three arbitrators will then assess the outcome of a case, as well as damage awards and any other unresolved issues.  Contrary to most investors’ initial beliefs, the arbitration process is not weighted towards the favor of brokers per se. 

Securities Lawyers for Arbitration

If you retain the counsel and representation of a securities fraud lawyer, the existing statistics on favorable plaintiff outcomes in securities arbitration cases are actually in your favor. Therefore, having a securities lawyer represent your claims is essential from the onset.  Without exception, brokers embroiled in a claim will undoubtedly come prepared with legal counsel, and for an unprepared investor, even with a seemingly prima facie case, this can prove disastrous without the assistance of a lawyer.