BACKGROUND
The National Association of Securities Dealers (NASD) was organized to regulate the
securities industry in the United States. Through its
regulatory organization (NASD Regulation, Inc.) the NASD
oversees the activities of virtually all brokerage firms
doing business in this country. Under their Code of Conduct,
"a member, in the conduct of his business, shall observe
high standards of commercial honor and just and equitable
principles of trade." (NASD Conduct Rule 2110) This means
that any member who engages in securities business or
investment banking in the United States must abide by
these principles in its dealings with other members and
with the public. The NASD should not be confused with
the Securities and Exchange Commission (SEC), which ensures
compliance with United States securities laws.
While most daily securities transactions proceed properly, disputes and controversies occasionally arise. When they do, the investor often has the dispute resolved in arbitration. Arbitration is a process whereby a panel of industry experts, typically three, hear and resolve a securities controversy. Awards rendered are usually enforceable and are not generally appealable through the court system. Public customers, with disputes against member firms, can never be forced to arbitrate unless they have given prior written consent. If such consent has been given, then the customer must arbitrate the dispute. These so-called "arbitration clauses" have been held to be enforceable and effectively preclude the customer from going into court. (except in very limited circumstances).
The NASD, through NASD Dispute Resolution, is by far the largest dispute resolution forum in the United States, hearing approximately 90 percent of all arbitration and mediation cases. The NASD recruits, trains and supervises its roster of almost 7,000 arbitrators, which the parties may choose from. As a result, most cases by public customers against stock brokers and brokerage firms are arbitrated under the auspices of the NASD.
THE ARBITRATION PROCESS
Arbitration has significant advantages over going to court. It is usually much quicker, less costly and is not burdened by many of the legal restrictions and procedures associated with a court of law. Although court does have it benefits, (including extensive discovery and pre-trial procedures, right to jury trial and right to appeal), arbitration is often a more logical and sensible alternative for an investor. It is particularly useful in very complex cases which lend themselves to a hearing before a panel of securities industry professionals.
Another significant advantage of arbitration is that arbitrators also attempt to render awards very quickly, typically within 30 days of the hearing. In addition, it may be much easier to collect on that award than a court judgment because the NASD now has rules requiring respondent firms to pay awards within 30 days or face disciplinary proceedings. (This is critical since an uncollectable court judgment is equivalent to not winning.)
A customer pursuing a claim in arbitration has an absolute right to be represented by anyone of their choosing. This may be a lawyer or a firm that specializes in securities arbitration representation.
A public customer may only arbitrate a claim against a broker, or his representative, for transactions arising out of the business activities of that broker. In determining where to initiate the procedure, the customer generally will file with the self-regulatory organization (SRO) where the securities were listed or where the transaction occurred. For arbitrations initiated with the NASD, the customer has six years from the time of the occurrence to begin proceedings. Ordinarily, the NASD will attempt to schedule the hearing near the investor's home.
NASD arbitrations are conducted in accordance with their Code of Arbitration Procedure. This is an elaborate series of rules that define how the arbitration must proceed.
In simplified form, the process begins when a customer (claimant) files a Statement of Claim with the Director of Arbitrations which details the dispute. It will clearly and concisely list all relevant details of the dispute, including what relief is sought (money damages, enforcement of a contract, etc.) and will often include copies of supporting documents and exhibits which the claimant intends to rely on at the hearing.
The Statement of Claim is then served upon the named broker, or brokerage firm (respondent) by the Director of Arbitration. The respondent then has 45 days in which to file a response, which must state all defenses and any counter-claims.
At the time of filing the Statement of Claim, the customer must also sign and file a Submission Agreement provided by the SRO. By signing this document, the claimant agrees to submit to arbitration and to abide by the award. (including any counter claims awarded against claimant). At this point, the provisions of the Code of Arbitration Procedure become effective and binding.
The customer must also, upon filing the Statement of Claim, include a check or money order made payable to the sponsoring organization. This check will include amounts for the forum's filing fee and hearing session deposit. The amount of the fees generally depends on the amount in controversy. If the arbitrators feel that multiple sessions will be necessary, then increased hearing session deposits may be required.
Cases in which the amount in controversy is less than $25,000 are heard by one arbitrator under simplified arbitration procedures. These cases are decided solely "on the papers"- no hearing is scheduled unless the parties request it.
The parties then go through the process of choosing an arbitration panel with each side able to strike names from an NASD provided arbitrator list. The remaining arbitrators are ranked in order of preference and a panel is chosen and a chair selected.
At this time, the parties may also begin a period of discovery in which they voluntarily exchange relevant documents and information about their respective cases.
In some cases, a pre-hearing conference is held, usually by telephone, in order to resolve issues or set timetables for the remainder of the case.
At the hearing, both sides are able to present their cases fully- this includes the presentation of opening and closing arguments, witnesses and evidence and any documents that are relevant to the case. Each party has the right to cross examine witnesses and the arbitrators also may ask questions. While the rules of evidence do not apply, arbitrators often follow them as a guideline.
Hearings generally are held in a city located near the customer's home and can last from one day up to several weeks. Upon completion, the parties leave the arbitration room and are sent written notification by the NASD of the award, usually within 30 days. If an investor prevails, the respondent has 30 days to pay the award, or face disciplinary action. The award may also be turned into a judgment in any court of competent jurisdiction and lawfully enforced.
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