Arbitration
is a method of having a dispute between two or more parties resolved by
impartial persons who are knowledgeable in the areas in controversy. Those
persons are called arbitrators.
Disputes involving the sale of securities by RR's are typically resolved
by arbitration under the guidance of the National Association of Securities
Dealers (NASD) or the New York Stock Exchange (NYSE).
The author recommends the NASD for arbitration disputes and those policies
will be discussed in this paper.
The Code of Arbitration Procedure includes the NASD's rules governing
arbitration. Arbitration is typically begun by the customer who files
a Statement of Claim with the Director of Arbitration. The Statement should
be typewritten or printed stating the details of the dispute, including
all relevant dates and names, in a clear, concise and chronological fashion.
It should request the relief sought. The claimant should attach documents
and supporting materials as exhibits to the Statement of Claim. The claimant
should provide sufficient copies for each party, the arbitrators, and
the self-regulatory organization such as the NASD.
Depending on the amount of the claim in dispute, the filing fee, costs
of arbitration, and potential number of arbitrators varies. A typical
claim between $50,000 and $100,000 presently involves a claim filing fee
of $1,000 and a hearing fee of approximately $750. If a pre-hearing session
before one arbitrator is required, it requires an additional hearing deposit
of $450. The costs are typically reimbursed to the claimant if the claimant
prevails at the arbitration hearing.
After the initial Statement of Claim is served by the Director of Arbitration
on the defendant, it is each party's responsibility to provide every other
party directly with any further pleadings, motions or correspondence.
It is also the party's responsibility to simultaneously provide sufficient
copies to the NASD for the arbitrators and its files. In the Statement
of Claim, the claimant should state whether the claimant will be represented
by an attorney, and if so, the attorney's name, address and telephone
number. It is recommended that an attorney be retained by the claimant
because the brokerage house will have retained experienced counsel to
defend the claim.
The claimant should also state where she wants the case to be heard and
the reasons for that choice. The actual decision as to the place of hearings
is made by the Director of Arbitration. The hearing location will likely
be in a major urban area closest to where the transaction at issue occurred.
For instance, a Mississippi investor will likely have her claim heard
in either New Orleans, Louisiana or Memphis, Tennessee.
The proposed panel of typically three arbitrators will be composed of
a majority of persons from outside the securities industry. However, at
least one of the three arbitrators in a claim involving $100,000 will
be one with experience in the securities industry. It is possible to challenge
the appointment of arbitrators. The Director of Arbitration notifies the
parties of the names, current affiliations and ten year's business history
of the proposed arbitrators. In addition, parties will be informed of
any additional information disclosed pursuant to the Uniform Code and
the Code of Ethics for Arbitrators by any arbitrator. The parties may
then use this information to challenge an arbitrator so that the Director
of Arbitration will appoint a substitute arbitrator. A party has an absolute
right to request that one arbitrator on the panel be replaced without
giving any reason for the request. The right of challenge may be exercised
by filing a written Notice of Challenge with the Director of Arbitration.
In the author's experience, normally a listing of the decisions made by
the arbitrator in prior disputes is provided so if the arbitrator has
generally found for the brokerage house, you may want to challenge that
arbitrator. Each arbitrator is required to swear or affirm to render a
fair and just award based on the documents and evidence presented by the
parties.
Parties must make every effort to prepare the case in advance of the hearing
so that it may be resolved promptly and justly. Preparation includes arranging
for witnesses and documentary evidence to be made available for presentation
to the arbitrators at the hearing. At least ten calendar days prior to
the first scheduled hearing date, the parties are required to serve on
each other copies of documents (including graphs, charts, and recordings)
they intend to present at the hearing and identify witnesses they intend
to present at the hearing. Failure to do this may result in exclusion
of documents or witnesses.
Parties are required prior to the hearing to cooperate in the voluntary
exchange of documents and information to expedite the arbitration. NASA
Notice to Members 99-90 approved the use of the Discovery Guide. It requires
that the parties respond to Document Production Lists that will be served
on the brokerage house and its RR. A list is also served on the customer
and the customer will then have to produce copies of documents, correspondence
and other information. Copies of complaints or statements of claim filed
in any other civil action involving security matters or security arbitration
previously filed by the customer against a defendant must also be produced
to the defendant. (There are approximately twelve document production
requests that must be produced by the brokerage house and the RR. There
may be approximately thirteen document production requests that must be
produced by the customer. There are additional document production requests
for the specific type of claim filed. For instance, additional documents
generally are required to be produced for claims involving unauthorized
trading, churning and/or failure to supervise.) In the author's experience,
additional written interrogatories and request for production of documents
are typically agreed to between the parties. If necessary, the NASD may
be petitioned for a ruling on discovery disputes. Rule 10213 of the NASD
Code of Arbitration Procedure allows for necessary pre-hearing depositions
where the stockbroker or other witness can be questioned under oath before
a court reporter. However, these are discouraged by the NASA. Therefore,
if allowed, depositions should not be lengthy proceedings and should be
expedited in accordance with the nature of arbitration to save time and
expense.
The parties will be notified in writing of the date and location of the
initial hearing at least eight business days in advance. A verbatim record
or recording is kept of the proceedings. A party that elects to have the
record transcribed bears the cost of the transcript unless the arbitrators
direct otherwise. At the hearing, the parties must present their respective
cases by testimony and documentary evidence to the arbitrators. Claimants
should document carefully the issues involved and their proof of damages,
and explain to the arbitrators how much in money damages is being claimed
and how they arrived at that figure.
The arbitrators are experienced and knowledgeable individuals. They appreciate
a clear presentation of the case free from repetition and irrelevant matter.
Generally, the following procedures will be observed at the hearing:
1. The arbitrators and the witnesses will be sworn.
2. Each party will be given an opportunity to make a brief opening statement, that is a brief outline of the issues involves and what facts that party intends to prove. A party may waive the opening statement, but the author suggests that is not a good practice.
3. The claimant will present facts to the arbitrators including relevant documents and testimony to establish and prove her claim.
4. The respondent will present his case in the same manner as the claimant. Witnesses and parties who testify will be sworn and are subject to cross-examination by the opposing side and to questioning by the arbitrators. The opposing party may object to any evidence prior to its receipt by the arbitrators. The parties should bring sufficient copies of documents for each of the arbitrators, other parties and the representative of the sponsoring organization. A party may offer an affidavit in lieu of live testimony of a witness, but this may or may not be allowed by the arbitrators. Parties should be prepared to explain why the witness could not come to the hearing and to explain whether the other party had an opportunity to examine the witness. A party should be prepared to bring the witness if the affidavit is not allowed, so relying on an affidavit is not a good practice.
5. Any counterclaim or other matter may be presented in the same way.
6. Parties may present rebuttal evidence if appropriate.
7. Closing statements may be presented and consist generally of final arguments by the parties and brief summations of the testimony and other evidence introduced at the hearing. A party should refer only to the evidence already in the record and not use the closing statement as an opportunity to present new evidence.
8. The arbitrators may proceed with a case even when a party does not appear and/or answer.
9. When the arbitrators have reached a decision typically several weeks later and have signed an award, copies will be mailed to the parties. The award will be in writing and signed by a majority of the arbitrators. The award may be entered by the prevailing party as a judgment in any Court of competent jurisdiction. All awards are required to be paid within thirty days of receipt unless a motion to vacate has been filed in Court. Typically, the awards will bear interest if not paid within thirty days.
It is important to remember that the arbitrator's decision will be based
solely on the documents and related material provided by the parties to
a dispute. It is therefore important that a party's case be carefully
and thoroughly prepared. In addition, it is the responsibility of the
parties to submit briefs for any novel theories of recovery and/or requests
for special damages. In some cases, arbitrators may require even parties
without lawyers to support their claims by reference to the relevant law.
Rule 10214 of the NASD Code of Arbitration states that arbitrators shall
be empowered to award any relief that would be available in a Court under
the law. The arbitrator(s) shall issue an award setting forth a summary
of the issues including the types of disputes and the damages or other
relief requested and awarded. The arbitrators are not required to write
an opinion or provide a reason for their award or ruling. Under Rule 10125,
the arbitrator(s) have the authority to provide for reasonable attorney's
fee reimbursement, in whole or in part, as a part of the remedy.