When Things Go Wrong
Solving Problems Between Investors and Their Brokerage Firms

Sometimes relationships between investors and their securities professionals sour. Securities laws provide for two very different responses to allegations of wrongdoing within the securities industry.

Public Response
The public response can take the form of remedial (sometimes referred to as "disciplinary") actions by the SEC or one of the securities industry's self-regulatory organizations (SRO), such as the National Association of Securities Dealers (NASD) or the nation's securities exchanges. Remedial actions are designed to stop and prevent future misconduct. For example, these actions can result in (1) court orders forbidding brokerage firms or their employees from engaging in certain kinds of conduct (anyone failing to obey the court's order risks imprisonment or other punitive action), (2) administrative orders by the SEC suspending or barring them from engaging in some or all aspects of the securities business, or (3) orders to give back illegally obtained money or pay fines and penalties. The SROs may impose similar sanctions on their members and employees of their members.

Particularly serious misconduct may be referred to criminal authorities for prosecution. State securities regulators can also take action against securities violators. Sometimes these actions require violators to return money to defrauded investors. Usually, however, the actions do not help individual investors and the SEC cannot directly intervene in disputes between investors and brokerage firms.

Private Response
Many investors try to recover losses that they believe were caused by inappropriate or illegal activities, either in Federal or state court or through arbitration. Claims against brokerage firms (and their employees) in arbitration are administered by the SROs of which a brokerage firm is a member. (The names and addresses of the SRO arbitration forums are listed below.)

Arbitration is a way to resolve disputes outside of the court system. It may be less complex, less expensive and less time consuming than the courts. While SRO employees administer the arbitration forums, they do not decide cases; independent arbitrators make the substantive decisions about cases based upon the facts that are presented to them. Investors in arbitration are not required to be represented by a lawyer, although many investors hire a lawyer to represent them. Investors without a lawyer should be careful in the proceedings because securities laws can be complicated and confusing. Moreover, industry parties to arbitration are usually represented by an attorney. Even though the SRO staff and arbitrators may try to be helpful to explain the process to investors who do not have a lawyer, they cannot act as an investor's lawyer.

An investor who brings a case should not expect someone else to act on his or her behalf. The arbitration rules require active participation by both the "claimant" and the "respondent." Claimants should carefully read all the arbitration rules, procedures pamphlets and the Arbitrator's Manual (prepared for arbitrators to help them administer cases fairly).

Arbitration cases are decided by one or three impartial persons (depending on how much money is involved in the dispute) who vow to resolve disputes fairly. While a majority of the panelists are not affiliated with the securities industry, one panelist is from the securities industry (but not with the company or people involved in the arbitration) in order to assure that there is adequate expertise among the decision makers. Decisions by arbitrators are final and binding, and the SEC and SROs cannot change or overturn an award by arbitrators. On rare occasions (for example, where there is arbitrator misconduct), a court may overturn, or "vacate" an arbitration award. The process for erasing an award requires the person dissatisfied with the award to act quickly -- within three months under federal law. Some states' laws may have different time requirements.

Disputes come to arbitration through one of two routes. All SROs require their members and members' employees to arbitrate disputes with customers at the customer's request. In addition, many securities firms have arbitration clauses or stipulations in the documents that investors sign when opening an account or using some special service from the firm. Since courts regard these arbitration contracts as binding, an investor signing such a contract cannot take a dispute to court.

Some disputes, nonetheless, may be resolved in the courts. To determine whether a dispute can be resolved in court, an investor should talk to a lawyer. As a general matter, however, the following kinds of disputes may be resolved in the courts:

Any claim that is part of a class action (a case involving numerous people complaining about a single person or company). These cases are so complex that the rules provide for them to be handled in the courts, even if the parties have an arbitration contract. If an investor is willing to give up any of the benefits of the class action case, however, he or she may pursue the claim in arbitration.

Disputes where there is no arbitration contract. While almost all securities firms use arbitration contracts for margin accounts, options accounts, and other complicated business (such as retirement accounts or managed accounts), they often do not use arbitration contracts for cash accounts in which the customer pays for the securities as they are purchased, and no other special services are requested. Without an arbitration contract, the customer is free to choose or not choose arbitration.

Disputes involving parties who are not members of an SRO. For example, because investment advisers are not SRO members, SRO arbitration departments ordinarily would not be able to accept a case against one. If an investment adviser is an affiliate of a brokerage firm that is a member of the SRO, however, and if the activities complained about are related to the brokerage activities, the arbitration forum may be able to accept the case.

The procedures for an arbitration depend, in part, on the amount of the claim. The rules and procedures are explained in pamphlets the SROs give to parties. Disputes up to $10,000 may be resolved solely on the parties' written submissions without any need to appear in person before an arbitrator. The fees for cases administered without a oral hearing, a simplified arbitration, begin as low as $30 for cases under $1,000, and increase to $150 for cases between $5,000 and $10,000. The procedures for cases involving claims over $10,000 are more complex, requiring oral hearings and sometimes prehearing conferences. The fees for complicated cases can reach several thousand dollars for claims over $5,000,000. At times, arbitrators order that some or all of the fees be refunded to a party, but that does not always happen.

Investors who pursue private actions in arbitration or court also are encouraged to file a complaint with the SEC or an SRO. These complaints help the regulators fulfill their own responsibilities. For example, the regulators may be able to take action to prevent other investors from being injured the same way. Unless formal public action is taken, the SEC cannot give investors information about an investigation. Moreover, even if an investor receives an award in arbitration, this does not necessarily mean that regulatory action is also taken. Similarly, action taken by regulators against an individual or firm does not necessarily mean that arbitrators will make an award in an investor's favor.

For more information about arbitration, contact:

American Stock Exchange
86 Trinity Place
New York, NY 10006-1881
(212) 306-1000

Boston Stock Exchange
One Boston Place
Boston, MA 02108
(617) 723-9500

Chicago Board Options Exchange
400 S. LaSalle Street
Chicago, IL 60605
(312) 786-5600

Chicago Stock Exchange
440 S. LaSalle Street
Chicago, IL 60605
(312) 663-2254

Cincinnati Stock Exchange
400 S. LaSalle Street 5th Floor
Chicago, IL 60605
(312) 786-8898

National Association of Securities Dealers
33 Whitehall Street
New York, NY 10004
(212) 858-4400

Pacific Stock Exchange
301 Pine Street
San Francisco, CA 94104
(415) 393-4000

Philadelphia Stock Exchange
1900 Market Street
Philadelphia, PA 19103
(215) 496-5000

Municipal Securities Rulemaking Board
1150 18th Street, NW Suite 400
Washington, D.C. 20036-2491
(202) 223-9347