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Securities Arbitration

I. Introduction

In addition to traditional securities litigation in the US there is an alternative a increasing trend for dispute resolution in the US Securities Industry, the “alternative dispute resolution’ or ADR.

Investors with the following investments should contact us in order to determine wether Securities Arbitration might be best suited for your claim:

 

Rhonda Breard & Breard Wealth Management / ING

Medical Capital Corporation

CIT InterNotes

Tenant-in-Common (TIC) 1031 exchanges

Provident and Share Royalties Investment Losses

Oppenheimer Bond Funds

Lehman Brothers Principal Protected Notes and other Structured Products

Charles Schwab YieldPlus Fund

 

If you have lost money due to your investments, you may be entitled to recover some of your losses through securities arbitration.  Please contact SanDiego@Thieler-Boeh-Seitz.com

 

 

ADR is per se not a new approach to dispute resolution at all but is increasingly common within the US Securities Industry. Since the 1800’s ADR has already been used in the US Securities Industry . Despite criticism and concerns whether ADR, and in particular the arbitrators, are bound and have to follow the dictate of the law , arbitration in particular, due to an overcrowded court system is faster, more cost-efficient , and due to several opinions of the United States Supreme Court by removing any barriers to resolving securities cases through arbitration the use of ADR, has increased dramatically during the last decade .


II. History of ADR in the Securities Industry

The process of alternative dispute resolution was used by securities institutions such as the New York Stock Exchange as early as 1817 .  Since 1872, the securities exchanges and regulators have developed rules for the fair and effective administration of disputes . As of today most present disputes between the securities industry and its customers, as well as those among the securities industry, in particular between the securities industry members and their employees, are all channeled into arbitration or submitted to mediation or other alternative dispute resolution processes usually at securities dispute resolution forums . Beginning in 1971, Congress granted the SEC “expansive power” to ensure the adequacy of the various exchanges and NASD’s arbitration rules and procedures .


III. Self-regulatory Organizations

Before illustrating the relevant law for ADR in the US securities industry, it is essential to understand how the securities industry in general is regulated and organized.
Since the Wall Street crash in 1929 (also known as the “Black Thursday”), the Great Depression, and numerous securities market scandals - Enron, WorldCom, Tyco, and others - the securities industry is heavily regulated  thru the Securities Exchange Acts of 1933 and 1934, Maloney Act, Federal Arbitration Act of 1925, The Securities Investor Protection Act of 1970, the Uniform Securities Act of 1930 in its latest revision of 2002, Sarbanes–Oxley Act of 2002, just to name a few.
In 1938 the Securities Exchange Act of 1934 was amended by the Maloney Act and pursuant to the federal statue the Securities Exchange Act of 1934 codified at Title 15 (Commerce and Trade) of the U.S. Code Chapter 2B Section 78s (b) (1), national securities exchanges, securities associations, and clearing agencies are required to register with the United States Securities and Exchange Commission or “SEC” . These registered organizations are called ‘self-regulatory organizations’ or “SROs” and also administer securities arbitration, provide arbitrators, arbitrator education, and set rules for their members , including those employees who are engaged n the sale or trading of securities . Therefore brokers and dealers can only do business if they have to register with the SEC respectively with the appropriate SROs . According to Title 15 (Commerce and Trade) of the U.S. Code Chapter 2B Section 78c (a) (26) self-regulatory organizations are by statute definition “any national securities exchange, registered securities association, or registered clearing agency’. Even though the SEC has the authority to set rules regarding broker/dealers, the SEC has delegated much of this authority to the SROs, most importantly to the FINRA or “Financial Industry Regulatory Authority“ , which is the successor organization to the National Association of Securities Dealers (“NASD”). On July 26, 2007 the SEC approved a merger of the enforcement arms of the NYSE and the NASD, to form a new SRO, the Financial Industry Regulatory Authority (FINRA) . Most US Securities firms are members of FINRA .  Other SROs include the, the New York Stock Exchange (NYSE), the Boston Stock Exchange, Chicago Board of Options, Cincinnati Stock Exchange, Midwest Stock Exchange, Municipal Securities Rulemaking Board, Pacific Stock Exchange, Philadelphia Stock Exchange, National Futures Association (NFA), the American Stock Exchange, and the NASDAQ  or ‘National Association of Securities Dealers Automated Quotation System’ . FINRA is the only securities association registered with the SEC . The NFA is the futures industry's self-regulatory organization under Section 17 of the Commodity Exchange Act . Other non-SRO ADR forums that exercise securities are the American Arbitration Association (“AAA”), with official, statutory status, Judicial Arbitration and Mediation Service, and others .
Although per definition these self regulatory organizations regulated themselves, they are required to file with the SEC any proposed rule or proposed change to its rules, including rules concerning the Alternative Dispute process, which the SEC, in return publishes for public comment and consideration, before confirming them . In addition to the SEC the U.S. Congress through its investigative arm the Government Accountability Office, formerly known as the General Accounting Office, watches also over the SROs . The SROs are the main forum of ADR within the Securities Industry, but there are also non-SROs ADR forums that are generally used for Securities Industry ADR, since either some arbitration clauses in broker/dealer agreements include a choice (so called Amex Window) or the parties mutually agree upon a non-SRO ADR forum . Before illustrating the SRO and non-SRO ADR forums and their procedures it is crucial to be familiar with some of the most relevant ADR US and Securities laws.

IV. ADR relevant US and Securities laws

There is various general US, and in particular Securities US law, that governs and effects procedures within ADR. General US Federal and State civil procure law also influences ADR and its process , as well as a variety of US Securities laws that from case to case apply. The following laws represent an excerpt of the most relevant codes and rules affecting ADR in the US Securities Industry.

1. Federal Arbitration Act of 1925

The Federal Arbitration Act (“FAA”) became law in 1925 and embodies a strong public policy favoring the ADR process of arbitration without mandating federal jurisdiction . The FAA has 16 sections; some sections are pointed out in the following. Under Section 1 the FAA applies with some exception to all contracts affecting commerce, where commerce understood by the Supreme Court as most economic transactions .
The FAA represents the cornerstone of judicial acceptation of arbitration in general, as it made arbitration contracts under Section 2 “valid, enforceable and irrevocable” , Section 3 ensures that a pending case before court remains pending but stayed until the arbitration is completed in order to avoid duplicative proceedings and potential conflicting outcomes, which could occur when arbitration and court proceedings are conducted simultaneously .
Section 4 provides in the event of a party refusing to arbitrate the opposing party with a right to sue for an order to compel the party to participate in arbitration, which is heard as a motion according to Section 6 .
If a party fails to agree on an arbitrator the court may appoint one under Section 5 . According to Section 7 Arbitrators can issue subpoenas for witnesses to appear before them and bring material evidence and section 9 provides the victorious party in arbitration with the right file a petition within one year with the court to enter the arbitration award as a court judgment .
  
2. Uniform Arbitration Act and Revised Uniform Arbitration Act

The Uniform Arbitration Act (UAA) from 1955 was intended to harmonize the arbitration law within the U.S. states   and has been one of the most successful Acts of the National Conference of Commissioners on Uniform State Laws with 49 jurisdictions that have adopted substantially similar legislation . The UAA has 25 sections. Its purpose is to validate arbitration agreements, but also make arbitration process effective by providing necessary safeguards and an efficient procedure for arbitration .
Nevertheless the UAA left some gaps which were closed by the Revised Uniform Arbitration Act (RUAA), which has 33 Sections. Applicable Sections for the ADR process within the Securities Industry will be illustrated in detail in the Securities Arbitration section .

3. Uniform Mediation Act
  
The Uniform Mediation Act (UMA)   approved by the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) in 2001 consists of 14 sections and provides a uniform guideline for the mediation process . The most important sections are section 2 to 9 . Section 2 defines relevant terms, Section 3 indicates that the UMA applies to mandatory and voluntary mediation, Section 4 explains the privileged nature of mediation and disclosure provisions, Section 5 provides waivers to Section 4, Section 6 contains various exceptions to the section 4, Section 7 prohibits a mediator to make specific reports, Section 8 provides confidentiality provisions, andSecion9 requires mediators to disclose all potential conflicts of interest.  

4. Securities Act of 1933 and Securities Exchange Act of 1934

A claim before ADR may be based on a violation of federal securities law . The Securities Act of 1933 and 1934 are the cornerstone of Federal Securities Law and build the foundation for investor protection in the United States . While most claims under the Securities Acts are brought as class actions pursuant to PSLRA before Federal Courts, purchasers of registered securities are also able to bring claims under the Securities Acts to ADR . The Securities Act of 1933 is designed to regulated the initial public offering of securities and ensure that investors receive enough significant and material information thereof, whereas the Securities Act of 1934 is intended to regulate the trading in securities which are already issued and outstanding .

a) Securities Act of 1933

Between 1911 and 1933 the securities industry was regulated at state level by so called “blue-sky law” , but due to the financial crisis surrounding the Black Thursday of 1929 and the Great Depression the US congress enacted at Federal Level in 1933 the Securities Act of 1933 or Federal Securities Act . The Securities Act of 1933 focuses on a single regulatory provision and requires that any issuance of securities to public investors be registered by filing a registration statement with the SEC, unless an exemption from the registration exists under the law . Rule 144, promulgated by the SEC under the 1933 Act, permits, under limited circumstances, the sale of restricted and controlled securities without registration   Sections 6,7, and 8 of the Securities Act of 1933 contain a statutory scheme for the registration process . The Securities Act of 1933 is in some respect a criminal statue   and anyone who signs the registration statement is subject to liability under section 11 for any material misstatement or omission therein .   A purchaser of a registered security may sue a single person or jointly the securities issuer, the companies chief executive, financial and accounting officers, each director, underwriter, and each accountant or other experts   under Section 11 of the Securities Act of 1933 when a registration statements contains “an untrue statement of a material fact or omit[s] to state a material fact required to e stated therein or necessary to make the statements therein not misleading”. Section 12 is broader than Section 11 of the Securities Act of 1993   and has two parts. Section 12 (a)(1) provides a purchaser of a registered security the right to bring an action against a person that “offers or sells a security in violation of section 5” .  Section 12(a)(2) take over where Section 11 leaves off and furnishes the purchaser of a registered security with the right to hold any person who offers or sells a security liable, if the purchaser acquired the securities by “means of a prospectus or oral communication” which includes a material misstatement or omission .Section 15 mandates that in general anyone who controls a person liable under Section 11 or 12 is jointly and severally liable to the same extent as the controlled person . Section 17(a), the antifraud provision of the Securities Act of 1933, is a provision of criminal character that covers fraud in the offer or sale of securities . Section 17 is not only limited to the initial offering, but also for fraud in the secondary market . 

b) Securities Exchange Act of 1934

The Securities Exchange Act focus is on the secondary market and the securities market regulation . The Securities Exchange Act of 1934 covers the creation of the SEC, regulation of the stock exchanges and securities firms through the SROs, and other important instruments of the securities industry regulation . It requires brokers and dealers to register with the SEC and regulate their activities . Besides provisions that impose disclosure and other requirements on publicly traded companies , the Securities Exchange Act of 1934 contains a number of provisions that may lead to civil liability of different participants of the securities trading process . In addition to the provisions of the Securities Exchange Act of 1934 there are additional general rules and regulations promulgated under the Securities Exchange Act of 1934. The most important provision for investor protection is clearly Rule 10b5, the securities antifraud rule promulgated under the Securities Exchange Act of 1934 . Every securities transaction lives under its protective shade . Rule 10b5 is very similar to the wording of Section 17(a) of the Securities Act of 1933 . While Section 17(a) covers fraud in the sale or offer of securities, rule 10b-5 covers fraud in the purchase or sale of securities in the secondary market . Typical 10b5 cases include, securities trading, where a party to a securities gives false or misleading information, corporate trading, where a corporate manager induces the corporation to enter into a disadvantageous securities transaction, corporate disclosures, where a corporation issues false or misleading information to the public, insider trading, where corporate insiders either use confidential corporation information to take advantage or tip the information to others, outsider trading, where outsiders with no relationship to the corporation use confidential information about the company to their advantage, and customer- broker disputes, where securities professionals engage in deceptive or other unprofessional conduct.

Rules 10b-5 does not itself specify the elements a plaintiff must show to be entitled to recovery, but the Supreme Court has identified the following elements. A plaintiff has to show that the defendant affirmatively misrepresented a material fact or omitted a material fact that made the statement misleading (material misinformation), that the defendant knew or was reckless in not knowing of the misrepresentation (scienter), that the plaintiff relied on the misrepresentation (reliance), that the plaintiff suffered actual losses as a result of the reliance (causation or loss causation), and finally that the plaintiff suffered damages (damages) . Claims under 10b-5 are today commonly heard in Federal courts after the Private Securities Litigation Reform Act of 1995 (PSLRA) reduce the abuse of the random securities lawsuits in order to address the problem of “professional plaintiffs” and other abusive practices . The Securities Litigation Uniform Standards Act of 1998 (or Uniform Standard Act, “SLUSA”) also preempted the role of state law and state courts. It closes the gap of PSLRA and requires that also claims under Section 11 and 12 of the Securities Act of 1933 be brought in Federal Court , but SLUSA does not apply for individual or derivative lawsuits . While the Securities Act of 1933 was rarely amended, the Securities Exchange Act of 1934 experienced a number of amendments .

5. The Uniform Securities Act

Since not all investments are covered federally and not all investment dealers are registered at the federal level the NCCUSL created in 1956 the Uniform Securities Act (“USA”). The USA provides guidance for each state in voluntary drafting its state securities laws . The most recent revision of the Act is the Uniform Securities Act of 2002 .
Since then more than 30 states, except New York, California, and Texas,   have adopted most or some of the provisions of the Uniform Securities Act . The Uniform Securities Act is divided into four parts. Section 101 and 102 contain antifraud provisions, Section 201 to 204 broker-dealer registration provisions, Section 301 to 306 securities registration provisions in Sections 301 to 306, and Section 401 to 419 general provisions such as definitions, exemptions, administrative, judicial review, investigatory, injunctive and criminal provisions, and others .
The Uniform Securities Act of 2002 thus far has been endorsed by the North American Securities Administrators Association, the Securities Industry Association, the American Bar Association, ABA Business Law and Litigation Sections, Investment Counsel Association of America, National Association of Securities Dealers, now FINRA, New York Stock Exchange, and the Certified Financial Planner Board of Standards .

6. The Securities Investor Protection Act of 1970

A larger number of brokerage firms experienced various types of financial difficulties in the 1960s and a financial collapse of one of its large member firms in 1963 , resulted in the Securities Investor Protection Act of 1970, which established the Securities Investor Protection Corporation or ‘SIPC’ .  The SIPC is responsible for establishing and maintaining a fund for the benefit of injured investors . It becomes a party to proceedings to liquidate securities broker-dealer which gets into financial difficulties and to arrange for the payment of claims asserted by their customers . The SIPC provides coverage to injured investors up to $500,000 per customer, but only up to $100,000 in cash if the investor has a claim for cash as opposed to a claim for securities .
The SIPC does not protect investors for any potential loss while invested in the securities market based on claims against broker-dealers that do not involve misappropriation or conversion . Thus the SIPC protects investors whose securities were misappropriated, never purchased, or stolen, but not against fraudulent sales practices, unsuitable investments and failures to execute sell orders . Most recently the SIPC had to reimburse/turn over $500million to investors harmed by Bernard Madoff‘s $50billion ponzi scheme . SIPC does not employ arbitration or any other ADR process within its decision process, but when a case is pending before court or arbitration and the broker/dealer files for bankruptcy protection then the SIPC may step in . 
 
7. SRO ADR Rules

In the 1970s most SROs had their own separate rules for administering securities arbitration disputes. The SEC’s Office of Consumer Affairs recommended the adoption of uniform alternative procedures for handling investor disputes and the creation of a new entity to administer them and as a result the Securities Industry Conference on Arbitration (“SICA”) was established in April 1977. 
The SICA originally developed and adopted a simplified uniform code procedure for alternative resolving investor claims up to $2,500, then raised it for claims up to $25,000, and later developed and adopted the Uniform Code of Arbitration (Uniform Code or Code), which established a uniform system of arbitration procedures to cover all disputes between customers and broker/dealers regardless of amount.  In addition, SICA prepared an explanatory booklet for prospective claimants (Procedures Booklet or Arbitration Procedures) explaining procedures under the Uniform Code. These rules were subsequently adapted to some regard by the SROs .

a) NASD / FINRA ADR Rules

The NASD adopted and further developed the SICA Uniform Code as the NASD Code of Arbitration  . Following the formation of FINRA the SICA no longer maintained or continued to amend the Uniform Code . Later FINRA’s Uniform Code of Arbitration was superseded by the Customer Code (Rule 12000 Series) and the Industry Code (Rule 13000 Series) on April 16, 2007 for claims filed on or after that date. The NASD Uniform Code of Arbitration remained in effect for cases filed before April 16, 2007. FINRA’s Uniform Code of Arbitration Procedure consists of a code arbitration procedure with general provisions and a Code of Arbitration Procedure for Customer Disputes and for Industry Disputes.
Both Arbitration Procedure Codes have nine parts with some overlapping general explanatory and procedural provisions. The specific parts will be referenced as needed later within illustration of the Securities Arbitration Procedure .
FINRA has its own “Code of Mediation Procedure” with ten sections under which all arbitrable securities disputes are eligible for mediation. 
The securities ADR process is also overseen by the National Arbitration and Mediation Committee (“NAMC”), which includes representatives from the public, the securities industry and the arbitrators and mediators serving in FINRA’s Dispute Resolution forum FINRA’s Dispute Resolution forum . Under Section 12102(b)/13102(b) of FINAR’s Code of Arbitration Procedure for Customer/Industry Disputes the NAMC has “the authority to recommend rules, regulations, procedures and amendments relating to arbitration, mediation and other dispute resolution matters to the Board” and “has such other power and authority as is necessary to carry out the purposes of the Code.”

b) ADR Rules of other SROs

Other SROs that implemented ADR Rules within their legal framework are for instance the NYSE and the NFA. The NYSE Regulation, a subsidiary of NYSE, continues to be responsible for monitoring trading that occurs on NYSE and NYSE Arca, Inc., and conducting investigations of suspicious trades.
The NYSE had its own Arbitration Rules (Rules 600 to 639) and Mediation Rules for NYSE disputes are governed under Rule 638, but amended them on August 06, 2007, including the addition of Rules 600A, which mandates that “Any dispute, claim or controversy between or among member organizations and/or associated persons shall be arbitrated pursuant to the NASD DR Codes of Arbitration Procedure”. Therefore any dispute after August 06, 2007 will be heard before the FINRA. 
The NFA is responsible for Futures disputes within the Securities Industry . NFA has its own ‘Code of Arbitration’ for future related disputes between customers and NFA members  along with its Customer Arbitration Publications  and ‘Member Arbitration Rules’ for disputes between NFA members . The NFA Code of Arbitration contains 19 sections and enables its mediation process within various Sections there under. The NFA does not have a own code of mediation but rather leave the choice of applicable provisions up to the parties. NFA offers a list of mediation services, including among others the AAA and JAMS. Thus if the parties agree upon mediation for a securities dispute before NFA they will have to choose what mediation forum and provisions should be applicable. 
 
8. ADR Rules of non-SRO Securities ADR forums

In addition to SRO Securities ADR forums like FINRA and NFA there are also non-SRO Securities ADR forum that can be utilized for ADR within the Securities Industry by parties either by consensus or by written pre-agreement.
a) American Arbitration Association ADR Rules

American Arbitration Association has among various arbitration and mediation provisions general specific provisions for commercial Arbitration and Mediation rules that apply in connection with its Securities Arbitration supplementary procedure provisions whenever the parties' arbitration agreement refers to the Securities Arbitration Rules of the American Arbitration Association, or where the parties mutually agree to utilize these Procedures to resolve a securities or commodities disputes  

b) Judicial Arbitration and Mediation Service ADR Rules

Judicial Arbitration and Mediation Service or “JAM” is an ADR forum with arbitrators that are mostly former judges . JAMS is used by NFA for mediation purposes .

c) Securities Arbitration Clinic

In order to reduce the costs for arbitration many law schools throughout the United States have initiates securities arbitration clinics.   These clinics are programs, where law students under the supervision of faculty members and lawyers offer mostly free representation before ADR forums, where a representation by a non-attorney is possible. 

V. ADR procedures within the Securities Industry

Within the securities industry most of the commonly known alternative dispute resolution processes are applied. For simplicity purposes the following ADR procedures are based on the FINRA, NFA and AAA ADR rules. Due to an increase of costumers in the securities industry, which have signed with their brokerage firm agreements requiring arbitration of all claims arising from the brokerage account, most frequently arbitration is used, followed by most popular ADR form mediation, whereas conciliation and negotiation should be part of every pre arbitration or mediation process. 

1. Arbitration within the Securities Industry ADR

Arbitration within the US securities industry is not only the most commonly used form of ADR within the Securities Industry , it is also the most commonly used for of dispute resolution form within the Securities Industry . The Arbitration process in the Securities Industry does not vary drastically from Arbitration in general. Even though Securities Arbitration varies from within each arbitration forum, in general every Securities Arbitration forum includes the following general steps: initiation and filing, arbitrator selection, preliminary hearing, discovery, hearings, post-hearing submissions, award based on the sections of the FAA.  The securities arbitration process before FINRA is overseen by the National Arbitration and Mediation Committee . Each procedural step is explained in detail in the following.

a) Initiation and Filing

In order to initiate arbitration the party requesting arbitration needs to address its demand for arbitration at the appropriate arbitration forum either mandated by the arbitration agreement or by both parties consensus. Under FINRA rules the securities arbitration process is initiated by filing an executed statement of claim or complaint including the appropriate  filing fees under the FINRA rules  .
For futures and options disputes NFA regarding options and futures requires a notice of intent to arbitrate according to Section 6 (a) of the NFA Code of Arbitration / Section 5 (a) of the NFA Member Arbitration Rules is filed.
In order to initiate the arbitration process at the American Arbitration Association the demanding party ‘claimant’ needs to file a demand for arbitration along with a copy of the arbitration provision and the appropriate filing fee to the with the American Arbitration Association  or both parties need to submit in cases where no arbitration agreement exists or the American Arbitration Association is not named as the resolution provider in the agreement a written submission to arbitrate under AAA Commercial Arbitration Rules and Mediation rules signed by the parties including the appropriate filing fee .
Under the latest FINRA Code of Arbitration for Customer/Industry Disputes the party requesting arbitration in accordance to FINRA rules has a time limitation of six years. SICA Code of Arbitration mandated a 6 year time limitation as well, the so called six year limitation or eligibility rule, but it was controversial discussed who has jurisdiction over the decision, whether the court or the arbitrator/arbitration panel. FINRA put an end to the discussion for FINRA applicable Arbitration with the implementation the wording “he panel will resolve any questions regarding the eligibility of a claim under this Rule” . FINRA’s Code of Arbitration for Customer/Industry Disputes Sec. 12206 (a) 2/ 13206 (a) 2 continue to include the six year limitation.
Under NFA Code of Arbitration Section 5 and Section 4 Member Arbitration Rules a party has two years to initiate arbitration from the date when the party filing the Arbitration Claim knew or should have known of the act or transaction that is the subject of the controversy.
The American Arbitration Association does not have a time limitation provision.
Once initiated the respondent will be served with the documents of the initiation of the arbitration .
According to FINRA Section 12303 of the Code of Arbitration for Costumer Disputes / Section 13303 of the Code of Arbitration for Industry Disputes the respondent has 45 days from the date of service to respond. The latest FINRA rules do not differentiate in time limits to respond in simplified arbitration under Section 12800/13800 of the Code of Arbitration of Customer/industry Disputes compared to the old FINRA Code of Arbitration Section 10302.
NFA distinguishes in the respondent’s time to answer to an arbitration claim depending on the amount in controversy. For claims under 50,000 a respondents shall answer the arbitration claim within 20 days, for claims over $50,000 the answer shall be returned within 45 days . 
A respondent may file an answering statement in duplicate with the American Arbitration Association within 20 days from the commencement of administration, simultaneously sending a copy of the answering statement to the claimant .

b) Arbitration Panel Selection

Once the respondent’s answer is received the parties need to agree on an arbitration panel.
Under FINRA the parties will have to agree on one up to three arbitrators depending on the amount in controversy.  Despite other simplified arbitration provisions for small claims under $25,000 arbitration under FINRA rules will be decided in general by a single public arbitrator selected from the public chairperson roster.   Beyond $25,000 and under $100,000 the FINRA arbitration will be heard before in general one public arbitrator selected from the public chairperson roster unless both parties agree to a three arbitrator panel, which will consist in general out of one non-public arbitrator and two public arbitrators, where one of whom will be selected from the public chairperson roster . If the claim is over $100,000, there are in general three arbitrator, which will consist in general out of one non-public arbitrator and two public arbitrators, where one of whom will be selected from the public chairperson roster, deciding over the arbitration under FINRA rules, unless both parties agree to one arbitrator, generally one public arbitrator selected from the public chairperson roster . 
Under FINRA Rule 12400/13400 Code of Arbitration for Customer/Industry Disputes the parties will receive a “neutral list” generate on a random basis by the “neutral List Selection System” a computer system out of FINRA’s roster of arbitrators depending on the number of arbitrators they need and hearing location . FINRA maintains three rosters of arbitrators, a roster of non-public arbitrators as defined in Rule 12100(p) /13100(p) Code of Arbitration for Customer/Industry Disputes, a roster of public arbitrators as defined in Rule 12100(u)/ 13100(u) Code of Arbitration for Customer/Industry Disputes, and a roster of arbitrators who are eligible to serve as chairperson . Non-pubic arbitrators under Rule 12100(p)/13100(p) Code of Arbitration for Customer/Industry Disputes are ‘industry related’ arbitrators  , such as a person “associated with, including registered through, a broker or a dealer (including a government securities broker or dealer or a municipal securities dealer)”, or an “attorney, accountant, or other professional who has devoted 20 percent or more of his or her professional work, in the last two years, to clients who are engaged in any of the business activities listed in paragraph (p)(1)”; or  “an employee of a bank or other financial institution and effects transactions in securities, including government or municipal securities, and commodities futures or options or supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities”.  Public arbitrators are arbitrators that are for instances not engaged in the conduct or activities described in Sec. 12100 (p)(1)–(4)/13100(p) (1)-(4) Code of Arbitration for Customer/Industry Disputes.
If the arbitration panel consists of one arbitrator the FINRA Neutral List will list eight arbitrators and the panel consists of three arbitrators the FINRA Neutral List will list 24 arbitrators . Both parties then will select their panel through a process of striking and ranking the arbitrators on lists . The Director will then prepare combined ranked list(s) of arbitrators based on the parties' numerical rankings and appoint the arbitrator(s) .
NFA mandates that arbitration under NFA Rules are heard for claims under $50,000 before one arbitrators, between $50,000 and $100,000 before one arbitrator unless the parties request a panel of three arbitrators, and for claims over $100,000 before three arbitrators . The NFA provides each party with a list of names of arbitrators . For Customer arbitration disputes the customer can request that the arbitration panel does include/ consist of an arbitrator not connected wit an NFA Member or NFA (except as NFA arbitrators) , otherwise the arbitration panel consists out of individuals who are NFA members of individuals therewith . Once each party received the list by the NFA each party can object to any arbitrator and the Secretary of NFA then appoints the arbitration panel .

Unless otherwise agreed upon securities arbitration claims under $100,000 are heard at the American Arbitration Association before one arbitrator, claims over $100,000 are generally heard before an arbitration panel consisting of three arbitrators . The AAA will submit to each party for disputes heard before a single arbitrator a list of five proposed arbitrators, not be affiliated with the securities industry, drawn from the National Panel of Securities Arbitrators and each party may strike two names from that list . In disputes before an arbitration panel of three arbitrators the AAA generally will provide each party with two lists of arbitrators, one with five names of five names of arbitrators affiliated with the securities industry and the other with ten names of arbitrators not affiliated with the securities industry. The parties will then strike any names objected to if any. From the remaining names on the both lists the AAA will select appoint one arbitrator from the first list and two from the second list . The rules containing provisions about disclosure obligations and ethical standards will be illustrated in Section .

c) Preliminary Hearing

Once the arbitration panel is appointed the parties will meet for a preliminary hearing, which under FINRA Rule 12500/13500 Code of Arbitration for Customer/Industry Disputes, NFA Rule Section 8 (g) of the Code of Arbitration/ Section 7(g) of the NFA Member Arbitration Rules, and Rule 20 of the AAA Commercial Arbitration Rules an initial prehearing conference’ is generally held by telephone.
Under FINRA Rule 12500 (c) within the preliminary hearing the arbitration panel will set discovery, briefing, and motions deadlines, schedule consecutive hearings, and address other preliminary matters .
Within the ‘preliminary hearing’ under the NFA Rules the parties shall exchange material and relevant documents , introduce documents to be intended to use as evidence  , and set a hearing plan . The arbitrators decide procedural matters, such as discovery between the parties. All outstanding disputes thereof will be addressed and cleared in order not to delay the later hearing . But during the preliminary hearing not every motion can be raised, Sec. 8/7 (e)(1)  Code of Arbitration/ NFA Member Arbitration Rules limits the motions that can be raised. A motion to dismiss for failing to state a claim will not be heard by the arbitration panel during the pre-hearing .
Under AAA Rules, the parties and the arbitrator should during the preliminary hearing discuss the future conduct of the case, including clarification of the issues and claims, a schedule for the hearings and any other preliminary matters .

d) Discovery - Information Exchange and Preparation

Securities arbitration rules encourage each party to cooperate to the fullest extend .
FINRA Rule 12504/13504 Code of Arbitration for Customer/Industry Disputes requires that ‘parties must cooperate to the fullest extent practicable in the exchange of documents and information to expedite the arbitration’. According to Section 12514/ 13514 FINRA Code of Arbitration for Customer/Industry Disputes parties are at least 20 days required to provide all other parties with copies of all documents and other materials in their possession or control that they intend to use at the hearing that have not already been produced and provide all parties with the names and business affiliations of all witnesses they intend to present at the hearing.
NFA section 8/7 of the NFA Code of Arbitration/ Member Arbitration Rules is very similar to FINRAs Rule 12504. Section 7/8 mandates that the parties “shall cooperate [...] in the voluntary exchange of material and relevant documents and written information’ and requires in Section 7/8 (b) that “each party shall serve […] all documents [...] which the party intends to introduce into evidence at the hearing […] at least 10 days prior to the date assigned for an oral hearing”.
AAAs Rule 21 of the AAA Commercial Arbitration Rules is less precise about an encouraged exchange promulgated by FINRA and NFA, but also requires the parties have toexchange copies of all exhibits they intend to submit at the hearing at least five day in advance to the hearing .
It is important to note at this point that the discovery stage can be extremely costly for both parties, depending on the need for information. Thousands of dollars can be accumulated when attorneys spend hundreds of hours analyzing through boxes of documents, making copies and scanning documents, using mailing services, investigators, etc.

e) Hearing

Before a hearing takes place the parties will be notified in advanced of the time and place of the hearing . An oral and personal hearing is in general required in all securities arbitration . Under FINRA Rule 12600 a hearing can be waived for small claims under $25,000 according to Rule 12800 or under Rule 12801. Before NFA the party may waive his right to an oral hearing only by failing to prosecute or defend the proceeding . The AAA does have a similar provision to FINRA’s provision to waive an oral hearing for small claims but under $20,000 specifically for securities arbitration in its Securities Arbitration Supplementary Procedures Rule 5.
Under FINRA 12513/13513 FINRA Code of Arbitration for Customer/Industry Disputes, NFA Section 9/8 (d) (7) NFA Code of Arbitration/Member Arbitration Rules, L-3, and R 31 AAA Commercial Arbitration Rules arbitrators are much like judges equipped with the authority to issue subpoenas compelling the attendance of witnesses or the production of documents for the hearing, which can be enforced in a court of competent jurisdiction. 
The actual hearing precedes much like any other arbitration hearing . The arbitration panel opens the hearing and calls the hearing to order . The panel makes sure everybody is present, all witnesses and documents submitted by the parties are available, and introduces the process and the case . If a properly informed party fails to attend a hearing the arbitrators can go forward with hearing in absence of the party and render an award . Other than in court securities arbitration rules allow parties in general also to be represented by non-lawyers . The panel then confirms that they know of no conflicts and reminds that the parties and witnesses have to avoid ex parte contact with the arbitrators . Then both parties, starting with the claimant will present their opening statements . Once both parties completed their opening statement including the presentation of their evidence the panel starts to hear the witnesses in general under oath  beginning with the claimant’s witnesses . Like general arbitration the arbitration panel starts with the interrogation of the witnesses and once the arbitration panel has no further questions the parties may ask the witnesses additional questions beginning with that party that listed the witness . Once all witnesses are heard there is a short break if the parties need to organize their closing arguments. Finally both parties present their closing arguments, the hearing will be closed and the arbitration panel will deliberate about the decision.

f) Posthearing Submissions

After the hearing the parties can if necessary file additional documentation or reopen the hearing/record under special circumstances. 

g) Award

Once the arbitration is closed the arbitration panel will render within 30 days a decision by majority vote if the panel consists of more than one arbitrator . The award can then be entered in court as a judgment . Even though controversial discussed arbitrators are generally not required to be instructed on the law and to follow the law . The arbitration panel generally awards compensatory and sometimes punitive damages .

h) Fees

Arbitration is faster and cheaper then litigation , but it is of course not for free. Securities arbitration under FINRA Code of Arbitration for Customer/Industry Disputes can include fees for filing, injunctive relief, member surcharge, amended claim, member prehearing process, member hearing process, adjournment, hearing session, settlements-forum allocation, hearing session, and forum. Securities Arbitration at AAA can include initial filing, proceed and final fees. No matter before what arbitration forum the securities arbitration is conducted costumers can expect to pay hundreds/thousands of dollar in fees depending on their amount of claim .
Attorney fees are in general not available in securities arbitration . In order to avoid that customers have to pay additional money to their loss most attorneys offering securities arbitration offer, like in securities class action, also contingency agreements, for securities arbitration and agree to pay for all costs and fees in advance. This procedure is only possible and reasonable as long as it is economical for the attorney. This practice logically ends in numerous cases where there is a strong claim on the merits, while the damages do not equal the prospective costs.

2. Mediation within the Securities Industry ADR

Whereas Arbitration is often used due to its commonly used arbitration agreements in the securities industry, non-binding mediation is the most popular form of ADR and is often described as “assisted negotiation of a dispute settlement” . Either during securities arbitration or instead of arbitration at all, parties of a securities dispute can mediate and settle their dispute . Since mediation before NFA can be done by a mediation forum of choice and the NFA offers a list including among others the AAA, it will be assumed that the provisions of AAA generally apply. 

a) Distinction between Mediation and Arbitration

The most important distinction between mediation and arbitration in general and also within the securities industry is that in mediation a neutral only assists the parties in settling their dispute, while in arbitration an arbitration panel renders a decision . Mediation often includes some type of innovative ‘outside the box’ approach and where in arbitration on the other hand is little room for such initiatives, because the arbitration panel decides the case solely on the basis of the evidence presented and the demands made .

b) Distinction between Mediation and Conciliation

Mediation also differs from conciliation most importantly in its results. In the less structured conciliation the parties reconcile and mend their relationship, whereas in more structured mediation resulting the dispute stands to the fore and the relationship may not continue . Conciliation is a process where a neutral may not even interact, while in Mediation the mediator may even actively suggest and promote a mutual acceptable settlement .  

c) Agreement to Meditate and Initiation

Once the parties have agreed upon mediation, the parties need to initiate the mediation process. Under FINRA Rule 14104 Code of Mediation Procedure “Mediation [..] requires the written agreement of all parties” if the mediation is requested during the arbitration process the arbitration will be not be automatically by stayed, but can be requested by both parties consent . NFA Code of Arbitration does not require a formal agreement from the parties, but will inform according to Section 14 NFA Code of Arbitration/Member Arbitration Rules about the options of mediation and will then have the parties opt for mediation or arbitration. According to Rule M-2 of the AAA Commercial Mediation Procedures the parties may request as well mediation in writing.
The parties to mediation like arbitration may be represented also by non-attorneys under FINRA Section 14106 Code of Mediation and Rule M-3 AAA Commercial Mediation Procedures

d) Mediator selections

Once the parties initiated the mediation process they have to agree on the mediator. Under FINRA they can choose from a list supplied by the director, a list or other source of their own or have the director select one mediator, that is not an arbitrator of any matter pending in FINRA Arbitration, or have any conflict of interest .
For mediations before the AAA the parties can search for mediators on the AAA panel of Mediators in order to agree on a mediator. If the parties can not agree on a mediators the AAA will send each party a list of mediators. If the parties can not agree on one mediators on this list, each party can strike unacceptable names from the list and preference the remaining mediators. The AAA will then from the remaining list of mutually approved mediators choose one mediator.   Only a mediator that is not involved in the arbitration process and is impartial and has no conflict of interest can serve as a mediator .

 

 

e) Mediation Session

Once the parties selected the mediator, the mediator will schedule a date for the (first) mediation session . Even though a mediator does not hold evidentiary hearings as in arbitration a mediator holds informal mediation sessions with the parties in order to understand the issues, facts, and positions of the parties .

In the mediation session the mediation process within the securities industry does not follow are different patterns then any other general mediation . Since mediation is a less formal ADR approach the mediation session may begin with introductory remarks and statement of the problem by the parties, followed by an information gathering time and the identification of the problems. The mediators may then guide the parties in the bargaining and generated with and for them options. The parties may then either come to an agreement or proceed with private causes  in order to for instance determine overlaps and discrepancies in their demands, before moving to an extended (‘second’) mediation session where the parties either can find an agreement or close mediation and proceed further with arbitration .

3. Negotiation within the Securities Industry ADR

Negotiation is the resolution of a dispute by the parties without a third party neutral or arbitrator . Negotiation is part of any settlement process and therefore an essential part of arbitration, mediation and also within litigation. Whenever parties agree to settle a dispute negotiation techniques and skills are essential. Negotiation in the Securities Industry is not different from any other negotiation in other commercial disputes. The same negotiation techniques and skills are used and required as in any other negotiation.  Negotiation as Securities Industry ADR process may include all or some of the general stage of the negotiation process like preparing to negotiate , preliminary stage , information stage , value claiming stage , closing stage , and value maximizing stage . It is important to keep in mind that within the US securities industry cultural differences within the US business culture influence the negotiation. The United States is considered a low context culture, like many European countries , but it is known for its less formal goal orientated impatient short term trail by error approach .

VI. Special issues in Securities ADR

1. ADR between Securities Industry members such as stock brokers and investors

Within Securities Industry ADR are several special issues that a wroth to be pointed out.
 
a) ADR Arbitration Agreements

Since most customers have signed agreements when they opened an account with the brokerage firm, they have to either choose among certain arbitration forums or are bound to one specific arbitration forum. Due to an increase in investor complaints, today many clauses now include a choice among several dispute resolutions organizations to administer the arbitration proceedings in case a dispute arises  . Nearly all claims for arbitration are being heard at FINRA , but the parties can also agree to another ADR forum or mediation instead of arbitration. In order to achieve this some parties have incorporated the so called ‘Amex Window’ . In addition parties have also a choice to choose a different ADR forum as long as they both agree upon it and do not violated their agreements, mostly arbitration agreements. Most SROs today require that their members consent to arbitrate disputes upon the demand of their customers .  Investors might compel a member of an SRO to arbitrate even without a written pre-dispute arbitration agreement .
The Supreme Court confirmed in its decision Shearson/American Express, Inc. v. McMahon that a under FAA agreement to arbitrate future disputes (pre-dispute arbitration agreement) in the setting of securities claims is valid and enforceable . Justice O’Connor noted that securities arbitrators are “readily capable” of handling complex claims, that streamlined procedures are not inconsistent with the underlying substantive rights, and that judicial scrutiny of arbitration awards—while limited—is sufficient to ensure that arbitrators meet their statutory obligations. The Court also found that any mistrust of arbitration as an efficient and fair means to resolve disputes is particularly unfounded in the context of securities arbitration, which is regulated by the SEC, which has “expansive power to ensure the adequacy of the arbitration procedures employed by the SROs” . Even under an existing arbitration clause arbitration can be waived due to an implied waiver by the defendant to proceed with litigation, even though it is controversially within various jurisdictions .

c) Common allegations against broker/dealer

Under Section 10b5 of the general rules and regulations promulgated under the Securities Exchange Act of 1934 as well as under certain other provisions (such as Section 17(a) of the Securities Act, FINRA Duties and Conflict Rules, NASD Conduct Rules), a number of principles have been developed to hold brokers/dealers to a fair strict standard of conduct  . Under the so called “shingle theory a broker by hanging up a shinle implicitly represents that he or she will conduct business in an equitable and professional manner . Before FINRA, NFA, and other Securities ADR forums commonly addressed allegations include misrepresentation, selling an unregistered security, churning, unsuitability claims, unauthorized trading, high pressure sales, breaching the fiduciary duty owed to the investor, as well as other stockbroker misconduct  .

 

aa) Misrepresentation

Liability for misrepresentation is premised under rule 10-b5 General Rules and Regulations promulgated under the Securities Exchange Act of 1934. Rule 15c1-2, 1-3 of General Rules and Regulations promulgated under the Securities Exchange Act of 1934 and Section 4b of the Commodity Exchange Act (7 U.S.C.§ 6b) prohibit misrepresentation in connection with the purchase or sale of a security and non-disclosure of or downplaying of risks involved in futures and options transactions. 

bb) Selling an unregistered Security

With a few exceptions all securities of publicly traded companies need to be registered by filing full disclosure documents with the SEC. Selling an unregistered securities violates Section 5 (a) of the Securities Act of 1933.

cc) Churning

Churning by definition is excessive trading in size and frequency of a customer’s financial resources and character of the account . Rule 15(c) 1-7 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934, NASD 2510 Conduct Rules, NYSE Rule 435, and Section 4b of the Commodity Exchange Act (7 U.S.C. § 6b).prohibit excessive trading by a broker/dealer. Even though there is no per se test to determine whether the activity is excessive, but the customer’s investment objectives, the nature of the account and other circumstances must be considered . Factors and criteria that can be considered are the turnover rate , an in-and-out-trading , proportion of account commissions to size of account, to broker’s total income and to branch’s income  , and excessive trading in options  .

dd) Unsuitability Claims

Under FINRA Rule 2353/ NASD 2310 Conduct Rules the broker/dealer making a recommendation to an investor must have grounds for believing that the recommendation is suitable for this customer with respect to his or her portfolio, financial situation, and needs, the so called “know your customer rule” , and must investigation the issuer and the terms, risk, and nature of the investment they recommend and “know your securities rule” . Neither the Commodity Exchange Act nor CFTC regulations impose suitability requirements on the futures industry, but NFA has adopted the “know your customer rule” under NFA Compliance Rule 2-30 . An unsuitable recommendation is one which, in light of the customer’s disclosed objectives and background, the broker knows or reasonably believes to be inappropriate . The distinction between unsuitability and churning is that unsuitability focuses on the qualitative, not quantitative, mismatch between investments and the investor’s objective . An example of unsuitability claims can be improper asset allocation and losses due to margin calls.
Improper asset allocation refers to a lack of diversification of the customer’s portfolio and can constitute an unsuitability claim for breach of fiduciary duty .
If an investor wants to maximize the potential return without additional financial commitment brokers/dealer offer on occasion margin call as an alternative, where the investor borrows money with interest from a brokerage firm to buy securities or make other investments.  These margin calls can be a basis for an unsuitability claim if margin trades were not suitable to the specific customer .

ee) Unauthorized Trading

Unauthorized Trading is a purchase or sale of a stock by a broker on behalf of an investor, who has not authorized the transaction . The difference to churning is that in churning the investor will show that the excessive trading has occurred to generate brokerage fees and commissions .
Since churning is not exclusive to a missing authorization the investor will not per se have to allege that the trade was per se unauthorized . FINRA rule and CFTC Regulation § 166.2 under NFA provides that a registered representative may not exercise a transaction without written authorization.

ff) High Pressure Sales

The practice of ‘High pressure sales” or ‘Boiler Room Operations’ has been developed by some of the unscrupulous securities brokers and dealers, where callers cold call investors for fraudulent transactions and recommend purchases of large blocks of speculative securities in new companies, prediction dramatic earnings and rapid increases in the market price of the securities . Even though the SEC denies that boiler room activities per se do not constitute a violation of the antifraud provisions, court have however numerous times imposed liability under either the “shingle theory” or antifraud provision . The NFA sees high-pressure sales tactics as violations of the anti-fraud provision of Section 4b of the Commodity Exchange Act violations of the anti-fraud provision of Section 4b of the Commodity Exchange Act  .


gg) Breaching the Fiduciary Duty

In order to constitute a fiduciary duty owed by the broker/dealer to the customer  the customer has to provide additional facts beyond the general sole broker/dealer – customer relationship in order to show a breach of fiduciary duty .

gg) Other broker/dealer Misconduct

Among other broker/dealer misconduct other misconduct may include a breach of contract. A broker is obligated to get the investor the best execution possible given market conditions. If a broker the purposely delays execution, a broker is liable for breach of contract. The broker negligently executes (or fails to execute) an order and the customer would have gotten a better fill but for the broker’s negligence .

2. Employment related ADR with Securities Industry

ADR within the Securities Industry can not only be used between broker/dealer and customers disputes, but also Securities Industry members disputes, like employment related disputes between Securities Industry members and their employees. The types of employment disputes most often seen in the securities industry are primarily statutory claims, such as discrimination based on age, sex, disability, failure to accommodate, as well as common law claims, such as breach of contract, wrongful termination, layoffs, compensations disputes, and others  .
For arbitration of employment disputes FINRA applies the Code of Arbitration for Industry Disputes, NFA its Member Rules or Arbitration, and the AAA its Commercial Arbitration Rules and its Employment Arbitration Rules and Mediation Procedures. Most employees within the securities industry are required to enter into an agreement, similar to the arbitration agreement for customer disputes, also known as the U 4 Form . The employee arbitration agreement mandates that arbitration has to be conducted before a specific SRO forum for any dispute arising in the course of their employment . For many years is was unclear whether an employer could require its employees to resolve discrimination claims in arbitration, but in 1991, the United states Supreme Court in Gilmer v. Interstate/Johnson Lane Corp. held, and reiterated its support in Circuit City Stores v. Adams, that a pre-dispute arbitration agreement for a claim brought under the Age Discrimination in Employment Act was enforceable and could therefore be subject to compulsory arbitration . The Supreme Court in Gilmer however did not decide whether its analysis applied to arbitration provisions in all employment contracts, or what contracts of employment are subject to the FAA . But the Supreme Court in Circuit City Stores v. Adams held in a 5-4 decision held that only the exclusion from FAA coverage was restricted to transportation workers . However from 1999 on due to critics of a pro-industry bias the NASD and the NYSE limited the arbitrability of employment discrimination disputes based on statutory employment discrimination claims pursuant to the U 4 form . The FINRA has continued this limitation in its Rule 13201 FINRA Code of Arbitration for Industry Disputes.  The NFA stated that it will not include mandatory arbitration of employment discrimination claims . The AAA does not exclude
Mediation of employment related disputes in the securities industry is becoming increasingly popular throughout the Securities Industry . It follows the same patterns as regular mediation. FINRA uses the same Code of Mediation for mediation between customers and securities industry member, as well as among securities industry members. NFA uses forums like AAA to resolve disputes via mediation, and the AAA applies its Commercial Rules of Mediation and Employment Mediation Procedures to all employment related disputes.

3. Securities Industry ADR and class actions

Under the SLUSA Securities Litigation Uniform Standards Act of 1998, most class actions involving fraud or defects in disclosure relating to the securities of most publicly held companies must be brought in federal court under federal law. The Uniform Code, the NYSE rules and now FINRA’s Code of Arbitration for Customer and Industry Disputes , NFA , and AAA  do not allow the submission of a claim as a class action . But the prohibition of class actions does not preclude the consolidation or joinder of claims  , which are specifically permitted before FINRA , NFA , and AAA  

V. Ethics and Securities Industry ADR

For ADR within the Securities under NSDA/NYSE Regulation, now FINRA, NFA, and AAA the primary source for guidance regarding arbitrator behavior/conduct addressing ethic norms was the 1977 American Bar Association (“ABA”) / AAA Code of Ethics for Arbitrators in Commercial Disputes . It was revised to latest version of the AAA/ABA Revised Code of Ethics [“Code of Ethics”] in 2003/2004 .
After massive management scandals of Enron, WorldCom, Tyco, and like due to also ethical failure, and the recent world largest ponzi scheme orchestrated by Bernard Madoff it is clear that within the financial industry and therefore also within the securities industry ethical standards mandatory. But even though only a few cases of unethical behavior by commercial arbitrators have arisen , maintaining a high standard of conduct within Securities ADR is also without a doubt mandatory. The Code of Ethics sets forth generally accepted standards of ethical conduct for the guidance of arbitrators and parties in commercial disputes, in the hope of contributing to the maintenance of high standards and continued confidence in the process of arbitration .The Revised Code of Ethics has ten canons, the revised Code of Ethics, while preserving many elements of the 1977 Code of Ethics, brings many principles in line with modern practice . The most significant change to the 2004 Revised Code of Ethics for Arbitrators in Commercial Disputes include a presumption of neutrality, definition of duties of a party appointed arbitrator, duty to disclose interests and relationships, clarification of the limits on permissible communication between arbitrator and parties, and guideline for arbitrator suitability .
In September 2001, California enacted the Ethics Standards for Neutral Arbitrators in Contractual Arbitration to address, among other things, disclosure of arbitrator conflicts of interest . Even though the Ethics Standards for Neutral Arbitrators in Contractual Arbitration contains extensive disclosure and disqualification requirements for arbitrators that conflict with the disclosure and disqualification rules of NASD and the New York Stock Exchange   the U.S. Court of Appeals for the Ninth Circuit and the Supreme Court of California held  that the Securities Exchange Act preempts application of the California Standards to NASD arbitrations the NASD, now FINRA, did no longer need to practicing its waiver provision. 
The NFA Code of Arbitration and Member Arbitration Rules have similar disclosure requirements for eventual conflicts under Section 4 (b) /3(b) NFA Code of Arbitration / Member Arbitration Rules. Beyond those provisions the NFA adopted ethical standards - not only limited to arbitration - in its ‘Compliance Rules’, including those specifically required by Section 17 of the Commodity Exchange Act, such as prohibitions against fraud, manipulative and deceptive acts and practices, and unjust and inequitable dealings.

 

If you have any questions about Securities Arbitration or think you have a case or want to report fraud, please do not hesitate to contact us at SanDiego@Thieler-Boeh-Seitz.com

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