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Stockbroker Arbitration: The Good and the Bad

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Boston, MAWhen investors sign up with an investment advisor, they usually sign a contract requiring that in the case of a dispute with their advisor, they go through stockbroker arbitration to settle the dispute. The Financial Industry Regulatory Authority (FINRA) stockbroker arbitration process is designed to resolve claims such as stockbroker fraud and other disagreements between investment advisors and their clients. But some critics argue the arbitration process is flawed and does not always help victims of stockbroker investment fraud.

In a letter dated February 12, 2013, William Galvin, chief securities regulator in Massachusetts urged the Securities and Exchange Commission (SEC) to examine mandatory arbitration clauses, arguing that they are not consistent with the fiduciary duty owed by investment advisors to their clients. According to the letter (found online at, The Massachusetts Securities Division sent surveys to 710 registered investment advisors in the state, asking about contracts investors signed with their advisors. Of the surveys received, nearly half confirmed their client contracts include a binding pre-dispute arbitration case.

Galvin notes in his letter that Section 921 of the Dodd-Frank Act (7/21/10) allows the SEC to change or ban pre-dispute arbitration clauses if such clauses are not in the public interest. Investment advisors have a fiduciary duty to act in the best interests of their clients.

“While arbitration may be appropriate in some cases, a clause binding an investor to arbitration before the circumstances are known may not be in the client’s best interest nor consistent with an investment adviser’s fiduciary duty,” Galvin writes. He also refers to the widespread use of mandatory arbitration as “troubling and a cause for regulatory concern.”

There are benefits to clients of going through the FINRA arbitration process. The length of time from when documents are filed to when the case is resolved is usually far shorter than in a court case. Furthermore, the findings of the FINRA arbitration panel are binding and appeals are allowed in only a very limited number of cases, meaning investors do not have to endure a lengthy appeals process. Finally, even if the dispute goes to FINRA arbitration, the two sides can settle at any time, similar to the courts.

But critics say investors should have the choice of either FINRA arbitration or the courts to resolve a dispute with their investment advisor, and forcing them into FINRA arbitration - when the dispute would be better handled by the courts - violates investors’ rights and the advisor’s duty to act in their best interest.


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