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What is securities arbitration?

Most disputes between brokerage firms and customers are arbitrated. Arbitration is a private dispute resolution process in which three arbitrators are appointed to decided the merits of a case. One of the arbitrators is required to be associated, presently or formerly, with an NASD member. The other two panel members are typically professionals, such as lawyers, accountants, investors or retired judges, who have an interest in securities or dispute resolution. In an arbitration, the parties are typically represented by counsel and present evidence through testimony and documents as in a court proceeding.

Who sponsors securities arbitration?

The largest sponsor of securities arbitration is the National Association of Securities Dealers, Inc. ("NASD"), which is a self-regulatory organization whose members are brokerage firms. The NASD has been granted authority by Congress through the Securities and Exchange Commission to regulate its members and individual brokers. Other organizations, such as the New York Stock Exchange, also conduct securities arbitrations.

What are the advantages of securities arbitration?

Arbitration has a number of advantages. Arbitration is generally less time consuming and less expensive than court, due to the fact that deposition discovery and motions practice are rare in arbitration. Pre-hearing procedures are more limited in arbitration than in court, and arbitrations are typically resolved in 12 to 18 months as opposed to 18 months to two years or more for court cases. However, unlike court, formal rules of evidence and procedure are inapplicable, and therefore the process is often more streamlined and less contentious. Many arbitration hearings are resolved in less than two full days of hearing time.

Do investors ever win in arbitration?

Yes. According to a recent study by the U.S. General Accounting Office, customers are successful in being awarded some damages in approximately 55% of the cases that are decided by an arbitration panel. In addition, approximately 50% to 60% of the cases that are filed are settled before an arbitration decision is rendered.

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