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Dispute Resolution for Investors

If investors have a dispute with their broker or brokerage firm, they have two options:

  • judicial dispute resolution
  • extrajudicial dispute resolution (mediation and arbitration)

Judicial resolution involves hiring an attorney and filing a suit in a judicial court. This often leads to litigation where a judge or jury decides on the proper resolution of the conflict.

Extrajudicial resolution, like arbitration and mediation, involves resolution outside the courts. Instead of a judge or a jury, an arbitrator or mediator helps resolve the dispute between the investor and the broker/brokerage firm.

Which dispute resolution method should you use?

If you have a dispute with your broker, you should first check your brokerage account opening agreement. Look for the dispute resolution provision and see which dispute resolution procedure you have agreed to follow when you signed the agreement.

If your account agreement with your brokerage firm states that you agree to resolve any dispute with your broker through arbitration, then you really have no choice but to use arbitration. There's an exception to this rule, though. If the broker or brokerage firm is already out of business, you can pursue your dispute in court.

If your brokerage account opening agreement doesn't require you to use arbitration as the dispute resolution method, you may use litigation. Just remember through that litigation can be costly and that conflict resolution can take a long time. On the plus side, you have recourse to appeal if you don't agree with the court's resolution.

Arbitration versus Mediation

Arbitration and mediation are different from one another.

Mediation: In mediation, a mediator acts as a facilitator. He does not sit in judgment and he has no authority to decide the resolution of the dispute. His suggestions are just that - suggestions - and they cannot be legally binding on both parties. His aim is to help each of the parties understand where the other party is coming from.

As a facilitator, the mediator sits in the discussions/negotiations between the two conflicting parties. He helps the parties focus on the issues. He sums up the information presented by both parties. He points out the strengths and weaknesses of each party's position or claims. In the end, the conflicting parties themselves have to decide on a resolution to their dispute. The mediator cannot impose a decision.

Arbitration: In arbitration, an arbitrator (or a group of arbitrators) acts as a judge or jury. The arbitrator reviews the pleadings and documents (i.e. evidence) submitted by both parties. In the end, the arbitrator or arbitrators make a decision and award monies/damages as they see fit.

The disputing parties have to agree that they will abide by the decision of the arbitrator or arbitrators before arbitration proceedings commence. This makes an arbitrator or a group of arbitrators' decision legally binding.

Using mediation: You should try mediation before you try any other method of dispute resolution. Through mediation, you can try to settle your differences with the other party without going to a lot of expense. Mediation also usually offers a quick resolution. Even if no full resolution can be obtained through mediation, partial resolution is still possible. At the very least, the mediator can help you see the weaknesses in your case.

If you cannot reach a resolution with your broker through mediation, you can proceed to use arbitration (or even litigation if your brokerage account agreement permits it).

Dispute Resolution Tips for Investors

  • Before deciding to sue or file an arbitration claim against a brokerage firm, investigate its background. If this firm goes under, it may not be able to meet the monetary damages you have been awarded by the court or arbitrator/s.
  • If you want to initiate a dispute with your broker, make sure to do so immediately after you discover his wrongdoing. This applies whichever dispute resolution method you choose.
  • If you are filing a case in federal court, make your move within 2 years of your discovery of your broker's culpability but no later than 5 years from the date of commission of the offense.
  • If you are filing a case in state court, make your move within the required period as stated in your state's statute of limitations.
  • If you are filing an arbitration claim with FINRA Dispute Resolution, make sure to make your claim no later than 6 years after the date of the commission of the offense.
  • If you are filing an arbitration claim with some other organization, make sure to abide by that organization's deadline for arbitration claims.
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