Although most business in the securities industry is completed without a problem, disputes and controversies will occasionally arise. Such disputes and controversies can be resolved by impartial arbitration


PREMIUM LEGAL RESOURCES LEGAL FORMS ASK A LAWYER

This pamphlet has been prepared by the Securities Industry Conference on Arbitration (SICA), a group composed of representatives of various self-regulatory organizations, the Securities Industry Association, and public members. SICA established a uniform system for the resolution of disputes involving investors and broker-dealers, which has been adopted by each of the self-regulatory organizations

TABLE OF CONTENTS

I. INTRODUCTION
II. WHAT IS ARBITRATION?
III. WHAT DISPUTES ARE ELIGIBLE FOR ARBITRATION?
IV. WHO ARE THE ARBITRATORS?
V. CAN I BE REPRESENTED BY AN ATTORNEY?
VI. HOW IS ARBITRATION BEGUN?
(1) Statement of Claim
(2) Small-Claims Procedures
(3) Counsel
(4) Location
(5) Arbitrators
(6) Submission Agreement
(7) Deposit of Fees
(8) Disclosure of Arbitration
(9) Incomplete Filing
VII. WHAT HAPPENS AFTER THE CLAIM IS FILED?
VIII. APPOINTMENT OF ARBITRATORS
IX. CAN I CHALLENGE AN ARBITRATOR?
X. HOW DO I PREPARE FOR A HEARING?
XI. HOW ARE THE HEARINGS CONDUCTED?
XII. HOW ARE THE PARTIES NOTIFIED OF THE ARBITRATORS DECISION?
XIII. CONCLUSION
XIV. GLOSSARY OF TERMS
XV. LIST OF SPONSORING ORGANIZATIONS

I. INTRODUCTION

Although most business in the securities industry is completed without a problem, disputes and controversies will occasionally arise. Such disputes and controversies can be resolved by impartial arbitration at one of the organizations listed at the end of this document. Arbitrations are conducted in accordance with the Uniform Code of Arbitration as developed by the Securities Industry Conference on Arbitration and the rules of the sponsoring organization where the claim is filed.

There are some differences among the rules of the sponsoring organizations such as who may serve as public arbitrators, the availability of prior awards, and whether your name will be made publicly available. Any questions regarding arbitration may be addressed to the Directors of Arbitration or their staff at the sponsoring organizations. In addition to initiating an arbitration, investors may file their complaints with the appropriate regulatory authorities, such as the Securities and Exchange Commission, state securities commissions, or one of the self regulatory organizations listed at the end of this document, when they believe there has been fraud or that other investors may be at risk. The regulatory agencies may then investigate the complaint and, if warranted, censure, fine, or suspend a wrongdoer.

This pamphlet is designed to assist prospective parties and their attorneys by explaining arbitration procedures and is not designed to give legal advice to any party or to anyone who contemplates use of these procedures. The procedures described in this pamphlet were developed for parties who represent themselves in an arbitration proceeding as well as those represented by counsel. This pamphlet explains the procedures set forth in the rules and answers questions regarding them but is not an interpretation of the rules or a substitute for the rules. We recommend that prospective parties carefully read the rules as well as this pamphlet.

II. WHAT IS ARBITRATION?

Arbitration is a method of having a dispute between two or more parties resolved by impartial persons who are knowledgeable in the areas in controversy. Those persons are called arbitrators. Arbitration of broker-dealer disputes has long been used as an alternative to the courts because it is a prompt and inexpensive means of resolving complicated issues. There are certain laws governing the conduct of an arbitration proceeding that must be considered by those planning to use arbitration to resolve the dispute. Most importantly, perhaps, is the fact that an arbitration award is final and binding, subject to review by a court only on a very limited basis. Parties should recognize, too, that in choosing arbitration as a means of resolving a dispute, they generally give up their right to pursue the matter through the courts.

III. WHAT DISPUTES ARE ELIGIBLE FOR ARBITRATION?

In considering whether to initiate arbitration, it is important to keep in mind that, generally, a public customer has a right to require a broker-dealer to submit for arbitration only disputes relating to or arising out of the business activities of the broker-dealer.

When deciding where to file your claim, you should determine which self-regulatory organization (SRO) supervises the markets where the transaction occurred or the securities are listed. A controversy is not eligible for submission to arbitration if six or more years have elapsed from the date of the event giving rise to the dispute. The arbitrators also may dismiss a claim barred by shorter applicable state or federal statutes of limitations. If there is a question about the statute of limitations, you should consult an attorney.

Even after a customer has signed the agreement to arbitrate, the customer may request either the sponsoring organization or the arbitrators to permit that customer to proceed with his or her claim in court. The customer should be aware, however, that in most cases the sponsoring organization and the arbitrators will retain jurisdiction and proceed with the arbitration.

IV. WHO ARE THE ARBITRATORS?

Arbitrators are impartial persons who are knowledgeable in the areas in controversy. Each sponsoring organization maintains a roster of individuals whose professional qualifications and experience qualify them for service as arbitrators. The arbitrators are not employees of the sponsoring organization and they, not the sponsoring organization, will decide your dispute. The arbitrators do, however, receive an honorarium from the SROs.

The Director of Arbitration will appoint a panel, usually consisting of one or three arbitrators. Unless a customer elects otherwise, the majority of the members of such panels are individuals referred to as "public arbitrators" who are neither associated with, nor employed by, a broker-dealer or securities industry organization. The Director of Arbitration will inform the parties of the names and business affiliations of the selected arbitrators, their employment histories for the last 10 years, as well as any conflict information disclosed pursuant to the Uniform Code. Some parties are interested in previous awards issued by prospective arbitrators. Beginning in the spring of 1989, each sponsoring organization will develop procedures to make available information on these awards.

V. CAN I BE REPRESENTED BY AN ATTORNEY?

Parties have an absolute right to be represented by an attorney and may do so at any stage of the arbitration. Parties should be aware that, even if they do not elect to be represented by counsel, the other party may have an attorney, and they can assume that broker-dealers will be represented by an attorney.

Any party represented by counsel should notify the Director of Arbitration of the counsel's name and address either in the Statement of Claim or the answer or by a separate written notice. After such notification, communications concerning the case will be addressed to the counsel.

The sponsoring organizations cannot recommend or provide counsel in the arbitration nor can employees of that organization provide legal advice. Parties who do not have counsel and wish to be represented may want to contact the local bar association for a referral.

VI. HOW IS ARBITRATION BEGUN?

To begin arbitration, the prospective claimant must do the following:

(1) Statement of Claim - File with the Director of Arbitration a type written or printed document stating the claim. This document should set forth the details of the dispute including all relevant dates and names, in a clear, concise, and chronological fashion and should conclude by indicating what relief (e.g., money damages in a specific amount, performance of a particular agreement, interest, etc.) is requested. The claimant should attach copies of documents and supporting materials as exhibits to the Statement of Claim. The claimant should provide sufficient copies for each party, the arbitrators, and the self-regulatory organization.

(2) Small-Claims Procedures - If the amount of the claim is $10,000 or less, the claim will be processed under the Simplified Arbitration Procedures. In public customer disputes, the public customer must request a hearing; otherwise the claim may be decided solely on the basis of reading the parties' submissions. The arbitrator, however, also may request a hearing or require a party to submit additional documentation. Parties may ask to submit additional documents to an arbitrator who is deciding the case without a hearing.

(3) Counsel - State whether the claimant will be represented by an attorney and, if so, the attorney's name, address, and telephone number.

(4) Location - State where the claimant wants the case to be heard and the reasons for that choice. The actual decision as to place of hearing is made by the Director of Arbitration. Arbitrators can be empaneled in many of the major urban areas throughout the country, but consideration generally will be given to a number of factors, including the convenience of the parties, the availability of necessary records or witnesses, and the availability of qualified arbitrators. Generally, in public customer cases, the hearing location is near where the customer resided when the dispute arose regardless of a predispute agreement to the contrary.

(5) Arbitrators - Unless a public customer requests otherwise, the proposed panel will be composed of a majority of persons from outside the securities industry. If a claimant would like a panel consisting of a majority of arbitrators from the securities industry, he or she should indicate that preference in writing when filing the claim.

(6) Submission Agreement - Complete and return three (3) copies of the Submission Agreement provided by the sponsoring organization. By signing the Submission Agreement, the claimant agrees to submit the dispute to arbitration and to abide by the decision (the "award") of the arbitrators. The claimant also agrees to be bound by the decision of the arbitrators with regard to any counterclaim (a claim against the claimant) permitted under these procedures that may be brought by an opposing party. Once a Submission Agreement has been signed, the procedures and timing set out in the Uniform Code become operative and binding. Generally, parties may not withdraw the Submission Agreement without the consent of either the other parties or the arbitrators.

(7) Deposit of Fees - Include a check or money order made payable to the sponsoring organization for the appropriate fee. This is only a deposit. In a small-claim arbitration, the final disposition of the deposit will be determined by the arbitrator. If the case is settled prior to the appointment of an arbitrator, the entire deposit will be refunded to the claimant. In other arbitrations, all but $100 will be refunded if the matter is resolved by the parties before the first hearing. If a hearing is held, the arbitrators will decide if the deposit should be refunded.

(8) Disclosure of Arbitration - At some sponsoring organizations, public customers must state in writing whether they either permit or decline to permit the inclusion of their names in the public version of the award.

(9) Incomplete Filing - A filing may be returned if it does not comport with the rules.

The Statement of Claim, including exhibits, Submission Agreement, and deposit should be submitted to the Director of Arbitration of the sponsoring organization at the address listed at the end of this pamphlet. All pleadings and exhibits after the claim is served must be sent to all parties directly with sufficient additional copies sent to the Director of Arbitration for the arbitrators and for the Department of Arbitration.

VII. WHAT HAPPENS AFTER THE CLAIM IS FILED?

Once the Statement of Claim has been received, the Director of Arbitration will send it to the opposing party (the "respondent"). Any member (e.g., brokerage houses) of an organization listed on the last page of this booklet may be a party in an arbitration proceeding. Similarly, an employee and/or representative of any such member also may be named as a party.

Following the receipt of the claim, the respondent has twenty (20) calendar days in the case of a small-claim arbitration and twenty (20) business days in all other arbitrations to provide an answer unless an extension of time has been granted by the Director of Arbitration. It is within the discretion of the Director of Arbitration to grant such extensions even over the objection of a party. However, the Director of Arbitration will consider the objection when determining the length of the extension.

The respondent may assert a related counterclaim as part of its answer, or may file a claim against a third party, that is, a claim against another person who may bear responsibility for any of the alleged damages. Generally, a claim is considered to be related if it pertains to the customer's account at the broker-dealer. In support of its defense or counterclaim, the respondent should attach copies of documents and supporting materials to its answer.

The respondent also should send to each party an executed Submission Agreement and a copy of the respondent's answer and any counterclaim. The respondent's executed Submission Agreement and answer shall also be filed with the Director of Arbitration, with additional copies for the arbitrator(s) along with any deposit required under the Schedule of Fees. On receipt of an answer containing a counterclaim, the claimant has ten (10) calendar days in the case of a small-claim arbitration and ten (10) business days in all other arbitrations to file a reply to any counterclaim. The claimant also should send to each party a reply to a counterclaim. The reply also shall be filed with the Director of Arbitration with additional copies for the arbitrators.

Service on a party may be effected by mail or other means of delivery. Filing with the Director of Arbitration should be made on the same date as service on a party.

VIII. APPOINTMENT OF ARBITRATORS

The Director of Arbitration will appoint, as appropriate, an arbitrator or panel of arbitrators. The Director of Arbitration will notify the parties of the names, current affiliations, and 10 years' business histories of the proposed arbitrators. In addition, parties will be informed of any information disclosed pursuant to the Uniform Code and the Code of Ethics for Arbitrators by any arbitrator. The arbitrators will be informed of the names of the parties to the dispute, counsel, witnesses, and the nature of the issues raised. If any arbitrator determines that he or she cannot render a fair and impartial award, the Director of Arbitration will appoint a substitute arbitrator.

In a small claim, if the arbitrator believes the controversy is such that additional expertise is needed, he or she can direct that an arbitration panel be formed with two (2) additional arbitrators. The majority of this panel will be from the public. The arbitrator also may request that a hearing be held or that additional documentation be provided.

IX. CAN I CHALLENGE AN ARBITRATOR?

A party has an absolute right to request that one arbitrator on the panel be replaced without giving a reason for the request. This right may be exercised by filing a written notice of a challenge with the Director of Arbitration. A party should supplement his or her written notice with a telephone call to the sponsoring organization. In addition, in all arbitrations, if any party has reason to believe that an arbitrator cannot render a fair and impartial award, he or she should immediately notify the Director of Arbitration. The arbitrator will be disqualified if the objection is based on facts that reasonably support the challenge. Each party is entitled to an unlimited number of challenges for cause.

Each arbitrator must swear or affirm to render a fair and just award based on the documents and evidence presented by the parties. Also, no party should attempt to communicate directly with any of the arbitrators. Such communication may render the decision of the arbitrator invalid. Any communication for the arbitrators must be addressed through the Director of Arbitration.

X. HOW DO I PREPARE FOR A HEARING?

Parties must make every effort to prepare the case in advance of the hearing so that it may be resolved promptly and justly. Preparation includes arranging for witnesses and documentary evidence to be available for presentation to the arbitrators at the hearing. If all parties agree, they may submit exhibits in addition to those in the Statement of Claim to the Director of Arbitration for forwarding to the other parties and the arbitrators prior to the hearing.

The parties are encouraged to cooperate in the voluntary exchange of such documents and information as will serve to expedite the arbitration. Any request for documents or other information should be specific, relate to the matter in controversy, and afford the party to whom the request is made a reasonable period of time to respond without interfering with the time set for the hearing. Document production and information exchange should be accomplished within the time set forth in the Rules.

On the written request of a party or an arbitrator or at the discretion of the Director of Arbitration, a prehearing conference will be scheduled. The Director of Arbitration will set the time and place of a prehearing conference and appoint either a staff person or an arbitrator to preside. The prehearing conference may be held by telephone, by written submission, or in person. Under the rules, there are time tables for parties either to produce requested information or to object to the production requests. If a prehearing conference without an arbitrator does not resolve the outstanding issues, those information-request disputes or issues will be referred to a single arbitrator prior to the first hearing. The single arbitrator has the authority to issue subpoenas, direct appearances of witnesses and production of documents, set deadlines for compliance, and issue other rulings that would expedite the arbitration proceedings or enable a party to prepare its case.

To the extent possible, testimony and documentary evidence should be exchanged voluntarily by the parties without the use of subpoenas. If a subpoena is necessary, the arbitrators and any counsel of record have such power of subpoena as may be provided by the law of the state where the hearing will be held or by the Federal Arbitration Act. All parties should be given a copy of the subpoena on its issuance. If a party has an attorney, the attorney should answer all questions concerning subpoenas. Parties without attorneys may request that the Director of Arbitration ask the arbitrators to issue a subpoena. The request should be in writing, should set forth why the subpoena is necessary and what efforts the requesting party made to obtain the appearance of witnesses and the production of documents without the use of the subpoena, and should include a copy of the subpoena which the arbitrators are requested to issue. If the arbitrators issue a subpoena, the requesting party has the obligation of serving the subpoena on the opposing party and bearing the costs involved as provided by law of the state where the hearing will be held or by federal law.

The procedures for the issuance and service of subpoenas vary. Parties may, therefore, wish to consult with an attorney to insure that legal requirements in the applicable jurisdiction are satisfied.

In addition to the subpoena process, in some instances the arbitrators have the power to direct the appearance of persons employed in the securities industry and the production of records in the possession or control of such persons. If parties request the arbitrators to use this power, they may be required to bear all reasonable expenses in connection with such appearance or production. All such requests should be made in advance of the hearing.

One final thought should be kept in mind when preparing for a hearing. The arbitrators are experienced and knowledgeable individuals. They appreciate a clear presentation of the case, free from repetition and irrelevancies.

XI. HOW ARE THE HEARINGS CONDUCTED?

The Director of Arbitration schedules the date of the hearing. The parties will be notified in writing of the date and location of the initial hearing at least eight (8) business days in advance. A verbatim record is kept of the proceedings. A party that elects to have the record transcribed shall bear the cost of such transcript unless the arbitrators direct otherwise.

At the hearing, the parties must present their respective cases by testimony and documentary evidence to the arbitrators. Claimants should document carefully the issues involved and their proof of damages, and explain to the arbitrators how much in money damages are being claimed and how they arrived at that figure. All hearings will be conducted by the arbitrators in the manner they determine will most expeditiously permit the presentation of the evidence and arguments of the parties.

Generally, the following procedures will be observed:

(1) The arbitrators and the witnesses will be sworn.

(2) Each party will be given an opportunity to make a brief opening statement, that is, a brief outline of the issues involved and what facts that party intends to prove. A party may waive the opening statement.

(3) The claimant will present facts to the arbitrators including relevant documents and testimony to establish and prove his or her claim.

(4) The respondent will present his or her case in the same manner as the claimant. Witnesses and parties who testify will be sworn and are subject to cross-examination by the opposing side and questioning by the arbitrators. The opposing party may object to any evidence prior to its receipt by the arbitrators. Parties should bring sufficient copies of documents for each of flu arbitrators, other parties, and the representative of the sponsoring organization. It is inappropriate to "testify" when questioning a witness, and a party may object if another party does that. A party may offer an affidavit in lieu of the live testimony of a witness. This may or may not be allowed by the arbitrators. Parties should be prepared to explain why a witness cannot come to the hearing and to explain whether the other party had an opportunity to examine the witness. A party should be prepared to bring the witness if the affidavit is not allowed.

(5) Any counterclaim or other matter may be presented in the same way.

(6) Parties may present rebuttal evidence if appropriate.

(7) Closing statements may be presented and consist generally of final arguments by the parties and brief summations of the testimony and other evidence introduced at the hearing. A party should refer only to evidence already in the record and not use the closing statement as an opportunity to present new evidence. A party may waive a closing statement.

(8) The parties are to leave together at the end of the hearing.

(9) The arbitrators may proceed with a case even when a party does not appear and/or answer.

XII. HOW ARE THE PARTIES NOTIFIED OF THE ARBITRATORS' DECISION?

When the arbitrators have reached their decision and have signed an award, copies will be mailed to the parties. The award will contain the names of the parties, a summary of the issues in controversy and the issues resolved, as well as the damages requested and awarded and the names of the arbitrators. The awards will be made publicly available. Arbitrators are not required to write opinions or provide reasons for the award. A party, however, may request an opinion. This request should be made no later than the hearing date. Some sponsoring organizations delete from the public version of awards information that identifies either the arbitrators or the parties. The decision of the arbitrators is final; that is, the decision is subject to review by a court only on a very limited basis.

IMPORTANT: It should be kept in mind that the arbitrators' decision will be based solely and exclusively on the documents and related material provided by the parties to a dispute. In the case of a hearing, the decision will be based on both the documents and testimony presented at the hearing. It is therefore important that a party's case be carefully and thoroughly prepared. As noted, this may be done either with or without the assistance of counsel. Such preparation will ensure that all relevant facts and evidence will be presented by the par-ties and, thus, considered by the arbitrators. Arbitrators are not allowed to reconsider a decision because new evidence has been found after the award was rendered.

In addition, it is the responsibility of the parties to submit briefs for any novel theories of recovery and/or requests for special damages. In some cases, arbitrators may require even parties without lawyers to support their claims by reference to the relevant law.

XIII. CONCLUSION

Remember that you should carefully read the arbitration rules of the sponsoring organization you have selected. This pamphlet is not a substitute for those rules. If you have any questions regarding arbitration procedures or want a copy of those rules, contact the Director of Arbitration of the sponsoring organization.

XIV. GLOSSARY OF TERMS

Answer. The respondent's written reply to a claim.

Arbitration. The person at the sponsoring organization who handles administrative matters in arbitration proceedings.

Arbitrator. A person chosen to decide disputes between parties.

Award. The written determination of the arbitrator(s).

Claim. A demand for money or other relief.

Claimant. A person making a claim.

Counsel. An attorney who advises and represents a party in an arbitration.

Counterclaim. A claim against the claimant.

Cross-Claim. A claim by a respondent against a co-respondent previously named by the claimant.

Filing. Delivery to the Director of Arbitration of the statement of claim or other pleadings, to be kept on file as a matter of record and reference.

Panel. The arbitrator(s) who decide(s) a dispute.

Party. A person making or responding to a claim in an arbitration proceeding.

Pleadings. The claim, answer, counterclaim, and/or third- party claim filed in an arbitration.

Respondent. The person against whom a claim is made.

Service. Delivery of the statement of claim or other pleadings to those parties named in the arbitration.

Third-Party Claim A claim by the respondent against a party not already named in the proceeding.

XV. LIST OF SPONSORING ORGANIZATIONS

To obtain further information, contact the Director of Arbitration at one of the following organizations:

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

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

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

Cincinnati Stock Exchange, Inc.
205 Dixie Terminal Bldg.
Cincinnati, OH 45202
(513) 621-1410

Midwest Stock Exchange, Inc.
400 LaSalle Street
Chicago, IL 60605
(312) 663-2354

Municipal Securities Rulemaking Board
1818 N Street, NW
Washington, DC 20036
(202) 223-9347

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

New York Stock Exchange, Inc.
11 Wall Street
New York, NY 10005
(212) 656-2772

Pacific Stock Exchange
220 Bush Street
San Francisco, CA 94104
(415) 393-4000

Pacific Stock Exchange, Inc.
223 South Beaudry Avenue
Los Angeles, CA 90012
(213) 977-4500

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

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