Question: What does settling problems by arbitration actually mean?

H. L. Genetti

Answer:

Dear H. L. Genetti,

Most brokerage firms ask clients opening an account to sign a document agreeing to resolve any disputes that may arise through arbitration. For example, at BUYandHOLD, this is something that you agreed to in the Client Agreement.

This means that the person signing the agreement will settle disputes he/she has with the brokerage firm, not via a lawsuit but rather through arbitration. In a lawsuit, a case is decided by a judge or by a jury. In arbitration, a case is typically decided by a three-person panel made up of one person from the brokerage industry and two independent arbitrators. The independent arbitrators are professionals, often lawyers, accountants or business people.

There is a filing fee, with an approximate range of $1,000 to $2,500. If the panel rules in the client's favor, it is likely (but not guaranteed) that the brokerage firm will be asked to cover the fee.

In arbitration, neither side can contest the panel's decision. It is final, which is why it's called binding arbitration. There is an exception to this rule, however. If you learn after the decision is handed down that one of the members of the panel is related to the broker involved or to someone in that brokerage firm, the decision will most likely be revoked.

As the client of a brokerage firm, you can not go to arbitration simply because you're unhappy with your broker. The arbitration process is set in motion only if you suffered losses because of alleged fraud, misbehavior or unauthorized trades.

I want to emphasis the point that alleged fraud must be involved. Many investors are confused about this. It is important to realize you cannot plead your case simply because you lost money on a stock your broker recommended.

You do not need a lawyer to file an arbitration claim. However, if a large amount of money is involved, you might want to consult an arbitration attorney. He/she should make an initial evaluation of your case for free. Any follow-up advice and consultations would be at your expense.

Tip: To locate an attorney who specializes in arbitration, check with your local bar association or consult the Public Investors Arbitration Bar Association. You may search for a lawyer in your area at: www.piaba.org. Or, if you call 888-621-7484 the Association will mail or fax you a list of names.

To learn more about how arbitration works, go to the Financial Industry Regulatory Authority's website at: www.fira.com and click on "Arbitration & Mediation" at the top of the home page.

Good luck!