After the U.S. Supreme Court decided to let brokerage firms make customers sign arbitration agreements, a lot of people thought that this was a faster, less expensive alternative than letting investors take their claims to courts. Recently, however, what seemed like a good way to resolve disputes between brokers and investors has come under close scrutiny.
Certain regulators and lawmakers are now saying that the system needs to be reviewed. According to William Galvin, the Massachusetts Secretary of the Commonwealth of Massachusetts, the arbitration side of disputes need to be fairer and not “stacked against” investors.
These kinds of concerns are taking on a new importance in the wake of the upcoming consolidation of the NYSE Group Inc.’s New York Stock Exchange and the National Association of Securities Dealers.
In arbitration, no broad right of appeal exists, and a three-person panel (rather than a jury of peers) hears the case. One benefit, however, is that disputes can move a lot more quickly through the arbitration system then in a court of law.
Some critics say that the arbitration system has become a lot like the court system that it sought to replace. Others have questioned the system’s fairness, in light of the fact that an industry-affiliated arbitrator sits on each panel. Representatives for investors have voiced concerns that arbitrators that depend on brokerage houses for their salaries may find it difficult to remain impartial.
In addition, there is a falling win rate among investors involved in arbitration disputes. Just 42% of investors won cases in NASD arbitration last year. Also, winnings are often smaller than what an investor had initially claimed if the claim is made against a big firm-reports a new study. In a study that hasn’t been finalized yet, clients’ recovery rates against Morgan Stanley, Merrill Lynch & Co., and Smith & Barney was reportedly at just 10%. (However, indications are that clients who retain attorneys experienced in this area of the law recover at far higher rates.)
Many claims are not reviewed by an arbitration panel. Last year, 81% of customer claims were resolved by mediation or settlement. It is possible that the 19% of cases that do arrive in front of a panel are the ones that brokerage firms believe they stand a good chance at winning.
Shepherd Smith and Edwards is a law firm committed to representing investors who have incurred losses because of brokers and brokerage firms. We have helped thousands of investors recuperate investment losses. Our record against major brokerage firms, as well as smaller firms, is far greater than the reported averages Contact Shepherd Smith and Edwards online, and your first consultation is free.
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