Mandatory Arbitration in the Securities Industry

II. The Law concerning Arbitration in the Securities Industry

(a) Bifurcation of arbitrable and nonarbitrable claims

III. The Case Against Mandatory Arbitration in the Securities Industry

A. The mandatory pre-dispute arbitration clause

B. The composition of the arbitration panel

C. The arbitrariness and finality of arbitration decisions

D. The uncertainty of punitive damage awards in arbitration

IV. Possible Alternatives or Solution to the Problems

A. Allow concurrent jurisdiction between state and federal courts

B. Expand composition of the arbitration panel

Mandatory Arbitration in the Securities Industry

This paper will discuss the use of arbitration to settle disputes in the securities industry, particularly those between investors and brokers. The thesis of this paper is that mandatory arbitration in the securities industry is unfair to investors, since it generally favors the brokers. The first part of the paper will describe the law governing arbitration in the securities industry. The second part of the paper will discuss why mandatory arbitration is unfair to investors. The last part of the paper will present some possible reforms for, and alternatives to, mandatory arbitration.

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y controversy between the parties to arbitration. The Court held that the award should stand. It reasoned that the two clauses created an ambiguity as to the parties' intent concerning punitive damages; therefore, under a rule of contract interpretation, the ambiguity must be construed against the party that drafted it: Shearson. The issue was finally sent down the road to settlement in 1996 by the New York Appellate Division, First Department. In Mulder v. Donaldson Lufkin & Jenrette, this court lifted the Garrity prohibition against the award of punitive damages by arbitrators. In doing so, the court relied upon the Mastrobuono decision, allowing punitive damages except where the parties have clearly and freely agreed otherwise. The Case Against Arbitration in the Securities Industry The McMahon decision coincided with "Black Monday," the stock market crash of October 1987. In the wake of the crash, an overwhelming number of claims were filed by small investors against brokers. Almost all of these were compelled to arbitration, ensuring that arbitration of securities disputes would be placed under close scrutiny. Thus, securities industry arbitration became a controversial issue by the early 1990s. There are four

Category: Government - M