Where the investor has a choice between arbitration and a lawsuit, arbitration can have significant advantages, as well as disadvantages. Simplified procedures, such as the lack of formal pleading rules, the absence of most pretrial motions, and simplified discovery, can substantially reduce the cost of obtaining a decision.

In arbitrations before the Financial Industry Regulatory Authority (formerly known as the National Association of Securities Dealers), when a panel of three arbitrators hears the case, one will be a stockbroker or other member of the securities industry. Typically, the other two panel members are lawyers, accountants, or other professionals. As a result, it is often easier to present cases involving industry practices or complex damages models to an arbitration panel than to a judge or jury.

Because the rules of FINRA (formerly known as NASD) require that arbitration awards be paid promptly, on pain of disciplinary proceedings against the broker, it is often easier to collect an arbitration award than a court judgment. Finally, the grounds for setting aside an arbitration award are extremely narrow, much narrower than the grounds for appealing a judgment. As a result, costly appeals are usually unnecessary.

On the other hand, litigation in court has its advantages as well. An arbitration panel, and in particular the industry member, may be more sympathetic to the broker advisor than a jury would be. In court, you have the right to conduct depositions and much more extensive documentary discovery than in most arbitrations. In court, you have the right to have your case decided in accordance with law, and you can appeal a judgment that you think is contrary to law. In California, arbitrators do not have to follow the law, though they often try to. In many cases, the right to conduct extensive discovery, the right to appeal an adverse judgment, and the right to a jury trial will outweigh the advantages of arbitration.

DISCLAIMER: Vincent DiCarlo, who authored and maintained this site, has entered government service and, as of September 1, 2008, is no longer engaged in the private practice of law.  Therefore, this site is no longer being maintained,  may not be accurate, and should not be relied upon.  It is not now and was not ever intended as legal advice.  It is being provided for historical purposes, and for the benefit of those lawyers who are capable of independently verifying the information and judging the opinions in it, and then reaching their own conclusions.  You are strongly advised to consult qualified legal counsel before adopting any of the ideas or suggestions in this material, which may or may not be applicable in your jurisdiction or to your specific situation, and may no longer be accurate or prudent in any case.  The opinions and statements at this site were solely those of the author.  They were not and are not those of, nor were they nor are they made on behalf of, any agency of government or anyone else.

Copyright © 1998-2008 Vincent DiCarlo