It was in 1817 that the Constitution of the New York Stock Exchange ("NYSE") first provided for the internal resolution of disputes among members. In 1872, the NYSE Constitution was broadened to provide for the arbitration of claims by customers against members. The National Association of Securities Dealers ("NASD") adopted arbitration rules in 1968. Arbitration was to provide an informal system for resolving disputes without going through the courts. The desire for a low cost and fair system of dispute resolution led to the adoption of a uniform set of arbitration rules by the Self Regulatory Organizations ("SRO's") in 1979 and subsequent reforms in 1989.

The Federal Arbitration Act, passed in 1925, provided that contracts to arbitrate are valid, irrevocable and enforceable. The courts, however, were slow to embrace the Federal Arbitration Act and, in 1953, in Wilko v. Swan, the Supreme Court determined that predispute arbitration agreements between brokers and investors were unenforceable as to claims arising under the Securities Act of 1933. It was not until 1987 in the landmark decision in Shearson/American Express, Inc. v. McMahon that the Supreme Court determined that predispute arbitration agreements would not deprive investors of the protections of the Exchange Act. The 1989 Supreme Court decision in Rodriguez de Quijas v. Shearson/American Express, Inc., explicitly overturned the earlier Wilco decision, making virtually all claims under the federal securities laws arbitrable.

The impact of the evolution of securities arbitration is evident. Today, customer agreements for virtually all margin accounts, option accounts, and even many cash accounts with brokerage firms contain predispute arbitration clauses. Regulations promulgated after Rodriguez require account agreements to have the arbitration clause highlighted, and include language informing customers that they are waiving their rights to seek remedies in court. As a practical matter, however, customers will not be able to open margin or options accounts without signing an agreement containing an arbitration clause.

A review of district court decisions following McMahon and Rodriguez shows that it is very difficult to avoid arbitration where an account agreement with an arbitration clause is present. Arguments such as forgery, fraud in the signing of the contract and adhesion have been used regularly and have been largely unsuccessful.

Today, virtually all customer agreements for margin accounts, option accounts, and even many cash accounts with brokerage firms contain predispute arbitration clauses.

The public and claimant's representatives perceive a prejudice by arbitration panels of SROs in favor of the securities industry. However, a study performed in 1988 by Deloitte Haskins & Sells on behalf of the New York Stock Exchange, however, established that the average arbitration payment, including judgments and settlements, is higher than the average payment in matters that have been litigated, and the payment as a percentage of the original claim is significantly higher in arbitration claims than in litigation.

The Uniform Code of Arbitration provides that:

"Any dispute, claim or controversy eligible for submission under Part I of this Code between a customer and a member and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons shall be arbitrated under this Code, as provided by any duly executed and enforceable written agreement or upon the demand of the customer."

In other words, even in the absence of an arbitration agreement, any member of an SRO or associated person may be compelled to arbitration upon the demand of a public customer.

EQUITY OR THE LETTER OF THE LAW?

Although arbitrators are not strictly bound by the law, they must follow it to the best of their ability. The decision of the arbitrators is binding upon the parties and there are very limited grounds upon which to vacate an award. An arbitration award that demonstrates a "manifest disregard of the law" can be vacated on appeal. Arbitrators are not required to and generally do not state their reasoning in determining an award.

There is no prescribed format for pleadings in arbitration. Original pleadings are often submitted in letter form and should be in narrative style. The Statement of Claim ("SOC") should be concise and set forth the relevant facts of the dispute and the remedies sought.

General denials, commonly used in court proceedings, are not recommended. They do not give the arbitrators the Respondent's position and could result in a bar to presenting various defenses.

Discovery procedures are more limited in arbitration than in litigation. The most common forms of discovery requests are the Request for Production of Documents and Request for Information. The relevancy of various documents and information is dependent upon the causes of action stated in the Claim. Discovery in arbitration is intended to be a voluntary exchange; however, when one party fails to comply with a request, the requesting party may ask for a prehearing conference during which the arbitrators rule on discovery disputes.

Generally, the strict rules of evidence do not apply in arbitration hearings. The tendency is to "take evidence for what it's worth." The Arbitrator's Manual states: "Arbitrators should be guided by the concepts of fairness in determining what evidence or testimony should be admitted". When in doubt, rulings are more appropriately made on the side of allowing rather than restricting evidence".