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Family Finances: Settling a Brokerage Firm Dispute

- Alan Lavine and Gail Liberman

We don't know about you, but we hate to sign those brokerage firm agreements that say we must agree to arbitration if we have a dispute. If there are problems, we want to be able to have our day in court. Unfortunately, if we don't sign the brokerage firm form, we can't do business with them.

We particularly have been skeptical about the NASD, which handles more than 90 percent of the securities-related arbitration cases filed. The NASD is a non-profit organization that represents the nation's brokers, so how likely are they to rule in favor of us?

But as NASD arbitration complaints hit record numbers--up 23 percent in August over the prior year--- attorneys lately have been telling us that the odds tend to favor consumers who file arbitration claims with the NASD.

"Most people will tell you that the perception that we were a forum for securities firms and not investor friendly has certainly gone away," agrees Linda Fienberg, president of NASD Dispute Resolution. "Of claims that go to arbitration, investors prevail between 52 percent and 60 percent of the time." Exactly how well investors do within those parameters varies by the year, she says.

What is arbitration?

Arbitration is a way of having disputes between two or more parties settled by impartial persons who are knowledgeable in securities industry disputes. Arbitrators must obey certain laws when they settle disputes.

The bottom line: When you agree to arbitration, you generally give up your right to go to court. "If you bring an arbitration claim and get a result you're not satisfied with, you can move to vacate the arbitration complaint in the appropriate state or federal court," Fienberg told us. "But the window is very narrow, and it happens very rarely. You have to show arbitrator misconduct or bias or total failure to comply with or value the law."

In arbitration, don't expect the kind of large damage awards you might receive if you were able to take your claim to court.

Fienberg says it averages six months to settle an NASD arbitration dispute that is heard by a single arbitrator without a hearing. For more complicated disputes, the average period is one and one-half years. You can get the specifics about filing a claim at www.nasdadr.com. Or, you can get a guide and forms by writing NASD Dispute Resolution, One Liberty Plaza, 165 Broadway, 27th Floor, New York, NY 10006.After you file your claim, you might expect a response from the brokerage firm's lawyer. That is followed by a discovery period where you must supply the broker with all the information they request.

After discovery, you go to arbitration. Thirty days after your arbitration hearing, the arbitrators make a decision.

"If you believe you have a loss caused by your broker, consider filing an arbitration claim," suggests Mark McNair, a former Securities and Exchange Commission attorney and editor of the SecuritiesSleuth.com. "Don't mislead yourself, the process isn't easy."

If you plan to file an arbitration claim, McNair advises hiring a lawyer. The reason: The brokerage firm will have legal representation. You will be at a disadvantage if you try and do it yourself.

There are some important issues to consider when filing a complaint with the NASD.

You must pay a non-refundable arbitration filing fee, plus a hearing session fee. Currently, Fienberg says, filing fees range from $25 to $600. A hearing deposit fee ranges from $25 to $1,200.

Claims under $25,000 are heard by a single arbitrator on paper without a hearing. Claims of $25,000 to $50,000 are heard by a single arbitrator with a hearing unless the investor asks for three arbitrators. For claims over $50,000, the presumption is three arbitrators will handle the case, although the parties can elect one. If you have a small claim, it's cheaper to use one arbitrator, McNair notes.

Beware. The General Accounting Office has raised concerns about the fact that many NASD settlements go uncollected. Fienberg says that whether you get paid largely depends on whether the firm is still in business--much as it would in a court case. "If an existing member firm does not pay in 30 days, the NASD will bring a proceeding to suspend a firm from doing business until it does pay," she said, so compliance is close to 100 percent. But the NASD has no such power once the company has filed bankruptcy.

"At the beginning of the case, we check all NASD records," she stressed. "If the individual or business is no longer in business, we notify the claimant. At that point, the claimant can ask for a default proceeding, take his or her case to court or do nothing."

To avoid such issues, she advises, carefully review the background of any broker at www.NASDR.com--before entering into a relationship with him or her. Also, check references.

"Check your statements every month," she adds. "If there is a transaction you don't recall directing, contact the broker. If you get no satisfaction, complain to the branch manager or compliance department. Do not sit on your rights. Act immediately."

Have a small claim? You might consider mediation, which is less formal and less costly than an arbitration action. However, it also is non-binding.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

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