When Is Securities Arbitration The Right Approach?

Law Blog

Securities arbitration represents an alternative process for resolving disputes involving equities, bonds, and many similar financial vehicles. It also can come up in some corporate legal disputes involving publicly-held companies. You might wonder when arbitration is the right approach. A securities attorney will tell you to consider it in these three situations.

Contractual Duty to Arbitrate

This is the simplest scenario, one where the parties are contractually obligated to try to resolve problems in arbitration. An explicit contract represents the strongest case for arbitration because it will be hard for anyone to get a court to let them out of it.

There may also be some scenarios where the obligation isn't explicitly in a contract but is still recognized by the courts. However, you should be able to at least get a judge to order a hearing to determine if that's the case in your situation.

Federal law recognizes some situations where specific parties must arbitrate. This includes most brokerages, most registered representatives, and some financial or investment advisors. Generally, people and organizations registered with state agencies, the SEC, or FINRA are more likely to have a legal obligation to pursue arbitration.

Mutual Consent

In many instances, parties may also agree to arbitration by mutual consent. They also can determine if they want to accept binding or non-binding arbitration. State and federal laws will apply to the proceedings. However, the arbitration forum itself can impose rules as long as they don't violate state or federal laws.

Mutual consent to arbitration may be desirable if the parties don't want a dispute to blow up. For example, the two parties may wish to avoid publicity that could harm their mutual interests. Arbitration also may be a good-faith way to avoid the expenses of lawsuits involving corporate and securities laws.

Corporate Rules

A corporation has extensive ability to set rules for governance within its legal confines. This means corporate disputes may fall within a company's arbitration guidelines. If two parties with interests within the business have a dispute, they may have a duty to arbitrate within the corporate guidelines. Folks who are unsure should ask a corporate lawyer to read the company's current charter to determine what the dispute resolution process is.

Notably, mutual consent may not apply in a corporate setting. If arbitration isn't the preferred dispute resolution mechanism within a corporation's structure, you will have to determine what is. For example, a board vote may be the only answer outside of filing a lawsuit. For more information, contact a securities law attorney near you.

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14 October 2022