Under the Securities Act of 1933, anyone who wishes to sell investment contracts to the public must publish certain information regarding the proposed offering, the company making the offering, and the principal figures of that company. These requirements are intended to protect the investing public from deceptive or misleading marketing practices. The company and its leading figures are strictly liable for any inaccuracy in its financial statements, whether intentional or not.
Violations of the 1933 Act, contract violations, and other disputes can be subject to arbitration.
What Is Arbitration?
Arbitration is a well-respected and widely used means to end disagreements. It is one of several kinds of alternative dispute resolution (ADR) (others include mediation and a hybrid approach). ADR allows disputing parties to resolve the issue in a way other than filing a lawsuit. Unlike litigation, arbitration takes place out of court.
When they make their initial agreement or when a dispute arises, the two parties will:
- Agree in advance to accept the arbitrator’s decision as final
- Negotiate virtually any aspect of the arbitration guidelines, including whether lawyers will be present and which standards of evidence to use
- Select an impartial third party, known as an arbitrator. They may select a panel of arbitrators (usually three)
- Participate in a hearing at which both sides can present evidence and testimony
The arbitrator listens as each side argues its case and presents relevant evidence; after some time to contemplate it, the arbitrator renders a written decision, including an explanation of their decision-making process.
The arbitrator’s decision is final, and courts are rarely willing to reexamine it. Unless the participants have earlier decided it would be otherwise, the decision is legally binding on all parties. Unlike judicial decisions, arbitrators’ decisions cannot be appealed to an appellate court. The arbitrator’s decision may be that one party needs to take action to remedy the situation or that one side needs to pay the other monetary damages. Arbitrators have more flexibility than judges, and their decisions may be more creative or flexible.
What are Securities?
There are four types of securities:
- Equity, which provides ownership rights to holders (that is, stock, which represents ownership in a corporation, including stocks, bonds, and mutual funds)
- Options, which consist of rights to future ownership of stock
- Debt, which includes government and corporate bonds, certificates of deposit (CDs), and collateralized securities, generally entitle their holder to the regular payment of interest and principal regardless of the issuer’s performance
- Hybrids, which combine aspects of debt and equity. Examples of hybrid securities include equity warrants (options issued by the company that give shareholders the right to purchase stock within a certain timeframe and at a specific price), convertible bonds convertible (bonds that can be converted into shares of common stock in the issuing company), and preference shares (company stocks whose payments of interest, dividends, or other returns of capital can be prioritized over those of other stockholders)
These are not the only forms of securities. An investment can be regulated as a security if:
- There is an investment of money.
- The investment is made into a “common enterprise.”
- The investors expect to make a profit from their investment.
- Any expected profits or returns are due to the actions of a third party or promoter.
Under this rule, it does not matter if a securities offering is formalized with a legal contract or stock certificates – any investment offering can be a security. In the case of Howey vs. SEC (1946), the court found that the plaintiff’s sale of land and agricultural services constituted an “investment contract” even though there was no trace of a stock or bond.
Courts have enforced securities provisions on unconventional assets such as beavers, whiskey, and chinchillas. In recent years, the SEC (Securities and Exchange Commission) has also sought enforcement against issuers of cryptocurrencies and non-fungible tokens.
What Types of Securities Disputes Are Subject to Arbitration?
Arbitration is usually reserved for disputes between two private parties. Securities violations involving federal violations or government disputes (such as tax violations) are usually resolved through traditional litigation methods or governmental investigations.
Arbitration resolves a wide spectrum of disputes and legal issues in a securities context. Securities law covers many types of securities violations, such as insider trading, stock distributions, investments, and corporate decisions. Many securities organizations use arbitration as a cost-efficient means of settling disputes.
Arbitration can be used for many types of securities violations, including:
- Breach of fiduciary duty
- Insider trading
- Unauthorized trading
- Unethical corporate practices
- Investment malpractice
What’s an Arbitration Clause?
In most cases, when you deal with a securities investment dealer or broker, they ask you to sign a contract for their services. Part of the contract may include an arbitration clause. An arbitration clause states that the parties agree to resolve disputes through arbitration rather than litigation. The parties agree to forfeit their right to file a lawsuit over investment disputes. Arbitration is almost always less expensive than litigation.
Arbitration clauses are generally allowed by law. However, they may be subject to various limitations depending on the jurisdiction. Thus, you may wish to consult with a lawyer before you sign any contract or agree to an arbitration clause.
Is Arbitration Better Than Litigation?
Arbitration has several advantages as well as disadvantages in comparison to litigation. Some of the advantages of mandatory securities arbitration include:
- Less time-consuming than litigation, and the result is issued quicker
- Better more cost-efficiency
- Allows parties to resolve conflicts in a non-confrontational manner
- Decisions are binding and enforceable under the law and, in general, may not be appealed
- May help promote a continued relationship between the parties
- Choice of decision-maker: One of the downsides to litigation in normal court is that the parties have no control over which judge is assigned to their matter. Rather, the court clerk will randomly assign a judge to the case, regardless of whether the judge has sufficient knowledge of the subject matter
- Arbitration is just as valuable as litigation when it comes to conducting discovery. Typically the parties will not lose out on discovering any crucial evidence before the arbitration hearing, such as written discovery like interrogatories, demands documentation, depositions, and the power to issue subpoenas.
- Since discovery is the backbone of all lawsuits, this is an important benefit. If they choose arbitration, the parties do not have to worry about negatively affecting their case
Some disadvantages of securities arbitration include the following:
- May limit the amount that a party can recover for damages
- In exchange for arbitration, the parties usually forfeit their right to litigation
- May sometimes be difficult to compel a party to comply with arbitration decisions
- Local or state laws may limit the ability to arbitrate
- The decisions are not appealable. This can be a benefit or a disadvantage
Thus, you should weigh the pros and cons of arbitration before you sign any arbitration clauses or engage in arbitration. In most states, you can’t file a lawsuit if there is ongoing arbitration for the same dispute (even if you haven’t signed an arbitration clause).
Do I Need a Lawyer for Securities Arbitration?
Even though arbitration is conducted out of court, you will almost always need the advice and counsel of a lawyer during arbitration. Arbitration and law and securities law are both complex and may revolve around key issues and concepts with which you are not familiar.
A securities lawyer can assist you and provide you with expert knowledge of the securities laws in your area. This can help you obtain a favorable decision during securities arbitration.
