The Regulatory Framework of Securities Arbitration - Chapter 1 - Securities Arbitration: Practice and Forms - Second Edition
W. Reece Bader
Burton W. Wiand
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Originally from Securities Arbitration: Practice and Forms - Second Edition
The United States securities markets provide arbitration forums for the resolution of disputes between market professionals and their customers, and among market professionals. The securities markets’ arbitration forums developed in a very short stretch of time, evolving from multiple forums, each with a set of similar procedures, to the present status of essentially one forum as the primary means for the resolution of securities-market disputes. Through steady dialogue between the securities industry, its self-regulatory organizations (SROs), representatives of the public and the Securities and Exchange Commission (Commission or SEC), substantial reforms to arbitration rules were conceived and implemented to promote the fairness and efficiency of arbitration forums. This growth in securities arbitration developed in tandem with changes in the law concerning the enforcement of arbitration agreements. The development of this body of law reflects a trend away from judicial hostility toward arbitration. In the mid-90s the arbitration forums developed new procedural reforms in response to judicial, customer, and industry concerns about the fairness of the systems. The 2000s subsequently saw a consolidation of arbitration forums, the goal being to streamline the broker–dealer regulatory system and establish a single set of rules and a single set of examiners within a single SRO. In March 2006, the New York Stock Exchange (NYSE) merged with the Archipelago Exchange to create the NYSE Group, Inc., a for-profit publicly owned company. And in July 2007, the NYSE and the National Association of Securities Dealers, Inc. (NASD) merged to form a single consolidated SRO known as the Financial Industry Regulatory Authority (FINRA).
The roots of present-day securities arbitration reach back to 1817, when the NYSE’s Constitution first provided for the internal resolution of disputes among members. In 1872, the NYSE Constitution provided for the arbitration of claims by customers against members. Shortly after its formation in 1934, the Securities and Exchange Commission encouraged the NYSE to “offer customers a standard arbitration agreement.” The NASD adopted arbitration rules in 1968. These early efforts at administering arbitration facilities provided an informal means for resolving disputes outside of the judicial system.
Interest in alternative means of dispute resolution grew in the 1970s as indicated in President Gerald Ford’s regulatory reform program in 1975. That program contained, as one of its four principal points, concerns for responsiveness to customers, including the handling of investor complaints. The Commission’s responding initiatives for focusing public and industry attention on the availability of fair and inexpensive dispute resolution forums for investors sparked the transformation of the SROs’ elementary arbitration facilities into modern arbitration forums. The first major changes occurred in 1979, with the adoption of a uniform set of arbitration rules for the markets’ forums; another wave of major changes came in 1989 with reform of those rules. Finally, the most significant reforms to date started in the mid-90s and have continued on into the 21st century.