The NASD operates the nation's largest arbitration forum for the resolution of disputes between customers and member firms, as well as between brokerage firm employees and their firms. Virtually all agreements between investors and their stockbrokers include mandatory arbitration agreements, whereby investors (and the brokerage firms) waive their right to trial in a court of law. Although the fairness of such mandatory arbitration clauses has been called into question, U.S. courts have consistently found them to be lawful.
As of June 2005, the pool of arbitrators consisted of 2,700 individuals classified by the NASD as industry panelists and 3,700 individuals classified as non-industry panelists.
In 1987, in Shearson/American Express v. McMahon, the United States Supreme Court ruled that account forms signed by customers requiring arbitration for disputes were enforceable contracts. Brokerage firms now require all customers to sign such documents, requiring binding arbitration.
For disputes between customers and member firms, the panel that decides the case consists of three arbitrators, one industry panelist and two non-industry panelists. For disputes between an employee and member firms, all three arbitrators are industry panelists. For a given case, the two sides are provided separate lists by NASD of local, available arbitrators, from which they chose. If one side rejects all listed arbitrators, NASD names the arbitrators who will serve; these can be rejected only for biases, misclassification, conflicts, or undisclosed material information, and biases or conflicts must be identified prior to the beginning of hearings. For an overview of the Securities Arbitration process, see Introduction to Securities Arbitration.
According to NASD, there were 6,074 cases for arbitration filed in 2005, a decrease from the peak of 8,945 cases filed in 2003. The average time to complete a case has risen from 10.5 months in 1995 to 14.3 months in 2005, a decrease ...