Ruling Upholds Use of Arbitration

CUSTOMER-BROKER DISPUTES

THE securities industry won a major victory recently when the United States Supreme Court upheld the arbitration process involving stock disputes, experts say. Barring any new congressional action to revamp the existing arbitration mechanism, the current system - which has resulted in widespread backlogs in the resolution process - is expected to remain in force.

Last week's decision by the high court was ``another win in a long line of victories for the securities industry,'' says Hartley Bernstein, a partner in the Manhattan law firm of Brandeis, Bernstein.

Mr. Bernstein, who represents a number of clients who have filed claims relating to stock market transactions, is an advocate of choice in disputes between stock brokers and customers. He would allow clients the option of going the arbitration route - or seeking relief in the courts.

But as Mr. Bernstein notes, most major brokerage houses now require customers to sign agreements that securities disputes will be resolved through arbitration, rather than by seeking redress in court.

In late May the US Supreme Court let stand a federal appeals court ruling that allows securities dealers to refuse to open accounts for customers who decline to sign arbitration agreements. The state of Massachusetts had sought to make arbitration agreements optional - thus allowing brokerage-house customers, if they so wished, to resolve their dispute in court. But an appeals court held that the Massachusetts rules were unconstitutional since they conflicted with the Federal Arbitration Act. The appeals court found that the federal law contained an ``unambiguous pro-arbitration mandate.''

Thus, in letting the appeals court decision against Massachusetts stand, the US Supreme Court upheld the current use of arbitration as the primary process for adjudicating stock disputes, since most major brokerage houses require customers to sign pre-dispute arbitration agreements.

The securities industry also won a major arbitration case back in 1987, in Shearson/American Express Inc. v. McMahon. In that decision the high court held that mandatory arbitration agreements are enforceable.

Proponents of arbitration contend that the process is less expensive than court litigation. But critics argue that mandatory arbitration has led to substantial backlogs; critics also believe arbitration panels favor the securities industry.

Arbitration claims have been up since the stock market plunge of Oct. 19, 1987, with many investors alleging that lapses or misconduct by brokers caused them to lose money. During 1989 some 4,000 claims were initiated before the National Association of Securities Dealers (NASD), according to Enno Hobbing, a spokesman for the group.

That number was about the same in 1988, but has risen steadily in recent years. In 1986, for example, there were some 1,600 cases; in 1987, about 2,800 cases.

The NASD now has about 75 people involved with arbitration cases, Mr. Hobbing says. The resolution-time on such cases is around 12 months. In late 1988 it took about 13 months to settle a claim.

Some groups note that the backlog on arbitration cases is starting to drop. Securities cases before the American Arbitration Association took about 284 days to resolve last year, down slightly from 294 days in 1988, according to Barbara Brady, an official with the AAA. The number of cases is also down slightly - to 440 cases last year, compared with 495 in 1988.

The NASD and AAA are only a few of the organizations dealing with securities-related arbitration cases.

Although the overall code of arbitration is the same for every group, based upon federal guidelines, there are differences in the way member organizations pursue arbitration. For that reason, the NASD and the Securities Industry Association have favored a single national entity to process arbitration disputes.

The NASD has just announced a study on the feasibility of such a single organization. One issue that would have to be resolved, however, is how such a national entity would be financed.

Meanwhile, Congress is not expected to undertake a major legislative overhaul of the arbitration process any time soon.

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