In the securities markets, arbitration of broker-dealer disputes has long been used as an alternative to the courts because it is fair, and because it is a faster and more economical means of resolving disputes than court-based litigation. There are certain federal and state laws which govern the conduct of an arbitration proceeding generally, and detailed procedural rules (set forth by the Financial Industry Regulatory Authority) that govern the conduct of securities arbitration proceedings.
In general, and in the securities industry, the parties agree to arbitrate pursuant to a written pre-dispute arbitration agreement (PDAA) that the parties enter into prior to any dispute arising.
The Dodd-Frank Act empowers the SEC to restrict or prohibit the use of PDAAs in customer contracts if it finds that such limitations are in the public interests and for the protection of investors. Similarly, the Dodd-Frank Act empowers the Consumer Financial Protection Bureau (CFPB) to restrict or prohibit the use of PDAAs in consumer financial services contracts, such as for credit cards and checking accounts, after conducting a study and reporting its findings to Congress.
The securities arbitration system has worked well for decades because it is subject to public oversight, regulatory oversight by multiple independent regulators and rules of procedure that are designed to benefit investors. Pre-dispute arbitration agreements (PDAAs) are a vital component of this system. Such agreements help shape the public policy in favor of arbitration that has been recognized by both Congress and the U.S. Supreme Court. Such public policy is strengthened by the recognition that securities arbitration promotes fair, efficient, and economical dispute resolution for all parties.