Ruling Upholds Use of Arbitration CUSTOMER-BROKER DISPUTES

Article excerpt

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. …