Making it Up as They Go Along: The Role of Law in Securities Arbitration

Abstract

This article addresses an issue of securities arbitration that has largely gone unexamined: whether arbitrators have to apply the law in deciding customers' disputes with their brokers. Because of the Supreme Court's 1987 opinion in Shearson/American Express v. McMahon, most customers' disputes with their broker-dealers are resolved today in an arbitration proceeding before a securities industry-sponsored forum. While the Supreme Court assumed that arbitrators would apply the law, there is considerable evidence that they do not. This article assesses what has happened to securities arbitration since the privatization of the law. While the regulators have focused on efforts to make the procedure more like litigation, very little effort has gone into ensuring that the arbitrators are trained to apply the law. However, given the difficulties investors would encounter in pleading and proving their claims in court, they may well be better off in a system where less attention is paid to the law and more to the equities of the actual dispute before the arbitration panel. While this is not a system where accountability and predictability of results can be achieved, investors may, in fact, fare better than they might expect.

Keywords: securities, arbitration, investor rights

JEL Classification: K10, K22