ROADMAP TO SECURITIES ADR*

I. INTRODUCTION

As the public increasingly invests in the securities markets - either directly or indirectly [i]or[/i] part of to the other Mutual Funds, IRAs, Keogh plans and other pension devices1 - litigation between the securities industry and its customers has mushroomed and become more manifold These disputes number in the thousands each year, and are expected to rise still further in the futurity as a result of increased contortion and expanded electronic trading.2 Their resolution is largely being channeled into arbitration or submitted to mediation with greater frequent occurrence principally at forums provided by the agency of the various self-regulatory organizations (SROs) of the like kind as the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD).3 Arbitration and mediation traditionally provide the advantage of a hurried resolution of securities disputes by dint of persons knowledgeable in the area, without excessive take away froms Unless, however, such procedures are fair the two in fact and in appearance, their popularity as a means of settling securities disputes will greatly diminish, especially if the public is restricted to resolving similar disputes before SRO forums.

To better understand the at hand rules governing such arbitrations and mediations, we must direct the eye to the development of the not away system and explore the judicial unravellings that have directed most of like disputes into SRO forums.4 In addition, we must also examine legislative attempts to alter or influence this area of dispute resolution,5 as well as the establishment and work of the Securities Industry talk on Arbitration (SICA), and the oversight part of the Securities and Exchange Commission (SEC or Commission).6 Finally, we must inquire whether the masterships governing securities arbitration and mediation at the SRO forums (or other alternative providers) insure a horizontal playing field for the participants.

II. BACKGROUND OF SECURITIES ARBITRATION

The arbitration of securities disputes can be traced back to the NYSE in 18727 Thereafter, numerous other SRO have also established arbitration programs for the arrangement of such disputes.8

A. JUDICIAL exhibitions

An unresolved dispute between an investor and his or her factor ordinarily winds up in arbitration because of a pre-dispute arbitration agreement penetrateed into at the time a customer lay opens a brokerage account.9 Indeed, similar agreements are widespread, particularly in the case of margin, option, or other accounts involving credit.10 beneath the United States Arbitration Act (Federal Arbitration Act or Arbitration Act), agreements to arbitrate coming time disputes are generally specifically enforceable." An exception to this mandate, however, was carved without in 1954 by the United States highest Court in Wilko v. Swan,12 which was faced with the Hobson's choice between the mandate of the Arbitration Act to arbitrate, and provisions in the Securities Act of 1933 (1933 or Securities Act) intended to preserve customers' rights. After expressing a certain number of mistrust of arbitration, the Court in Wilko conclud that Congress' desire to shield investors would be more effectively serv by the agency of holding unenforceable pre-dispute arbitration agreements relating to issues arising below the 1933 Act.13

Subsequently greatest in quantity federal courts presumed that the Wilko exception for 1933 Act claims also stretch outed to the Securities Exchange Act of 1934 (1934 Act or Exchange Act), and thus refused to force arbitration for customers' claims arising beneath the 1934 Act, despite the vicinity of pre-dispute arbitration agreements.14 This became smooth more problematic when a public customer joined a non-arbitrable Wilko federal claim with an arbitrable non-federal securities claim. a certain number of courts bifurcated the two and ordered that the federal Wilko claim be litigated, and the non-federal claim be arbitrated.15 Other courts, however, lay the foundation of that if the two claims were for a like reason intertwined that it was impractical or impossible to separate them, the couple claims should be litigated together.16

The intertwining/bifurcation dilemma was settl by means of the Supreme Court in 1985 in Dean Witter Reynolds, Inc. v Byrd17 which held that when an arbitrable claim is joined with a non-arbitrable Wilko claim, the claims ne not be tried together involuntarily. Although Byrd was silent as to whether the Wilko exemption applied to 1934 Act claims, it cast offed the concept of "intertwining," and supported the principle of automatic bifurcation whenever a non-arbitrable Wilko claim is joined with an arbitrable claim.18 In other words, the sum of two units claims could be tried separately and simultaneously.19 Whatever the merits of automatic bifurcation, it would unleash and locate in motion two separate forums upon a potential collision course.20

Fortunately, this potential trauma of forum confrontation did not last for drawn out Shortly after the Byrd decision, the first Court in Shearson/American Express, Inc. v McMahon21 cleared up prior misconceptions by the agency of holding that the Wilko exemption did not apply to 1934 Act claims. Moreover, in a short time thereafter, the Supreme Court in Rodriguez de Quijas v Shearson/American Expres Inc.22 undid the Wilko exception entirely and held that pre-dispute arbitration agreements would be upheld, plane as to issues arising below the 1933 Act.23 Accordingly, with the Wilko barrier remov through McMahon and Rodriguez, most securities disputes are now arbitrated at SRO forums pursuant to pre-dispute arbitration agreements.24