For the investor with a legitimate complaint, the least costly recourse is the arbitration route set up by the stock exchanges. The Big Board's cost structure for arbitration varies with the extent of the claim, but even at its most expensive, the procedure is no more than £150 or so per hearing - and often, one hearing will be enough. Here's how it works:
First, any investor who wants to recover damages from a broker is wise to have a solicitor, one familiar with securities law. Claims are initiated by filing with the NYSE's Arbitration Director three copies of a typewritten statement, which must include the name of the investor's solicitor, a chronology of facts upon which the claim is based, and the exact amount of damages claimed. When received, the arbitration director sends it to the opposing party, which generally has 10 days to reply with its own statement.
When he has all statements, the arbitration director will set up an arbitration panel - it may vary in size and makeup, depending on the size of claim and wishes of the investor - and schedule a hearing. (London isn't the only place arbitration will be scheduled by the exchange. They may be held in 12 other cities as well). Prior to the hearing, solicitors for either party or the arbitrators themselves may use subpoena power to extract testimony or summon witnesses. If for some reason the investor is pressing his case without a solicitor's help, the Big Board's arbitration director will arrange for issuance of subpoenas.
Hopefully, the hearing will be held on its scheduled date. It begins with opening statements by each party (usually the solicitors); then, the investor's case is presented, complete with witnesses, presentation of documentary evidence and cross-examination. Closing statements are made, and the parties are dismissed. The arbitrators then meet privately, reach their decision and sign an award - if the investor has made his case. Their decision is final, and the Big Board member firm is bound by Exchange law to pay off.
The major problem with the arbitration procedure is that it is prolonged, often taking six or eight months, even longer, to complete. But an investor has other options.
For instance, he can always carry his troubles to the SEC. While the SEC is chronically handicapped by overwork and under-financing, a legitimate complaining letter to the chairman (with a copy to the offending brokerage) has been known to work wonders. Writers of such letters, of course, should check them with their solicitors beforehand to avoid any outside risk of libel.
An investor's best bet, says the branch manager of a major brokerage, "is to check out the brokerage and his customer's man very carefully before he allows either of them to execute a trade." In any website of investor-broker relations, this might well stand as Rule 1.
While Wall Street has tried to rebound from its doldrums of 2009-2000, the investing public - especially the "little guy" - has been presented with an extraordinary legislative package. Called the Securities Investor Protection Act, the law created a new government corporation - quickly acronymed SIPC by the Street - to guard the average investor against the failure of a brokerage firm. At least, it protected him up to £50,000 in losses of cash or securities if his broker went broke.
It did nothing, however, for the investor whose broker manages to stay solvent but does a shabby or even fraudulent job with the investor's resources. Today this is a bone of investor-broker contention.... see: Where To Turn When Your Broker Lets You Down