We encounter many investors who are unaware that by investing in stocks and bonds they give up important constitutional rights. For example, they sacrifice their right to a jury trial if a broker negligently handles their account or steals from it or fails to follow the investor’s instructions.

Every stockbroker in the United States compels its investors to agree to arbitrate each and every dispute entirely on the broker’s terms. They do this by including an arbitration clause in their account opening documents. Often, they bury them in small print documents of 25 pages or more of words that are incomprehensible to those not in the securities business.

The courts call these arbitration agreements “contracts.” Of course, since there is no choice for the customer, many of these agreements are far from contracts. They are the product of a vast conspiracy among brokers. When one broker insists a customer waive his constitutional right to a jury trial by signing an arbitration clause, the customer is free to go to another broker.

Nonetheless, the demand for arbitration will be the same from that broker and from all. When a customer refuses to sign, the broker will refuse to open an account. That is true of every stock brokerage in the United States.

In enforcing arbitration clauses against investors who, in most cases, do not understand these “agreements,” the Courts rely on statutes enacted by the federal and state governments.

Since all brokerage transactions are deemed to involve interstate commerce, courts mainly look to the Federal Arbitration Act which enforces arbitration regardless of whether the “agreement” to arbitrate is voluntary in any genuine sense. If you wish to invest in stocks and bonds, either sign an “agreement” to arbitrate, or you become the victim of a broker conspiracy to refuse to deal with you and everyone like you who insists on his constitutional right not to arbitrate but, instead, have a court trial.

To be sure, the Federal Arbitration Act says that no one has to arbitrate unless they enter an agreement to do so. However, courts from the Supreme Court down rule over and over that doubt about whether arbitration had been agreed upon by the investor is resolved in favor of the broker and arbitration.

As might be expected, many other industries have hopped on the arbitration bandwagon. Look at your providers for your cell phones, cable, and internet, among dozens of other examples.

True, the courts are exceedingly busy and legislatures are tight-fisted (in some respects) in supporting relief for heavy court dockets, yet investors regularly have arbitration panels rule against them without any requirement to state a reason, and there are virtually no appeals permitted from arbitration decisions.

Yes, there are some effective arguments against even signed arbitration agreements. But, they are exceedingly difficult and, accordingly, winning outcomes for investors are rare.

Nonetheless, investors can help protect themselves in four ways:

1. Clearly understand what the arbitration agreement provides;
2. Consult independent counsel before you sign an arbitration agreement; and
3. If something goes wrong, consult counsel early. Remember, all calls to your broker are recorded.
4. Keep every document from your first meeting with your broker representative and take notes of conversations.


This blog is for information purposes only.  It is not a legal opinion and may not be relied upon as such.  Every client’s circumstance is different factually and legally.  For an opinion directed to your circumstances, seek counsel and inform counsel of all your circumstances and provide counsel with all documents which, of course, have been carefully saved.