Resolving Disputes in the Securities Industry

October, 1998

Bre-X sent a shudder through what had appeared to be, at that time, an ever richer stock market. It had seemed that nothing could go wrong. Investors and brokers were having a field day. Wealth was being amassed.

There was hardly a need for dispute resolution in the investment business. Who could possibly complain about the odd loss when the overall portfolio did nothing but move in a healthy upward direction? Bre-X changed that and the roller coaster ride we have seen in the stock market recently has exacerbated the situation (it should be pointed out that Bre-X never traded on the VSE).

The phones at the Centre are beginning to ring? "I've lost my shirt" "my broker made the wrong investments" "I'm merely an unsophisticated investor" "the broker has a duty to ensure my investments are safe".

How very fortunate, then, that the Vancouver Stock Exchange and the Investment Dealers Association of Canada, have just recently revamped, broadened and simplified the excellent dispute resolution process they developed with the Centre back in 1993. More accurately, what good planning on the part of the VSE and the IDA.

The Programme provides clients of the 60 participating member firms of the Investment dealers Association and the Vancouver Stock Exchange with a way of dealing with their disputes, other than by litigation. Many disputes are for amounts which are too small to warrant the cost of litigation, resulting in investors who are frustrated because they believe their problem has not and cannot be dealt with. The consequences are bad public relations for the brokerage house and broker, whose lifeblood is satisfied and confident clients.

The Programme provides a significant benefit to the broker and the brokerage house: Confidentiality. Disputes will not show up in the Registry records when a search is made by counsel when retained by a dissatisfied investor client.

Both sides benefit from having the dispute dealt with sooner rather than later. The brokerage firm is denied the temptation to put the complaint on a back burner, hoping that it will disappear. Delay only leads to the increased frustration of the investor. Frustration begets anger. Complaints are lodged with the Securities Commission, the Stock Exchange and the IDA. Reputations are damaged.

The relationship between a broker and client is based on trust. When that trust is broken, for whatever reason, there often follows significant emotion. This needs to be dealt with. The longer the wait for some sort of resolution, the greater the emotion.

The Programme was developed in 1993. Investors were offered an arbitration option, to be commenced at their request. The brokerage firms were obliged to participate. The Programme covered disputes of up to $50,000. The cost, including administration and arbitrator fees, was expected to be no more than $1,500.

The new Programme is similar except that the programme covers disputes of up to $100,000, and a mediation is offered as an option. Parties may agree to use the programme even where the amounts in question are greater than $100,000.

Under the Programme, investors are encouraged to try to resolve their problems with the broker or, failing that, with the brokerage house. The very availability of mediation and mandatory arbitration, together with an imminent binding decision within months rather than years, may encourage parties to enter good faith negotiations in earnest. Failing that, they may then opt for one of the services offered under the Programme.

The parties must both agree to mediate. If that is their choice, they advise the Centre. The Centre will assist with the appointment of a mediator and ensure that the process moves forward smoothly. The cost is a $350 administration fee plus the cost of the mediator's time, generally less than four hours.

If the investor wishes to arbitrate, the broker and firm have no option but to agree. The administration fee is the same as for mediation. The arbitrator, selected by the parties with the assistance of the Centre, charge their time separately.

Demand for the programme has not been great since its inception. There has been an average of half a dozen files opened a year; amounts in dispute have averaged just under $50,000; total costs to the parties has been around $3,000. However the satisfaction rating has been high.

The number of files opened under the Programme is in great contrast to the experience in the US, where well over 5,000 cases for arbitration are filed with the National Association of Securities Dealers a year. While I hardly think it likely that we will ever approach such numbers, I do expect to see a significant increase in cases as the effects of the bear market begin to be felt. If the B.C. experience were to track that of the US in proportion to our population, we should expect approximately 75 files a year.

How does the Programme impact lawyers? First, of course, they may use the Programme as an avenue for recourse in the event that they have a personal investment problem with their broker. More importantly, perhaps, it provides them with an option for their clients who want to resolve disputes with the investment professionals in a cost effective, expeditious way which keeps contention to a minimum. Brokerage houses are anxious to resolve disputes with a minimum of bad publicity and adverse public relations. There is a real opportunity here to provide an important service to the investing community.