# SECLaw - The Law of the Financial Markets from Top Securities Lawyers > Securities law rules, regulation, practice tips and commentary from the nation's top securities lawyers. ## Main ### Arbitration Source: [https://seclaw.com/category/securities-arbitration/](https://seclaw.com/category/securities-arbitration/) ## Arbitration Securities arbitration refers to the alternative dispute resolution process to resolve claims between broker firms and their customers and employees. [FINRA](https://seclaw.com/glossary/finra/) operates the largest arbitration forum in the United States for the resolution of these disputes. While no one can be forced to give up their rights to a trial in court, virtually all agreements between investors and their stockbrokers include mandatory arbitration agreements, and every registered stockbroker is required to arbitrate their disputes with their customers and firms. Our site has been providing information regarding securities arbitration since 1995, starting with Overview of the Securities Arbitration Process. We update the site on a regular basis and invite you to explore our commentary and links and to ask questions. Prefer to talk by phone? Call Mark Astarita at 212-509-6544 with any questions regarding securities law, enforcement and arbitration. [![securities arbitration](https://seclaw.com/wp-content/uploads/2017/07/shutterstock_335441990-300x200.jpg)](https://seclaw.com/what-is-securities-arbitration/ "What is Securities Arbitration?") [Arbitration](https://seclaw.com/category/securities-arbitration/) [Brokers](https://seclaw.com/category/brokers/) [Featured Articles](https://seclaw.com/category/featured/) [Investors](https://seclaw.com/category/investors/) [Primer](https://seclaw.com/category/primer/) ### [What is Securities Arbitration?](https://seclaw.com/what-is-securities-arbitration/) Securities arbitration has become the most often-used method of resolving disputes in the securities industry. Since the late 1970’s, FINRA and its predecessors have required brokerage firms and [stock](https://seclaw.com/glossary/stock/) brokers into securities arbitration to resolve their disputes with each other, and with their customers. That requirement led to brokerage firms \[…\] [Continue Reading →](https://seclaw.com/what-is-securities-arbitration/ "Permalink to What is Securities Arbitration?") [![Tips for a successful securities mediation](https://seclaw.com/wp-content/uploads/2020/10/Depositphotos_42522815_xl-2015-300x200.jpg)](https://seclaw.com/tips-for-a-successful-securities-mediation/ "Tips for a Successful Securities Mediation") [Arbitration](https://seclaw.com/category/securities-arbitration/) [Brokers](https://seclaw.com/category/brokers/) [Investors](https://seclaw.com/category/investors/) ### [Tips for a Successful Securities Mediation](https://seclaw.com/tips-for-a-successful-securities-mediation/) Tips for a Successful Securities Mediation Securities arbitration is a proven method for resolving disputes in the securities industry. It is a quicker and more cost-effective alternative to traditional court proceedings. With increasing frequency, investors and advisors are turning to mediation to make the process even more effective. Mediation is \[…\] [Continue Reading →](https://seclaw.com/tips-for-a-successful-securities-mediation/ "Permalink to Tips for a Successful Securities Mediation") [![Arbitration Hearing](https://seclaw.com/wp-content/uploads/2020/10/Depositphotos_42522815_xl-2015-1-300x200.jpg)](https://seclaw.com/what-does-a-securities-lawyer-do/ "What Does a Securities Lawyer Do?") [Arbitration](https://seclaw.com/category/securities-arbitration/) [Brokers](https://seclaw.com/category/brokers/) [Compliance](https://seclaw.com/category/compliance/) [Corp Finance](https://seclaw.com/category/corp-finance/) [Enforcement](https://seclaw.com/category/enforcement/) [Investors](https://seclaw.com/category/investors/) [Private Placements](https://seclaw.com/category/corp-finance/privateplacement/) [Public Offerings](https://seclaw.com/category/corp-finance/initial-public-offerings/) ### [What Does a Securities Lawyer Do?](https://seclaw.com/what-does-a-securities-lawyer-do/) Mark J. Astarita, Esq. is a nationally recognized securities attorney, representing clients in securities investigations, arbitrations and litigation matters across the country. You can contact him at 212-509-6544 or by email at mja@sallahlaw.com Securities law is a specialized field of law encompassing various types of securities lawyers. Transactional securities lawyers \[…\] [Continue Reading →](https://seclaw.com/what-does-a-securities-lawyer-do/ "Permalink to What Does a Securities Lawyer Do?") [![](https://seclaw.com/wp-content/uploads/2023/01/Depositphotos_621090292_L-300x200.jpg)](https://seclaw.com/sec-office-of-the-investor-advocate-publishes-its-policy-recommendations-on-mandatory-arbitration-and-registered-index-linked-annuities-research/ "SEC Investor Advocate’s Recommendations on Arbitration and Index-Linked Annuities") [Arbitration](https://seclaw.com/category/securities-arbitration/) [Enforcement](https://seclaw.com/category/enforcement/) ### [SEC Investor Advocate’s Recommendations on Arbitration and Index-Linked Annuities](https://seclaw.com/sec-office-of-the-investor-advocate-publishes-its-policy-recommendations-on-mandatory-arbitration-and-registered-index-linked-annuities-research/) Washington D.C., Dec. 5, 2023 — In a move towards transparency and investor empowerment, the Securities and Exchange Commission’s Office of the Investor Advocate has released its comprehensive Report on Activities for the Fiscal Year 2023\. This document not only outlines the Office’s accomplishments during the fiscal year but also \[…\] [Continue Reading →](https://seclaw.com/sec-office-of-the-investor-advocate-publishes-its-policy-recommendations-on-mandatory-arbitration-and-registered-index-linked-annuities-research/ "Permalink to SEC Investor Advocate’s Recommendations on Arbitration and Index-Linked Annuities") [![finra CAT](https://seclaw.com/wp-content/uploads/2021/05/1620735616175407-0-300x162.png)](https://seclaw.com/arbitration-claims-filed-against-stifel-broker-chuck-roberts/ "Arbitration Claims Filed Against Stifel Broker Chuck Roberts") [Arbitration](https://seclaw.com/category/securities-arbitration/) [News](https://seclaw.com/category/news/) ### [Arbitration Claims Filed Against Stifel Broker Chuck Roberts](https://seclaw.com/arbitration-claims-filed-against-stifel-broker-chuck-roberts/) A veteran financial advisor with Stifel Nicolaus & Co. Inc. is facing a rash of investor complaints stemming from the sale of structured notes, the performance of which is typically tied to an underlying asset, such as a specific stock or an index like the S&P 500 stock index. According \[…\] [Continue Reading →](https://seclaw.com/arbitration-claims-filed-against-stifel-broker-chuck-roberts/ "Permalink to Arbitration Claims Filed Against Stifel Broker Chuck Roberts") [![](https://seclaw.com/wp-content/uploads/2017/08/shutterstock_363135068-300x200.jpg)](https://seclaw.com/overview-securities-arbitration-process/ "Securities Arbitration Overview-2023 Update") [Arbitration](https://seclaw.com/category/securities-arbitration/) [Brokers](https://seclaw.com/category/brokers/) [Featured Articles](https://seclaw.com/category/featured/) [Investors](https://seclaw.com/category/investors/) [Primer](https://seclaw.com/category/primer/) ### [Securities Arbitration Overview-2023 Update](https://seclaw.com/overview-securities-arbitration-process/) Securities Arbitration is not like any other proceeding Background Arbitration is a dispute resolution process, which is an alternative to the traditional lawsuit in court. Rather than have a matter decided by a judge and jury, participants to an arbitration proceeding have their dispute resolved by an impartial panel \[…\] [Continue Reading →](https://seclaw.com/overview-securities-arbitration-process/ "Permalink to Securities Arbitration Overview-2023 Update") [![FINRA Brokercheck](https://seclaw.com/wp-content/uploads/2023/02/Depositphotos_467610492_L-300x200.jpg)](https://seclaw.com/what-is-finra/ "What is FINRA") [Arbitration](https://seclaw.com/category/securities-arbitration/) [Investors](https://seclaw.com/category/investors/) [Primer](https://seclaw.com/category/primer/) ### [What is FINRA](https://seclaw.com/what-is-finra/) FINRA, the Financial Industry Regulatory Association, is the successor to the National Association of Securities Dealers and is authorized by Congress to regulate and oversee the broker-dealer industry, insuring that it operates fairly and honestly. It oversees over 4,000 brokerage firms and more than 600,000 brokers across the country—and analyzes \[…\] [Continue Reading →](https://seclaw.com/what-is-finra/ "Permalink to What is FINRA") [![finra CAT](https://seclaw.com/wp-content/uploads/2021/05/1620735616175407-0-300x162.png)](https://seclaw.com/ubs-pays-14-1-million-defamation-award-to-compliance-officer/ "UBS Pays $14.1 Million Defamation Award to Compliance Officer") [Arbitration](https://seclaw.com/category/securities-arbitration/) [Brokers](https://seclaw.com/category/brokers/) ### [UBS Pays $14.1 Million Defamation Award to Compliance Officer](https://seclaw.com/ubs-pays-14-1-million-defamation-award-to-compliance-officer/) After years of appealing the arbitrators’ decision, UBS finally pays. The appeals of the original arbitration award increased the amount UBS had to pay by a reported $3 million. According to AdvisorHub, in his arbitration complaint filed in June 2018, the compliance officer alleged UBS defamed him on his U5 \[…\] [Continue Reading →](https://seclaw.com/ubs-pays-14-1-million-defamation-award-to-compliance-officer/ "Permalink to UBS Pays $14.1 Million Defamation Award to Compliance Officer") [![Securities Lawyer](https://seclaw.com/wp-content/uploads/2019/10/NYC-1-300x200.jpg)](https://seclaw.com/morgan-stanley-deferred-comp-claims/ "Morgan Stanley Deferred Comp Claims") [Arbitration](https://seclaw.com/category/securities-arbitration/) [Brokers](https://seclaw.com/category/brokers/) [Compliance](https://seclaw.com/category/compliance/) ### [Morgan Stanley Deferred Comp Claims](https://seclaw.com/morgan-stanley-deferred-comp-claims/) Morgan Stanley may have violated ERISA rules when it cancelled certain deferred compensation assets for brokers who left the firm. We are investigating claims for Morgan Stanley advisors who were denied their deferred compensaton payments when they left the firm. There is a proposed class action pending, but individual advisors \[…\] [Continue Reading →](https://seclaw.com/morgan-stanley-deferred-comp-claims/ "Permalink to Morgan Stanley Deferred Comp Claims") [![ubs](https://seclaw.com/wp-content/uploads/2018/02/ubs-logo-e1553961531752.png)](https://seclaw.com/ubs-yes-losses/ "UBS YES Losses?") [Arbitration](https://seclaw.com/category/securities-arbitration/) [Investors](https://seclaw.com/category/investors/) ### [UBS YES Losses?](https://seclaw.com/ubs-yes-losses/) Investors who lost money in UBS’ Yield Enhancement Strategy (YES) may be able to recover their losses [Continue Reading →](https://seclaw.com/ubs-yes-losses/ "Permalink to UBS YES Losses?") ### What is Securities Arbitration? Source: [https://seclaw.com/what-is-securities-arbitration/](https://seclaw.com/what-is-securities-arbitration/) ![securities arbitration](https://seclaw.com/wp-content/uploads/2017/07/shutterstock_335441990.jpg) Securities arbitration has become the most often-used method of resolving disputes in the securities industry. Since the late 1970’s, [FINRA](https://seclaw.com/glossary/finra/) and its predecessors have required brokerage firms and [stock](https://seclaw.com/glossary/stock/) brokers into securities arbitration to resolve their disputes with each other, and with their customers. That requirement led to brokerage firms requiring, through their customer agreements, that their customers must use FINRA arbitration to resolve any dispute. --- **Mark J. Astarita, Esq., is a nationally recognized securities attorney who has represented parties in over 600 securities arbitrations. Be sure to read [Overview of Securities Arbitration](https://seclaw.com/overview-securities-arbitration-process/), his acclaimed analysis of the securities arbitration process, which has been downloaded tens of thousands of times.** --- ## Pre-dispute Arbitration Clauses![Securities arbitration](//upload.wikimedia.org/wikipedia/commons/thumb/b/b1/Supreme_Court_of_the_United_States.jpg/350px-Supreme_Court_of_the_United_States.jpg "The United States Supreme Court.") After much litigation and a decision by the United States Supreme Court, those arbitration agreements, known as “pre-dispute arbitration clauses” are valid and enforceable. Today, mandatory arbitration clauses in other industries are being attacked by a variety of consumer groups, as being unfair to consumers, biased in favor of whatever industry is using the process, and a host of other allegations. ## Securities Arbitration is Not Traditional Arbitration Securities arbitrations are substantially different than other consumer arbitration procedures. While there are some issues with the process, the process bears no resemblance to the one being discussed by the anti-mandatory arbitration advocates. ## Is Securities Arbitration Fair? Every so often politicians, reporters, and investors start to complain that securities arbitration is not fair. I have represented investors, financial professionals, and brokerage firms in over 600 FINRA arbitrations. The process works well for most cases and is at least as fair as going to court. According to FINRA statistics, approximately 50% of all investor claims settle without a hearing, and investors receive compensation in half of the cases that go to a hearing. Assuming that the settlements were “wins” for the investors, that translates to a 75% “win” rate for investors. ## Give up a Jury Trial? The complaint that investors are giving up their right to a jury trial is true, but misleading. The simple fact is that jury trials are the exception in court cases, not the rule. According to the Annual Reports of the Administrative Office of the U.S. Courts (as referenced by an article from the **[Bolch Judicial Institute ](https://judicialstudies.duke.edu/)at [Duke Law School) ](https://law.duke.edu/)**approximately 1 percent of all civil cases filed in federal court are resolved by trial, and only 0.7 percent are decided by juries. **Less than 1% of court cases actually get to a jury**. While it certainly is a perceived benefit to have a trial by a jury, the simple fact is that you are not going to get there, and if you do, it will take years. With motions to dismiss, motions for summary judgment, motions to file amended pleadings, and motions to reargue motions that were denied, the process in court gets bogged down. And even if the plaintiff makes it through all of those motions, the final step before getting to a jury is the settlement conference, where a judge attempts to get the parties to settle the dispute. And a judge can be very persuasive in settlement discussions. ## Motions to Dismiss In FINRA arbitrations, dispositive motions are exceedingly rare. Motions to dismiss are permitted only under very limited circumstances, as outlined in FINRA Rule 12504\. Specifically, such motions may be granted only when: (1) the parties have settled their dispute in writing, (2) the moving party was not properly named, or (3) the claims fail to state a claim even if all alleged facts are taken as true and viewed in the light most favorable to the non-moving party. In practice, these motions are discouraged and rarely granted. So limited are they, in fact, that they are often viewed as functionally non-existent within the FINRA arbitration framework. Unlike in court litigation, FINRA arbitrations do not allow motions for summary judgment. The absence of this procedural mechanism eliminates a powerful tool typically used to narrow or eliminate claims prior to a hearing. While some may view this as a benefit — ensuring that every party receives a full evidentiary hearing regardless of legal complexity — it also has drawbacks. For respondents facing legally defective or factually unsupported claims, the inability to resolve matters early through dispositive motions may result in increased time, expense, and exposure. Nevertheless, parties in FINRA arbitration retain significant control over the adjudicative process. Perhaps most notably, they play a meaningful role in selecting the panel of arbitrators who will ultimately hear the case and render an award. This panel, typically consisting of one or three neutral arbitrators depending on the nature and amount of the claim, is chosen through a ranked selection process from a list provided by FINRA. As a result, while formal pre-hearing motion practice may be limited, the forum provides a structured yet flexible mechanism to resolve disputes with input from industry-savvy decision-makers whom the parties themselves helped to choose. — My article, Introduction to Securities Arbitration, is a walk-through of the entire process and has been downloaded tens of thousands of times. I updated it as needed, and it is available [here](https://seclaw.com/overview-securities-arbitration-process/). ### Recent Blog Posts [What is Securities Arbitration?](https://seclaw.com/what-is-securities-arbitration/) Securities arbitration has become the most often-used method of resolving disputes in the securities industry. Since the late 1970’s, FINRA and its predecessors have required brokerage firms and stock brokers into securities arbitration to resolve their disputes with each other, and with their customers. That requirement led to brokerage firms requiring, through their customer agreements, ... [Tips for a Successful Securities Mediation](https://seclaw.com/tips-for-a-successful-securities-mediation/) Tips for a Successful Securities Mediation Securities arbitration is a proven method for resolving disputes in the securities industry. It is a quicker and more cost-effective alternative to traditional court proceedings. With increasing frequency, investors and advisors are turning to mediation to make the process even more effective. Mediation is a form of alternative dispute resolution that ... [What Does a Securities Lawyer Do?](https://seclaw.com/what-does-a-securities-lawyer-do/) Mark J. Astarita, Esq. is a nationally recognized securities attorney, representing clients in securities investigations, arbitrations and litigation matters across the country. You can contact him at 212-509-6544 or by email at mja@sallahlaw.com Securities law is a specialized field of law encompassing various types of securities lawyers. Transactional securities lawyers assist companies with capital raising, stock ... [SEC Investor Advocate’s Recommendations on Arbitration and Index-Linked Annuities](https://seclaw.com/sec-office-of-the-investor-advocate-publishes-its-policy-recommendations-on-mandatory-arbitration-and-registered-index-linked-annuities-research/) Washington D.C., Dec. 5, 2023 — In a move towards transparency and investor empowerment, the Securities and Exchange Commission’s Office of the Investor Advocate has released its comprehensive Report on Activities for the Fiscal Year 2023\. This document not only outlines the Office’s accomplishments during the fiscal year but also brings to light key findings ... [Arbitration Claims Filed Against Stifel Broker Chuck Roberts](https://seclaw.com/arbitration-claims-filed-against-stifel-broker-chuck-roberts/) A veteran financial advisor with Stifel Nicolaus & Co. Inc. is facing a rash of investor complaints stemming from the sale of structured notes, the performance of which is typically tied to an underlying asset, such as a specific stock or an index like the S&P 500 stock index. According to an article in InvestmentNews, Miami ... [Securities Arbitration Overview-2023 Update](https://seclaw.com/overview-securities-arbitration-process/) Securities Arbitration is not like any other proceeding Background Arbitration is a dispute resolution process, which is an alternative to the traditional lawsuit in court. Rather than have a matter decided by a judge and jury, participants to an arbitration proceeding have their dispute resolved by an impartial panel of one or three arbitrators. Virtually every dispute ... [What is FINRA](https://seclaw.com/what-is-finra/) FINRA, the Financial Industry Regulatory Association, is the successor to the National Association of Securities Dealers and is authorized by Congress to regulate and oversee the broker-dealer industry, insuring that it operates fairly and honestly. It oversees over 4,000 brokerage firms and more than 600,000 brokers across the country—and analyzes billions of daily market events. What ... [UBS Pays $14.1 Million Defamation Award to Compliance Officer](https://seclaw.com/ubs-pays-14-1-million-defamation-award-to-compliance-officer/) After years of appealing the arbitrators’ decision, UBS finally pays. The appeals of the original arbitration award increased the amount UBS had to pay by a reported $3 million. According to AdvisorHub, in his arbitration complaint filed in June 2018, the compliance officer alleged UBS defamed him on his U5 termination filing, which accused him of ... [Morgan Stanley Deferred Comp Claims](https://seclaw.com/morgan-stanley-deferred-comp-claims/) Morgan Stanley may have violated ERISA rules when it cancelled certain deferred compensation assets for brokers who left the firm. We are investigating claims for Morgan Stanley advisors who were denied their deferred compensaton payments when they left the firm. There is a proposed [class action](https://seclaw.com/glossary/class-action/) pending, but individual advisors may be better served by bringing ... [UBS YES Losses?](https://seclaw.com/ubs-yes-losses/) Investors who lost money in UBS’ Yield Enhancement Strategy (YES) may be able to recover their losses ### Featured Articles [Customer Claims in Arbitration](https://seclaw.com/customer-claims/) I have been representing customers and brokers in securities arbitration matters since 1982\. In those 35 years I have handled over 700 securities arbitration cases. Since securities arbitration is such a large part of my practice, I also survey all of the arbitration awards that are entered in matters across the country, write columns for investors and brokers on the topic, and stay well informed on developments in this unique area of law. Today, FINRA administers virtually all of the securities arbitration disputes in this country, with the AAA and JAMS handing the remainder. From my work, and my review of the statistical summaries published by FINRA it is clear that investment disputes fall into very well-defined categories. Naturally, the type of cases that are filed is a function of the market. Not only are there fewer arbitrations when the markets are doing well, economic factors create different types of claims. For example, when Internet stocks fell in April 2000, the arbitration forums saw a significant increase in arbitration filings, and the emergence of a new category of claim, for over-concentration, or failure to diversify. As the markets improved in 2003, through 2007, we saw a sharp decrease in the number of arbitration ... [Expungement of Customer Complaints](https://seclaw.com/expungement/) You can remove derogatory reports from your CRD Report. Call 212-509-6544 to discuss the process with a securities law attorney. The problems associated with FINRA‘s CRD Disclosure System are well known to visitors to SECLaw.com, as we have written about the issue a number of times. The concept of disclosing every allegation, justified or not, against a registered person, to anyone who cared to ask, is unheard of in our system of justice. The addition of BrokerCheck, where the information is available to anyone with an Internet connection has made the situation intolerable. For that reason, we are often asked to file an expungement request with FINRA, to remove unwarranted items from the CRD system The interests of investor protection overrode the concepts of fundamental fairness and due process for brokers, and today there is full disclosure of every wart, pimple and untrue allegation made against a broker. Not fair to the broker, but of a theoretical benefit to the investing public. Part of the problem are customer arbitrations. Customers can file an arbitration against a broker for anything, at virtually no cost to the customer. They can say anything they want, it doesn’t cost them anything, and there is no penalty for ... [Insider Trading – The Legal and Illegal](https://seclaw.com/insider-trading/) Illegal [insider trading](https://seclaw.com/glossary/insider-trading/) is a serious securities law violation that carries potential civil and criminal penalties. Civilly, the penalties can be as large as three times the gross profit on the trading. An insider trading investigation by the [SEC](https://seclaw.com/glossary/sec/) requires experienced securities counsel, as the initial investigation often dictates the final outcome. If you have questions regarding an SEC subpoena or an investigation, call Mark Astarita, Esq. at 212-509-6544\. Mark and his partners have decades of securities litigation experience as SEC Staff attorneys, and broker-dealer attorneys. Insider Trading Definition “Insider trading” is a term that most investors have heard and usually associate with illegal conduct. Recent government actions, including the criminal case against Martha Stewart, have enforced that view. However, Martha Stewart was not convicted of insider trading; she was convicted for obstruction – lying to the SEC There is no statutory definition of “insider trading.” As defined by the courts, it refers to purchasing or selling a security while in possession of material, non-public information concerning that security, where the information is obtained from a breach of fiduciary duty or a duty arising from a relationship of trust or confidence. When we think of illegal insider trading, we think of a company’s executives, ... [Introduction to Blue Sky Laws](https://seclaw.com/introduction-to-state-securities-laws/) Mark Astarita, Esq. is a nationally recognized securities attorney who represents investors, financial professionals, issuers and financial firms in a wide variety of matters involving federal and state securities laws. He can be reached at mja@sallahlaw.com. The state securities laws and the regulatory scheme has not changed much since 2001 when I published the first version of this [Blue Sky Law](https://seclaw.com/glossary/blue-sky-law/) introduction. While the SEC directly, and through its oversight of the FINRA and the various Exchanges, is the main enforcer of the nation’s securities laws, each individual state has its own securities laws and rules. These state rules are known as “Blue Sky Laws”. What Are Blue Sky Laws? Blue sky laws are state regulations established as safeguards for investors against [securities fraud](https://seclaw.com/glossary/securities-fraud/). The laws, which may vary by state, typically require sellers of new issues to register their offerings and provide financial details of the deal and the entities involved. As a result, investors have a wealth of verifiable information on which to base their judgment and investment decisions. Why “Blue Sky” laws The origin of the term is a bit unclear, but the first use of the term that we are aware of is in an opinion of Justice McKenna of the United States ... [Finders Explained – Be Careful](https://seclaw.com/finders083101/) A question I am often asked is what is the definition of a finder, or questions that lead to that question. The issue arises when an unregistered person or entity introduces investors to an issuer and seeks to obtain payment based on the investment made by the investor. The problem is, that in many instances, the introducing party is acting in a manner that requires registration as a broker or a dealer, and thus must be registered in order to accept compensation for the introduction to the investor. The issues of finders and compensation are currently a “hot” topic for securities regulators, and the issue is in great flux today. It is, therefore difficult to describe finders in a general way that is helpful because the answer in a particular case will turn on the particular facts. One small factual change, and the answer changes. General Definition of a Finder Addressing the issue GENERALLY, he does not have to register if the finder is only a finder. Being a finder means that he only introduces; he does not discuss, negotiate, or get involved in the transaction. However, the SEC may take a different view of “discuss” or “get involved” than you do. Statutes and ... [Cold Calling Rules](https://seclaw.com/coldcall/) Compliance with securities regulations is only the beginning By Mark J. Astarita, Esq. Introduction Cold calling is a method of marketing a service or product by calling prospective clients “cold” – that is, without an introduction, to determine if the potential client has a need for, or interest in, the caller’s product. Cold calling has a long history in the brokerage community, and while having a poor reputation, is a legitimate and valuable marketing tool for brokerage firms, and provides a legitimate source of information for customers, provided the tool is not abused. However, there have been abuses, inside and outside the brokerage industry, of the cold calling procedure. Most of the complaints regarding the procedure have arisen outside the industry, and relate to the time of day that the calls are made, the use of automated dialers and similar technological “advances” in the telecommunications industry, as well as outright fraud. While these complaints have focused on non-brokerage industry firms and practices, the regulations regarding same effect the brokerage industry. The Basic Regulations and Rules In accordance with the Telephone Consumer Protection Act of 1991, the Federal Communications Commission (FCC) issued a cold-calling rule. The rule establishes procedures to eliminate unwanted telephone solicitations to residences ... [Churned or Traded?](https://seclaw.com/churned-or-traded/) [Churning](https://seclaw.com/glossary/churning/) claims dominated the securities arbitration landscape in the 2000’s, but have declined over the years, as the trading mania waned. As the markets improved, we have begun to see a resurgence of churning claims again. The common perception among the general public is that a customer who trades his or her account on a regular basis is a broker’s dream. While the commissions generated by such activity might very well enhance a broker’s payout, the activity could very easily turn into a broker’s nightmare if not carefully monitored. Churning Churning is excessive trading in a customer’s account by a broker taken in the context of the customer’s financial situation and investment objectives. While no one test is available to determine if an account has been churned, churning requires three elements, first, excessive trading, and second, control of the account by the Registered Representative, and three, intent to defraud the customer. The intent element is difficult to prove, but will typically be proven by establishment of the first two elements. The problem with customers who trade heavily with a retail broker is that the broker may later be subjected to a claim for churning, if the trading does not turn out to be profitable. ... [Responding to a Wells Notice](https://seclaw.com/wells-notice-sec-finra-investigations/) By Mark Astarita Being the subject, target, or even a witness in an SEC or a FINRA investigation is not a pleasant experience. As I discussed in my column “When the SEC Comes Calling” a financial professional’s involvement in a regulatory investigation or proceeding is extremely serious, and can be a career busting event. Receiving a [Wells Notice](https://seclaw.com/glossary/wells-notice/) could be worse. Interested readers should also read Tips for Responding to an SEC Subpoena. Be Prepared While careful preparation and use of experienced counsel is the key to a successful outcome, prospective defendants (who are called respondents in these types of proceedings) have a valuable tool in their arsenal when dealing with the regulators – the Wells Submission. My partners and I have been involved in hundreds of investigations with FINRA and the SEC. While we are often able to head off an investigation before we reach the Wells Notice stage, we have made countless wells submissions. If you have an SEC or an 8210 Request from FINRA, call us before you respond. We may be able to save you time, and your license. Wells Notice The process starts with a Wells Notice – a notification from a regulator that it intends to recommend that enforcement ... [How Long Does an SEC Investigation Take?](https://seclaw.com/long-sec-investigation-take/) SEC investigations can be a harrowing experience for the witness as well as the targets. One of the first questions my clients ask when faced with a subpoena from the SEC is how long is this going to take? While I hate to give the typical lawyer answer, that answer is, “it depends.” Mark J. Astarita, Esq. is a national securities attorney with over 30 years of experience representing investors, traders, and financial professionals in SEC investigations, administrative proceedings, and court injunctive actions. For a free consultation regarding a securities law issue, email him at mja@sallahlaw.com It depends on the case. Investigations, where the SEC believes there is ongoing harm, can be in court in a matter of days. In fact, some investigations move to court before the target is even aware of the investigation. But that is rare, and it is hard to say how long an investigation takes. All SEC investigations are conducted privately. Investigators attempt to obtain facts and evidence, first through informal inquiries, then by examining brokerage records, and reviewing trading data, and then by serving subpoenas for documents, and ultimately testimony. Five Year Statute of Limitations? In theory, there is a statutory requirement that the SEC is required to bring an ... [Securities Lawyer Mark J. Astarita’s Significant Matters](https://seclaw.com/mark-j-astarita-significant-matters-and-results/) Obtained decision from FINRA’s National Adjudicatory Council which reversed a hearing Panel’s findings of violation, vacated all sanctions and dismissed the complaint. Successfully defended broker-dealer in arbitration with [hedge fund](https://seclaw.com/glossary/hedge-fund/) claiming 5 million dollars in losses for misrepresentations regarding firm’s abilities, platform, and expertise. Zero award for the Claimant. Obtained six-figure award for broker against wirehouse for breach of contract, misrepresentations, fraudulent inducement, and unjust enrichment Successfully defended regional brokerage firm in customer claim for unsuitability, inadequate due diligence Negotiated favorable settlement for broker and firm of claims by an octogenarian for allegedly unsuitable variable life insurance policy, and obtained expungement of the arbitration with a finding that the transaction was suitable and that the claimant was fully informed of the risks of the investment. Successfully defended and obtained a denial of a claim by a CPA customer against a broker-dealer, where the customer claimed unsuitability, breach of fiduciary duty, fraudulent misrepresentation, failure to supervise, respondeat superior, negligent misrepresentation, [unauthorized trading](https://seclaw.com/glossary/unauthorized-trading/), negligence, fraud, and [control person](https://seclaw.com/glossary/control-person/) liability. Complete denial of all claims Obtained an award of attorney’s fees and compensation for a broker against a brokerage firm for filing a false and malicious U-5\. Obtained a full dismissal of a wire houses’ claims against a broker for ... | **_[![Sallah Astarita & Cox](https://seclaw.com/wp-content/uploads/2021/06/image001-722509.png)](https://www.sallahlaw.com/mark-j-astarita-esq.html)_** | Representing Advisors and Investors, Nationwide. | | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | > [Federal Securities Law, a Securities Lawyer Guide](https://seclaw.com/federal-securities-law/) --- [Mark J. Astarita, Esq.](http://www.securitieslawyer.us) is a securities lawyer who represents investors, financial professionals and firms in litigation, arbitration and regulatory matters across the country. He is a partner in the national securities law firm of Sallah Astarita & Cox, LLC and can be reached by email at [mja@sallahlaw.com](mailto:mja@sallahlaw.com) or by phone at 212-509-6544. --- Follow us on [Twitter](http://www.twitter.com/seclaw), [Facebook](http://www.facebook.com/seclaw.us) and [The Securities Law Blog ](http://seclaw.blogspot.com). ##### [ Mark J. Astarita](https://seclaw.com/author/admin/) Securities Attorney at [Sallah Astarita & Cox](http://www.sallahlaw.com) | [212-509-6544](tel:212-509-6544) | [mja@sallahlaw.com](mailto:mja@sallahlaw.com) | [Website](http://www.securitieslawyer.us) | [\+ postsBio](#) Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings. He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links. * Mark J. Astarita https://seclaw.com/author/admin/ [![SEC subpoena](https://seclaw.com/wp-content/uploads/2015/12/shutterstock_139897957-150x150.jpg)](https://seclaw.com/tips-responding-sec-subpoena/) June 2, 2025 [SEC Subpoenas – Tips for Responding – 2025](https://seclaw.com/tips-responding-sec-subpoena/) * Mark J. Astarita https://seclaw.com/author/admin/ [![Tips for a successful securities mediation](https://seclaw.com/wp-content/uploads/2020/10/Depositphotos_42522815_xl-2015-150x150.jpg)](https://seclaw.com/tips-for-a-successful-securities-mediation/) February 19, 2025 [Tips for a Successful Securities Mediation](https://seclaw.com/tips-for-a-successful-securities-mediation/) * Mark J. Astarita https://seclaw.com/author/admin/ [![](https://seclaw.com/wp-content/uploads/2025/02/create-a-highly-detailed-and-visually-appealing-image-that-represents-150x150.png)](https://seclaw.com/exemption-from-exchange-act-rule-13f-2-and-related-form-sho/) February 8, 2025 [Exemption From Exchange Act Rule 13f-2 and Related Form SHO](https://seclaw.com/exemption-from-exchange-act-rule-13f-2-and-related-form-sho/) * Mark J. Astarita https://seclaw.com/author/admin/ [![](https://seclaw.com/wp-content/uploads/2025/01/create-a-high-resolution-highly-detailed-image-depicting-a-meeting-in-150x150.png)](https://seclaw.com/sec-small-business-advisory-committee-to-continue-discussing-challenges-facing-emerging-fund-managers-and-explore-hurdles-for-small-public-companies-not-listed-on-a-national-securities-exchange/) January 30, 2025 [SEC Small Business Advisory Committee to Continue Discussing Challenges Facing Emerging Fund Managers, and Explore Hurdles for Small Public Companies Not Listed on a National Securities Exchange](https://seclaw.com/sec-small-business-advisory-committee-to-continue-discussing-challenges-facing-emerging-fund-managers-and-explore-hurdles-for-small-public-companies-not-listed-on-a-national-securities-exchange/) ### Share this: * [ Click to share on Facebook (Opens in new window) Facebook ](https://seclaw.com/what-is-securities-arbitration/?share=facebook) * [ Click to share on X (Opens in new window) X ](https://seclaw.com/what-is-securities-arbitration/?share=x) ### Like this: Like Loading... [![The Securities Lawyer](https://www.seclaw.com/wp-content/uploads/2017/07/COPENHAGEN-1.jpg)](http://www.securitieslawyer.us) ### Securities Arbitration Overview-2023 Update Source: [https://seclaw.com/overview-securities-arbitration-process/](https://seclaw.com/overview-securities-arbitration-process/) ## Securities Arbitration is not like any other proceeding --- --- ## Background![Securities Arbitration](https://www.seclaw.com/wp-content/uploads/2021/05/1620735616175407-0-300x156.png) Arbitration is a dispute resolution process, which is an alternative to the traditional lawsuit in court. Rather than have a matter decided by a judge and jury, participants to an arbitration proceeding have their dispute resolved by an impartial panel of one or three arbitrators. Virtually every dispute between investors and brokers and brokerage firms is resolved in arbitration, typically before a [FINRA](https://seclaw.com/glossary/finra/) arbitration panel. Although arbitration and mediation have existed as dispute resolution mechanisms for well over 200 years, it was not until the decision of the United States Supreme Court, in [Shearson v. MacMahon, 482 U.S. 220 (1987)](http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=us&vol=482&invol=220) that arbitration became the most widely used means of resolving disputes in the securities industry. Arbitration of broker-dealer disputes has long been used as an alternative to the courts because it is a prompt and inexpensive means of resolving complicated issues. There are specific laws that govern the conduct of an arbitration proceeding from both the federal government and the various states. One of the most important legal aspects of arbitration is that arbitration awards are final and binding, subject to review by a court only on a very limited basis. Parties should recognize, too, that in choosing arbitration as a means of resolving a dispute, they generally give up their right to pursue the matter through the courts. ## Duty to Arbitrate Generally, and in the securities industry, a party cannot be compelled to arbitrate a dispute unless he has contractually bound himself to do so. However, the reader should not be misled by this statement, as a contractual obligation to arbitrate a dispute does not arise solely from a written contract, but rather may be created in various ways. Registered representatives and their firms are contractually bound to arbitrate their disputes with their customers, even in the absence of a written contract with the customer. The contractual obligation arises, not from a customer agreement but their registration with [FINRA](https://www.seclaw.com/glossary/finra/), the self-regulatory agency which oversees the securities industry, under the guidance of the [SEC](https://seclaw.com/glossary/sec/). Every registered representative is registered with FINRA, as is every brokerage firm. Investment advisers, who are registered with the states or with the SEC, are not members of FINRA. In order to compel an adviser to arbitrate, there must be a separate agreement to do so, which may be contained in the adviser’s investment advisory agreement. By virtue of their registrations, brokerage firms and stockbrokers are bound by the [FINRA Code of Arbitration Procedure](https://www.finra.org/rules-guidance/rulebooks/finra-rules/12000). There are actually two arbitration codes, [one for customer disputes](https://www.finra.org/arbitration-mediation/printable-code-arbitration-procedure-12000), and [another for industry disputes](https://www.finra.org/13000), although the two codes are substantially similar in content. While a broker is bound to arbitrate his disputes with his customer, and a customer can force a broker to do so, the reverse is not true. Brokers cannot force their customers to arbitrate their disputes based on the FINRA rules. Rather, the broker who wishes to force a customer to arbitrate a dispute must find a contractual commitment, by the customer, to arbitrate. --- _Nationally known [securities attorney](http://www.securitieslawyer.us) Mark Astarita has represented broker-dealers, investment advisers, hedge funds, investment partnerships, individual brokers, and investors across the country for over 30 years in well over 600 securities arbitrations. To find out if he can help you with your securities arbitration, email him, but do not send confidential information until you speak to him._ --- Before the MacMahon decision, this presented a problem for brokers and brokerage firms, as many relied upon what is known as a “pre-dispute arbitration agreement”; that is, an agreement that is entered into by the customer, before any dispute arose, to arbitrate any dispute, that might arise later. This pre-dispute agreement was typically contained in a customer agreement, or in a margin agreement, and was widely used by the brokerage industry. However, such pre-dispute agreements were not widely accepted by the courts, and many courts refused to enforce pre-dispute arbitration agreements. However, the Supreme Court decision in MacMahon resolved that issue, holding that such agreements were enforceable, and thus began the nearly universal use of arbitrations in customer-broker disputes. Today, such mandatory arbitration clauses are being attacked by various consumer groups as being unfair to consumers, biased in favor of whatever industry is using the process, and a host of other allegations. As noted above, securities arbitrations differ substantially from other consumer arbitration procedures. While there are some issues with the process, the process bears no resemblance to the one discussed by the anti-mandatory arbitration advocates. I have represented parties in over 600 securities arbitrations. The process works well for most cases and is at least as fair as going to court. According to FINRA statistics, approximately 50% of all investor claims settle without a hearing, and investors win the cases that go to a hearing approximately half the time. Assuming that the settlements were “wins” for the investors, that translates to a 75% “win” rate for investors. ## The Arbitration Agreement While there is no “standard” arbitration agreement, most brokerage firms use language similar to the following: I agree that all controversies that may arise between us concerning any order or transaction or the continuation, performance or breach of this or any other agreement between us, shall be determined by arbitration before a panel of arbitrators selected by the National Association of Securities Dealers or the [New York Stock Exchange](http://maps.google.com/maps?ll=40.7068333333,-74.0110277778&spn=0.01,0.01&q=40.7068333333,-74.0110277778%20%28New%20York%20Stock%20Exchange%29&t=h "New York Stock Exchange"), Inc., as I may designate, pursuant to the rules of the organization in existence at the time of the submission to arbitration. I understand that a judgment upon the arbitration award may be entered in any court of competent jurisdiction. Newer arbitration agreements refer to FINRA rather than the NASD and the NYSE. Both organizations merged their arbitration forums along with their regulatory powers in 2008\. However, the older agreements will still apply to new disputes. ## Arbitration Rules and Procedures Arbitration, while being styled as a “businessman’s” method of resolving disputes, is governed by state and federal law, as well as by the rules of the arbitration forum itself. A host of disputes can, and do, arise, regarding the location of the hearings, the composition of the panels, which disputes can be arbitrated, what discovery can be obtained, and other disputes. Most states have provisions in their civil practice rules for arbitration, which provide a basic framework for the arbitration and due process considerations, as well as procedures for the confirmation of an arbitrators award, a procedure that gives an arbitration award the force and effect of a judgment after a trial in a court. Many states have adopted the Uniform Arbitration Act, although some states, most notably New York, have specific and individual rules for oversight of arbitrations. New York’s arbitration statute is contained in Article 75 of the[ New York CPLR](gopher://lbdc.senate.state.ny.us:70/11/.laws/Civil%20Practice%20Law%20%26%20Rules). Although there is some controversy over the concept, most courts and commentators agree that the Federal Arbitration Act ([9 USC Sec. 1, et. seq.](http://www.law.cornell.edu/uscode/9/1.html)) supersedes the state rules for securities arbitrations where there is a conflict between the two. ## Securities Arbitration Forum Rules There are basically three forums that are used for the majority of securities arbitrations, FINRA Dispute Resolution, the American Arbitration Association, and JAMS. FINRA-DR is by far the most widely used, and since it is subsidized by FINRA, also the least expensive. ## Starting an Arbitration Arbitrations are commenced by filing a statement of claim with the applicable arbitration forum, together with a submission agreement and the required fees, which are based on the amount of money in controversy and the type of arbitration. At FINRA, filing fees start at $50.00 for customer claims and $225 for industry disputes. The filing fees increase based on the claim amount to a maximum of $2,300 for customer claims and $4,200 for industry disputes. A chart of FINRA arbitration filing fees is set forth in FINRA Rule 12900\. Fees Due When a Claim Is Filed. The FINRA arbitration department, and the arbitrators, can require hearing deposits to cover the costs of the hearing, but that is rarely the case. There is also a FINRA Member surcharge when a member firm is named in an arbitration by a customer. Those are also based on the amount in controversy and range from $150 to $4,325 for a claim in excess of $10 million. ## Submission Agreement Each party must also file what is known as a Uniform Submission Agreement, which provides a written agreement by the parties to the arbitration to submit the dispute to the arbitrators. Sometimes a party to an arbitration will refuse to sign such an agreement under the theory that by not doing so, he can avoid the consequences of an adverse decision. However, the author is unaware of any case where an arbitration award was vacated because of a party’s refusal to sign the agreement. Courts have held that parties are bound to the decision, despite the refusal to sign the agreement by virtue of their participation in the hearings. In the author’s experience, the refusal to sign the Uniform Submission Agreement, particularly in the case of a registered person, only serves to annoy the arbitrators and the forum and to place the credibility of the party in doubt before the hearings even begin. ## The Statement of Claim The Statement of Claim does not have to be in a particular format and may even be in narrative form, although many practitioners use the format that a complaint to be filed in court would take, with a caption, identification of the parties, statement of facts, and requests for damages, in numbered paragraphs. There are few ironclad requirements for a statement of claim. Generally, it must specify all of the relevant facts and circumstances surrounding the dispute, detailing the nature of the dispute, the relevant dates or time frame, the transactions in dispute, the securities involved and the amount of damages sought, or the type of relief sought. After the filing of the Statement of Claim and the Submission Agreement, FINRA’s staff serves the documents, along with instructions for the arbitration process, to the named respondent. Service is typically done by mail to the address of the party. If service cannot be completed or the respondent can not be located, FINRA will typically seek the assistance of counsel for the claimant in effectuating service. While a technical reading of the case law and rules regarding service might lead one to the conclusion that the mere mailing of the documents to the last known address of the party is sufficient, such is often not the case. A better course of action, where a party cannot be located or does not file an answer, is for counsel to have copies of all relevant documents served upon the party in a manner that is considered effective service in accordance with the rules of a court that has jurisdiction over the errant party. Then, if required to do so, counsel can demonstrate to the arbitrators or to a court when attempting to enforce the award that all of the due process requirements of the court were met and hopefully be able to obtain enforcement of the award, or avoid having the arbitration award vacated because of the failure to notify the missing party. ## **Answers, Counter-Claims, and Third-Party Claims** After service of the Statement of Claim, the Respondents each file an Answer to the allegations. Like the Statement of Claim, the Answer does not have to be in any particular form and can be a narrative. The Answer, however, must specify all the available defenses the party relies upon and all facts relative to those defenses. A general denial (the equivalent of the statement “I didn’t do it”) is not a sufficient answer and, according to the rules of most arbitration forums, may lead to an order precluding the respondent from offering evidence at the hearing. Respondents who are filing answers have the right to assert claims against the claimant (known as counterclaims), claims against other respondents (known as cross-claims), and claims against persons or entities who are not parties (known as third-party claims). Respondents who are brokerage firms pay a fee to FINRA simply for being named in the arbitration, and any respondent who files a counter-claim pays an additional fee based on the dollar amount of the claim. ## **Hearing Location** After the filing of all claims, answers, and replies, FINRA will typically notify the party of the location of the hearing. Unfortunately for industry members, FINRA’s procedural guidelines call for the customer’s location at the time of the dispute as the deciding factor for selecting a hearing site. This means that brokers should be prepared to defend arbitration claims in every major city where they have customers and be prepared to bear the expenses of traveling to such cities. The hearing situs decision has become a point of controversy in many arbitrations, as often broker-dealers are being forced to pay the expenses of flying witnesses and attorneys to far away hearing locations simply because a customer resides in that city. While the response to these complaints is that the broker-dealer chose to accept the customer in a faraway city, such an argument is far too simplistic and self-serving for the customer who chose to deal with a broker-dealer in a faraway city. While a traditional legal analysis would often lead to the opposite result, forcing the customer to have his case tried in a distant city, FINRA and its predecessors have been unwavering in their decision to hold hearings where the customer resides. The location of the hearing is an important factor in an arbitration proceeding, particularly if a customer names as a respondent each and every individual he ever spoke with and every officer of the corporation or every supervisor whose name he can find. The costs of flying these witnesses to hearings, which typically take place in multiple sessions over the course of a few months, can quickly escalate into thousands of dollars just for airfare. lodging and meals. Obviously, the smaller the case, the larger the problem. Fortunately, recent administrative changes at the SROs have expanded the pre-hearing conference to allow the parties to address the inclusion of parties with no substantive relation to the case and to remove those parties before the hearings commence. The increased use of Zoom has also alleviated some of these problems, and having a witness testify remotely has become much more common ## Arbitrator Selection Securities arbitrations are decided by one arbitrator or three arbitrators, depending on the dollar amount of the claim. For claims under $50,000, a single arbitrator decides the case and the case is subject to the simplified arbitration procedures under [Rule 12800 – Simplified Arbitration](https://www.finra.org/rules-guidance/rulebooks/finra-rules/12800). For claims between $50,000 and $100,000, the panel will consist of one arbitrator unless the parties agree in writing to three arbitrators. For claims over $100,000, the panel will consist of three arbitrators unless the parties agree in writing to one arbitrator. In a FINRA arbitration, the parties select arbitrators to hear their case from a panel of professionals who have been vetted by FINRA regarding their qualifications and potential conflicts. FINRA administers the arbitration but has no input into the award or decision-making process. Arbitrators are chosen by the parties using FINRA’s list selection algorithm, a computer algorithm, to randomly generate lists of arbitrators from FINRA’s arbitrator roster. The specific case type will affect the number of lists generated and the number of arbitrator names per list. The process has become complicated, and FINRA has an overview of the [arbitrator selection process](https://www.finra.org/arbitration-mediation/arbitrator-selection) on its website. ## Prehearing Discovery In the “usual” court proceeding, all parties are entitled to “discovery”, that is, the taking of depositions and exchange of documents before the actual trial. In arbitration, there is very little discovery, keeping in line with the intended purpose of arbitration, which is to provide speedy and cost-efficient methods of resolving disputes. The limited discovery concept of arbitration has proven over the years to be a major issue in the area of securities arbitrations. Over time, discovery has expanded, and the various security arbitration forums have modified their rules to address rising concerns about discovery in securities arbitrations. The main problem in securities arbitrations was that customers/claimants often require documents from the brokerage firm/respondent to prove their claim. The firm’s financial records, [stock](https://seclaw.com/glossary/stock/) ledgers, order tickets, commission runs, restricted securities lists, and a host of other documents are often essential elements of a customer’s case. Pre-1989, with extremely limited discovery, customers often found themselves at an arbitration hearing without the necessary documents, particularly in cases involving manipulation of security or in cases involving sales practices. In May 1989, the various SROs amended their arbitration rules to not only provide for expanded discovery but to formalize a procedure for resolving discovery disputes. The changes had an enormous impact on the securities arbitration process. Before 1989, a respondent could virtually guarantee a delay in starting an arbitration hearing by refusing to produce documents to the claimant. There being no mechanism for the resolution of disputes before the start of the arbitration hearing, the first hearing day was often used to resolve discovery disputes, and the remainder of the hearings would typically be adjourned to permit the parties and their counsel time to produce and review the documents that the Arbitrators had ordered to be exchanged. Today, FINRA’s standard pre-hearing conference call script that is used by the arbitrators includes the scheduling of a discovery conference with the Chairperson of the Panel. Additionally, any party to an arbitration can request a pre-hearing discovery hearing with an arbitrator before the start of the hearings to have those disputes resolved. FINRA will attempt to schedule a telephone conference call with the parties, and the arbitrators, or at least the Chairman of the Arbitration Panel, a month in advance of the actual hearings, to have the arbitrators resolve the disputes before the hearing and thereby avoid the attendant delays. Depositions are still not available in arbitrations. However, having participated in well over 600 arbitrations and a vast number of court proceedings, I believe that when balancing the benefits of the arbitration process over court litigation, depositions are unnecessary in all but extreme cases. Arbitrations, which are not governed by the rules of evidence that apply to a court trial, have a certain amount of leeway in the questioning of witnesses, which enables the skilled attorney to obtain information from a witness during the course of the hearings themselves. This procedure, coupled with the usual month-long breaks between arbitration sessions, provides attorneys with ample opportunity to investigate claims made during the testimony without delaying the proceedings further and without encumbering the financial resources of the party with endless depositions. In discovery, it is essential for the broker-dealer or broker attorney to obtain all of the financial information he can about the claimant. Many cases have been won because of the pre-hearing work done by an attorney in an effort to learn all of the essential facts about the customer. The inquiry into the financial information of a customer in a [suitability](https://seclaw.com/glossary/suitability/) or [churning](https://seclaw.com/glossary/churning/) case typically starts with a document request to the customer, asking for identification of all brokerage accounts, security, and commodity, maintained by the customer, or for his benefit, during recent years. I say recent years because, depending on the details of the particular case, “recent” can mean as few as 2 years and as many as 10\. This information, coupled with a request for the claimant’s tax returns, often provides invaluable insight into the customer’s financial and investment sophistication. From there, the attorney can request the actual account documents and can subpoena to the hearing the documents that the other brokerage firms maintained for the customer. This inquiry often leads to valuable information. For example, in one case where the author was defending a broker against a 1.2 million dollar churning/unsuitability/fraud claim, the customer claimed that one of the accounts he maintained was for his 92-year-old invalid mother and that the options trading that was in the account was totally unsuitable for her. In fact, options trading for a 92-year-old invalid is, by most criteria, unsuitable. However, the broker claimed that he was not aware that the woman was 92, nor an invalid, and insisted that the information he had on the new account form was that the woman was 65, with a large net worth, and that only a small percentage of her total assets were placed in options. A dispute then arose over who placed the information on the new account form, with the customer claiming that the broker fabricated the information and the broker claiming that it was exactly what he was told by the customer when the accounts were established. While my other suggestions, contained elsewhere, for verification of new account information, could have gone a long way toward resolving this dispute, those procedures were not followed in this case. However, discovery and third-party subpoenas to the three brokerage firms revealed that the exact same information was contained on the new account forms at the other brokerage firms, establishing that it was the customer who was lying about his mother’s age, to trade options in the account, and not the broker. While there were many other factors involved in that particular arbitration, the customer’s claims were denied in full, the customer was ordered to pay approximately $50,000 in outstanding margin debt to the brokerage firm and $190,000 to the broker personally for filing a false and malicious claim. Without full discovery from the customer, to identify the other brokerage accounts, and subpoenas to the firms themselves, we would have never known about the falsification of the mother’s age and could very well have had a different result. Discovery should be done as exhaustively as the case will permit, and one should not be shy in asking for documents from the other side. My guiding principle has always been one of reasonableness, is the specific request reasonable? will it help resolve an issue? is it overly burdensome on the other side to produce it? Answer those questions correctly, and you can almost guarantee that an arbitrator will order the production of the documents, despite the objections of the other party. ## Hearing Procedures Securities arbitrations are conducted in the same manner that a court trial is held. There are opening statements, then the introduction of evidence by the claimant, the introduction of evidence by the respondents, rebuttal cases, and closing arguments. Evidence is typically introduced through the testimony of witnesses. In the typical customer-broker case, the customer testifies about his relationship with the broker and then calls any other witnesses who support his case. Those witnesses may offer documents into evidence, such as correspondence between the parties, account statements, and similar documents. After each claimant’s witness testifies on “direct examination” (questioning by the claimant’s attorney), the witness is cross-examined by the respondent’s attorney. If there is more than one respondent, the attorneys typically select one attorney to bear the brunt of the cross-examination. The rest of the respondents’ attorneys examine the witness after completing his examination. Cross-examination of witnesses in arbitrations is more lenient than in court proceedings. In the typical court proceeding, cross-examination is “limited to the scope of direct”; that is, the cross-examiner cannot ask the witness questions about areas or topics that were not addressed on direct examination. In arbitrations, however, the procedural rules are not so closely followed. Cross-examinations often go beyond direct examination so long as the area of inquiry is related to the issues in the case or the credibility of the witness. When all of the respondents’ attorneys have cross-examined the witness, the Arbitrators may ask questions of the witness. Some arbitrators may interrupt the examination of a witness to ask a question, but those are usually to clarify a witness’s answer. However, at this stage, the arbitrators can ask any questions they may have. The extent of the examination by the arbitrators varies widely and depends on how extensive the attorneys’ questions were and the particular arbitrator involved. Some arbitrators seem to ask many questions, while others ask none, regardless of the examination by the attorneys. After the examination by the arbitrators, the claimant’s attorney has the opportunity to question the witness again, and here the limitations on examinations are enforced. At this point, called “re-direct,” most arbitrators will only allow questions that were raised by answers on the cross-examination or by the arbitrators’ questions. When re-direct is complete, re-cross begins, limited again by the scope of the arbitrators’ questions, and the redirect. This process continues for all of the claimant’s witnesses. When the witnesses have testified, the claimant “rests”, that is, he has no further evidence to introduce, and the process starts again with the respondent’s witnesses. After all sides have produced their witnesses, either or both sides may introduce charts or summaries of the evidence produced. Since charts and summaries are not technically evidence but merely summaries of evidence, they can be introduced by the attorney, although some arbitration panels will require that they be supported by a witness. A good practice is to ask the arbitrators before you “rest” if such summaries will be permitted at the end of the case. If the answer is no, then you still have the opportunity to introduce the summaries or charts through a witness. However, if the summary is truly a summary of the evidence, an arbitration panel will rarely refuse to accept the summary from an attorney. For more information on the securities arbitration hearings, go to [What Happens at a FINRA Arbitration Hearing?](https://www.seclaw.com/what-happens-at-a-securities-arbitration-hearing/) ### Stipulations Stipulations entered into between the parties as to factual matters not in dispute can go a long way toward moving a hearing along and can considerably shorten the presentation of evidence. While stipulations are actively encouraged in most courthouses across the country, the arbitration forums do not actively encourage the parties to enter into stipulations. With “the judge” not “forcing” the parties to at least meet to discuss possible stipulations, there are frequently countless hours wasted in arbitrations where parties attempt to prove facts that are really not in dispute and which could easily be resolved by a stipulation. ### Rules of Evidence It is often said that the rules of evidence do not apply in arbitrations, and this statement, while true, is, standing alone, misleading. Rules of evidence DO apply in arbitrations, they are just not as strictly applied as they would be in a court proceeding. Participants in an arbitration are well-advised to keep this in mind, for many arbitration participants have been surprised that rules of evidence were applied to their cases. While the application of a particular rule of evidence to a particular fact pattern will vary with the rule, the evidence, and the arbitrator, a few general observations may be in order: * The more significant the evidence, the more likely the rules will be strictly applied; * Double and triple hearsay are rarely admitted into evidence; * While the rules relating to authenticity are not strictly enforced, the arbitrators will often permit an attorney to “testify” as to the source of a document, and third parties are rarely forced to appear solely to authenticate documents; and * No arbitrator will exclude evidence based on the Best Evidence Rule. Arbitrators are often guided by their common sense, both in a legal and practical sense, in deciding evidence questions. Therefore, true hearsay on insignificant points will often be admitted, such as when a customer is describing how he met the broker – “My friend Jack said that the broker was a good broker.” However, if a claimant attempts to admit third-party statements, such as “Jack said the broker ripped me off,” the claimant will find himself on the receiving end of a motion to strike the testimony and most probably an irate arbitrator. Evidence issues can be easily resolved with some preparation. Years ago, the arbitration forums had no requirement for the mandatory exchange of documents and witness lists before the hearing. Then a requirement for a 10-day exchange was enacted, and in 1995, the NASD increased the requirement to 20 days. Arbitration participants are well-advised to address the evidence issues before the hearing, if for no reason other than to prevent looking foolish in front of the arbitrators when you cannot get a particular document into evidence. Most attorneys with experience in arbitrations will stipulate to authenticity issues, particularly those relating to account documents, correspondence, tax returns, research reports, stock prices, and similar facts and documents that the attorney, with a minimal amount of effort, can verify before the hearing, on his own. By waiting until the last minute, or even the day of the hearing, such stipulations will be lost, forcing the attorney, and his client, to additional costs and delays. ### The Actual Hearings Arbitration hearings are typically scheduled for four consecutive days, months in advance. The scheduling and conduct of the hearings are some of the more annoying parts of the arbitration process. The scheduling of hearings is a large problem in securities arbitrations. The schedules of the arbitrators, parties, attorneys, and witnesses often result in a delay of months before hearings are scheduled. And it is a rare hearing indeed which begins at the appointed hour. Hearings are typically scheduled to start at 9:30 AM, but the proceedings do not actually commence until 10 o’clock or 10:30 for various reasons. A lunch break typically consumes an hour and fifteen minutes, with a 15-minute delay in restarting the hearing, and the arbitrations typically end at 5 o’clock. In large cities, notably New York, Boston, and Newark, some arbitrators insist on stopping at 4 PM to avoid rush hour traffic. With two or three breaks during the course of a session, it is not unusual for a “full” day of arbitration to involve only 5 hours of testimony or even less. Unfortunately, there is not too much that any of the participants can do to increase the amount of time it takes to complete an arbitration except to keep the delays in mind when commencing such a proceeding. ### The Award FINRA’s procedures contain a provision that awards will be rendered within 30 days of the last hearing date or of submitting post-hearing briefs if permitted by the arbitrators. The arbitration award does not, by law, have to be in any particular form, and most states simply require that the award is in writing and signed by the arbitrators. Arbitrators do not have to provide a reason for their decision or even a statement about how they arrived at a damage figure. The typical arbitration award in the securities industry contains a statement about the nature of the dispute, an identification of the parties, the main factual and legal contentions of the parties, and the decision, which is typically only one sentence long. After the Award is served on all parties and depending on the state’s rules regarding arbitration, there is the potential to file an appeal to the state or federal court of an arbitration award. However, as noted above, the grounds for an appeal are extremely limited and rarely successful. ### Conclusion Despite what might be implied by some of the author’s comments, the securities arbitration process has proven itself to be a fair and expedient method of resolving a large number of customer disputes and has served tens of thousands of participants over the years. A successful arbitration hearing, however, requires careful preparation and thought. The process should not be taken lightly or thought of as being insignificant or unimportant because it is not “in court.” Customers and brokers often have millions of dollars at stake in securities arbitrations, and the procedure, regardless of how small the dollar amount, is as serious, as important, and as binding as a trial. Participants are urged to understand all they can about the process as soon as proceedings are commenced and to retain experienced counsel to represent their interests during the process and at the hearing. A securities arbitration, where a customer is attempting to recoup significant losses, is not the place for self-representation or for the use of new and experimental, nonprofessional representation. An attorney, who is knowledgeable and experienced in the arbitration process, in the operation of brokerage firms, and in the securities laws, is the best way to ensure the best possible result. While the author, being a securities attorney, realizes that the foregoing comment may appear to be self-serving, the author has never lost a securities arbitration to a party representing himself or to an attorney not familiar with the securities industry and the arbitration process. A word to the wise. For more information on arbitration, contact [Mark J. Astarita](http://www.securitieslawyer.us) Last Updated: February 2023 > [What is Securities Arbitration?](https://seclaw.com/what-is-securities-arbitration/) > [A Look Inside a Securities Arbitration Hearing 2023](https://seclaw.com/what-happens-at-a-securities-arbitration-hearing/) ##### [ Mark J. Astarita](https://seclaw.com/author/admin/) Securities Attorney at [Sallah Astarita & Cox](http://www.sallahlaw.com) | [212-509-6544](tel:212-509-6544) | [mja@sallahlaw.com](mailto:mja@sallahlaw.com) | [Website](http://www.securitieslawyer.us) | [\+ postsBio](#) Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings. He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links. * Mark J. Astarita https://seclaw.com/author/admin/ [![SEC subpoena](https://seclaw.com/wp-content/uploads/2015/12/shutterstock_139897957-150x150.jpg)](https://seclaw.com/tips-responding-sec-subpoena/) June 2, 2025 [SEC Subpoenas – Tips for Responding – 2025](https://seclaw.com/tips-responding-sec-subpoena/) * Mark J. Astarita https://seclaw.com/author/admin/ [![securities arbitration](https://seclaw.com/wp-content/uploads/2017/07/shutterstock_335441990-150x150.jpg)](https://seclaw.com/what-is-securities-arbitration/) June 1, 2025 [What is Securities Arbitration?](https://seclaw.com/what-is-securities-arbitration/) * Mark J. Astarita https://seclaw.com/author/admin/ [![Tips for a successful securities mediation](https://seclaw.com/wp-content/uploads/2020/10/Depositphotos_42522815_xl-2015-150x150.jpg)](https://seclaw.com/tips-for-a-successful-securities-mediation/) February 19, 2025 [Tips for a Successful Securities Mediation](https://seclaw.com/tips-for-a-successful-securities-mediation/) * Mark J. Astarita https://seclaw.com/author/admin/ [![](https://seclaw.com/wp-content/uploads/2025/02/create-a-highly-detailed-and-visually-appealing-image-that-represents-150x150.png)](https://seclaw.com/exemption-from-exchange-act-rule-13f-2-and-related-form-sho/) February 8, 2025 [Exemption From Exchange Act Rule 13f-2 and Related Form SHO](https://seclaw.com/exemption-from-exchange-act-rule-13f-2-and-related-form-sho/) ### Share this: * [ Click to share on Facebook (Opens in new window) Facebook ](https://seclaw.com/overview-securities-arbitration-process/?share=facebook) * [ Click to share on X (Opens in new window) X ](https://seclaw.com/overview-securities-arbitration-process/?share=x) ### Like this: Like Loading... ### Enforcement Source: [https://seclaw.com/category/enforcement/](https://seclaw.com/category/enforcement/) ## Enforcement [Enforcement](https://seclaw.com/category/enforcement/) ### [SEC Charges Georgia-based First Liberty Building & Loan and its Owner for Operating a $140 Million Ponzi Scheme](https://seclaw.com/sec-charges-georgia-based-first-liberty-building-loan-and-its-owner-for-operating-a-140-million-ponzi-scheme/) The Securities and Exchange Commission today announced that it filed charges seeking an asset freeze and other emergency relief against Newnan, Georgia-based First Liberty Building & Loan, LLC and its founder and owner Edwin Brant Frost IV in… SEC Press Release For more information, contact the securities lawyers at Sallah \[…\] [Continue Reading →](https://seclaw.com/sec-charges-georgia-based-first-liberty-building-loan-and-its-owner-for-operating-a-140-million-ponzi-scheme/ "Permalink to SEC Charges Georgia-based First Liberty Building & Loan and its Owner for Operating a $140 Million Ponzi Scheme") [Enforcement](https://seclaw.com/category/enforcement/) ### [Regulators to Hold Outreach Event for Municipal Market Professionals](https://seclaw.com/regulators-to-hold-outreach-event-for-municipal-market-professionals/) The Securities and Exchange Commission, the Municipal Securities Rulemaking Board (MSRB) and the Financial Industry Regulatory Authority (FINRA) today announced that registration is now open for the 2025 Joint Compliance Outreach Program, a two-day event… SEC Press Release For more information, contact the securities lawyers at Sallah Astarita & Cox, \[…\] [Continue Reading →](https://seclaw.com/regulators-to-hold-outreach-event-for-municipal-market-professionals/ "Permalink to Regulators to Hold Outreach Event for Municipal Market Professionals") [Enforcement](https://seclaw.com/category/enforcement/) ### [SEC Publishes Data on Broker-Dealers, Mergers & Acquisitions, and Business Development Companies](https://seclaw.com/sec-publishes-data-on-broker-dealers-mergers-acquisitions-and-business-development-companies/) The Securities and Exchange Commission’s Division of Economic and Risk Analysis (DERA) has published new reports and data on broker-dealers, mergers and acquisitions (M&A), and business development companies (BDCs). Today’s reports provide the… SEC Press Release For more information, contact the securities lawyers at Sallah Astarita & Cox, at 212-509-6544 \[…\] [Continue Reading →](https://seclaw.com/sec-publishes-data-on-broker-dealers-mergers-acquisitions-and-business-development-companies/ "Permalink to SEC Publishes Data on Broker-Dealers, Mergers & Acquisitions, and Business Development Companies") [Enforcement](https://seclaw.com/category/enforcement/) ### [SEC Extends Compliance Date to Help Broker-Dealers Fully Test and Implement Daily Reserve Computation Requirement](https://seclaw.com/sec-extends-compliance-date-to-help-broker-dealers-fully-test-and-implement-daily-reserve-computation-requirement/) The Securities and Exchange Commission today voted to extend the compliance date to June 30, 2026, for the amendments to Rule 15c3-3 (the broker-dealer customer protection rule) that the Commission adopted on Dec. 20, 2024\. The amendments require certain… SEC Press Release For more information, contact the securities lawyers at \[…\] [Continue Reading →](https://seclaw.com/sec-extends-compliance-date-to-help-broker-dealers-fully-test-and-implement-daily-reserve-computation-requirement/ "Permalink to SEC Extends Compliance Date to Help Broker-Dealers Fully Test and Implement Daily Reserve Computation Requirement") [Enforcement](https://seclaw.com/category/enforcement/) ### [SEC Office of the Investor Advocate Delivers to Congress Report on Objectives for Fiscal Year 2026](https://seclaw.com/sec-office-of-the-investor-advocate-delivers-to-congress-report-on-objectives-for-fiscal-year-2026/) The Securities and Exchange Commission’s Office of the Investor Advocate today delivered its Report to Congress on the office’s objectives for fiscal year 2026\. As detailed in the report, the Investor Advocate’s priorities for fiscal year 2026… SEC Press Release For more information, contact the securities lawyers at Sallah Astarita & \[…\] [Continue Reading →](https://seclaw.com/sec-office-of-the-investor-advocate-delivers-to-congress-report-on-objectives-for-fiscal-year-2026/ "Permalink to SEC Office of the Investor Advocate Delivers to Congress Report on Objectives for Fiscal Year 2026") [Enforcement](https://seclaw.com/category/enforcement/) ### [Kevin Muhlendorf Named SEC Inspector General](https://seclaw.com/kevin-muhlendorf-named-sec-inspector-general/) The Securities and Exchange Commission today announced that Kevin Muhlendorf will be the agency’s new Inspector General, effective July 28\. Mr. Muhlendorf is a former SEC and Justice Department attorney who for the past nine years has been a partner in… SEC Press Release For more information, contact the securities \[…\] [Continue Reading →](https://seclaw.com/kevin-muhlendorf-named-sec-inspector-general/ "Permalink to Kevin Muhlendorf Named SEC Inspector General") [Enforcement](https://seclaw.com/category/enforcement/) ### [SEC Announces Departure of David Saltiel](https://seclaw.com/sec-announces-departure-of-david-saltiel/) The Securities and Exchange Commission today announced that David Saltiel, who has served as Acting Director of the Division of Trading and Markets, will depart the agency effective July 4, 2025\. He has served as Acting Director since December 2024, and… SEC Press Release For more information, contact the securities \[…\] [Continue Reading →](https://seclaw.com/sec-announces-departure-of-david-saltiel/ "Permalink to SEC Announces Departure of David Saltiel") [Enforcement](https://seclaw.com/category/enforcement/) ### [SEC Names Jamie Selway as Director of Trading and Markets](https://seclaw.com/sec-names-jamie-selway-as-director-of-trading-and-markets/) The Securities and Exchange Commission today announced the appointment of Jamie Selway, an accomplished financial markets leader, as Director of the Division of Trading and Markets, effective June 17, 2025\. “I’d like to welcome Jamie to the SEC,” said… SEC Press Release [Continue Reading →](https://seclaw.com/sec-names-jamie-selway-as-director-of-trading-and-markets/ "Permalink to SEC Names Jamie Selway as Director of Trading and Markets") [Enforcement](https://seclaw.com/category/enforcement/) ### [Brian Daly Named Director of Division of Investment Management](https://seclaw.com/brian-daly-named-director-of-division-of-investment-management/) The Securities and Exchange Commission today announced that investment management industry leader Brian T. Daly will become the new Director of the Division of Investment Management, effective July 8\. Mr. Daly brings decades of experience serving in… SEC Press Release [Continue Reading →](https://seclaw.com/brian-daly-named-director-of-division-of-investment-management/ "Permalink to Brian Daly Named Director of Division of Investment Management") [Enforcement](https://seclaw.com/category/enforcement/) ### [SEC Names Kurt Hohl as Chief Accountant](https://seclaw.com/sec-names-kurt-hohl-as-chief-accountant/) The Securities and Exchange Commission today announced that Kurt Hohl, with nearly 40 years of accounting and auditing experience, has been named Chief Accountant, effective July 7, 2025\. Acting Chief Accountant Ryan Wolfe will return to his role as… SEC Press Release [Continue Reading →](https://seclaw.com/sec-names-kurt-hohl-as-chief-accountant/ "Permalink to SEC Names Kurt Hohl as Chief Accountant") ### Brokers Source: [https://seclaw.com/brokerlegalinformation/](https://seclaw.com/brokerlegalinformation/) ## **Featured Books** [Securities Litigation and Enforcement in a Nutshell –](http://Securities%20Litigation%20and%20Enforcement%20in%20a%20Nutshell) The 2nd edition of the Securities Litigation and Enforcement Nutshell focuses on an area of law that burgeoned nearly two decades ago after the accounting and corporate governance scandals at Enron, WorldCom, and other large publicly traded companies. It is an area of law that has only continued to expand with the 2008 financial crisis and subsequent legislation, including the [Dodd-Frank](https://seclaw.com/glossary/dodd-frank/) Act of 2010 and the JOBS Act of 2012 and several recent rulings by the U.S. Supreme Court. The Nutshell examines private, [SEC](https://seclaw.com/glossary/sec/), and criminal enforcement of federal securities laws, with an emphasis on the elements that establish [securities fraud](https://seclaw.com/glossary/securities-fraud/) and the doctrinal and practical issues that typically emerge in prosecuting or defending such claims. [Broker-Dealer Regulation in a Nutshell](http://www.amazon.com/exec/obidos/ASIN/0314144625/ref=nosim/thesecuritlawhom) is a similar introduction, and while the laws regulating broker-dealers are complex, this book provides an overview of the concepts and regulations. [Investment Adviser Regulation: A Step-by-Step Guide to Compliance and The Law](https://www.amazon.com/s?k=0872240991&camp=1789&creative=9325&linkCode=ur2&tag=thesecuritlawhom) is an excellent starting point for understanding the regulation of investment advisers. --- ### Recent Articles [SEC Subpoenas – Tips for Responding – 2025](https://seclaw.com/tips-responding-sec-subpoena/) How you respond to an SEC subpoena makes a difference. Tips from an experienced securities attorney. [What is Securities Arbitration?](https://seclaw.com/what-is-securities-arbitration/) Securities arbitration has become the most often-used method of resolving disputes in the securities industry. Since the late 1970’s, [FINRA](https://seclaw.com/glossary/finra/) and its predecessors have required brokerage firms and [stock](https://seclaw.com/glossary/stock/) brokers into securities arbitration to resolve their disputes with each other, and with their customers. That requirement led to brokerage firms requiring, through their customer agreements, ... [SEC’s Division of Investment Management to Host Third Annual Conference on Emerging Trends in Asset Management](https://seclaw.com/secs-division-of-investment-management-to-host-third-annual-conference-on-emerging-trends-in-asset-management/) The Securities and Exchange Commission’s Division of Investment Management announced it will host the third annual Conference on Emerging Trends in Asset Management on Thursday, June 5, 2025\. The conference will bring together a variety of asset… SEC Press Release [FINRA Proposes Changes to Reporting Outside Business Activities](https://seclaw.com/finra-proposes-changes-to-reporting-outside-business-activities/) FINRA Regulatory Notice 25-05, issued on March 14, 2025, proposes consolidating Rules 3270 and 3280 into a single rule—tentatively titled Rule 3290—to streamline and reduce unnecessary burdens regarding associated persons’ outside activities. The comment period for this proposal ends on May 13, 2025\. Key Points of the Proposal Consolidation of Rules: The proposal aims to merge FINRA ... [By Building Wealth, Investors Power U.S. Economy](https://seclaw.com/by-building-wealth-investors-power-u-s-economy/) How Investing Fuels the U.S. Economy and Builds Your Financial Future The SEC Shines a Light on Investing During National Financial Literacy Month Each April, the U.S. Securities and Exchange Commission (SEC), through its Office of Investor Education and Advocacy (OIEA), uses National Financial Literacy Month to spotlight the critical role investing plays—not only in shaping a ... [Should Brokers and Firms Share a Lawyer?](https://seclaw.com/two-lawyers-0201-2/) By Mark J. Astarita, Esq. A repeating question on my website comes from brokers who are named in an arbitration proceeding by a customer, and whose firm offers to provide an attorney to represent both the broker and the firm. The question is always, do I need my own attorney? When Trust Issues and Financial Liability Complicate ... [Tips for a Successful Securities Mediation](https://seclaw.com/tips-for-a-successful-securities-mediation/) Tips for a Successful Securities Mediation Securities arbitration is a proven method for resolving disputes in the securities industry. It is a quicker and more cost-effective alternative to traditional court proceedings. With increasing frequency, investors and advisors are turning to mediation to make the process even more effective. Mediation is a form of alternative dispute resolution that ... [SEC Seeks Candidates for Membership on the Investor Advisory Committee](https://seclaw.com/sec-seeks-candidates-for-membership-on-the-investor-advisory-committee/) The Securities and Exchange Commission is seeking candidates for appointment as members of the SEC’s Investor Advisory Committee, which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act to help protect investors and improve… SEC Press Release [Advisers Settle SEC Charges for Acting as Unregistered Brokers](https://seclaw.com/three-investment-adviser-representatives-settle-sec-charges-for-acting-as-unregistered-brokers/) SEC Takes Action Against VCP Financial and Investment Advisers for Regulatory Violations Investment Advisers Caught Selling Pre-IPO Investments Without Proper Registration The SEC has announced settled charges against three investment adviser representatives—Tamir Shabat, Danny Z. Spiegel, and Joseph J. Orlando, Jr.—for operating as unregistered brokers while selling membership interests in LLCs that purportedly invested in pre-IPO companies. ... [An SEC Subpoena, FINRA OTR. 2025 Update.](https://seclaw.com/sec-subpoena-response/) By Mark J. Astarita, Esq. Understanding the implications of an SEC subpoena is crucial for those involved in securities law. WHILE BROKERS OFTEN BECOME upset or even angry when they are named in customer arbitration; nothing strikes fear in the hearts of licensed individuals as much as receiving an SEC subpoena or a FINRA 8210 request. The ... ## Introductory Materials [Introduction to the Federal Securities Laws](https://seclaw.com/federal-securities-law/) – written by securities lawyer Mark Astarita, an overview of the federal regulatory scheme for the financial markets. Written for the non-lawyer, with links to more detailed information [**Introduction to the Blue Sky Laws (State Securities Laws)**](https://seclaw.com/introduction-to-state-securities-laws/) – In addition to the Federal Securities Laws, each state has its own securities laws. Those laws vary from state to state and require registration or notification of securities offerings and registration of brokers and brokerage firms. Each state has a regulatory agency that administers the law, typically known as the state Securities Commissioner. This introduction provides an overview of the regulatory scheme. A list of state securities commissioners and their addresses is available in our **[Guide to State Securities Regulators](https://seclaw.com/state-securities-commissions-state-blue-sky-laws/).** **[Introduction to Securities Arbitration](https://seclaw.com/overview-securities-arbitration-process/)** – In general, and in the securities industry, a party cannot be compelled to arbitrate a dispute unless he has contractually bound himself to do so. Registered representatives and their firms are contractually bound to arbitrate their disputes with their customers, even in the absence of a written contract with the customer. The contractual obligation arises not from a customer agreement but from their registration with [FINRA](http://www.finra.org/). For customers and financial professionals, an introduction to the process, from start to finish. **[Introduction to the Initial Public Offering Process](https://seclaw.com/public-offering-legal-center/)** – in the Corporate Finance section, an introduction to the public offering process **[Introduction to Private Placements](https://seclaw.com/introduction-private-placements/)** – in addition to public offerings, many companies raise money by selling securities in a private offering. There are many restrictions and caveats to the process. **[Introduction to Insider Trading](https://www.seclaw.com/insider-trading/)** – there is legal [insider trading](https://seclaw.com/glossary/insider-trading/) and illegal insider trading. When investors, regardless of their relationship with the company, trade on material, non-public information, there is a risk that the trading is illegal. **[Registration of Investment Advisors](https://seclaw.com/riaoverview/)** – one of our featured articles, an introduction to becoming an investment adviser and what you need to know to start an advisory firm **[Guide to Broker-Dealer Registration](/docs/brokerdealerregistration.htm)** **–** an updated version of the SEC’s original guide is now online. --- > [What is Securities Law?](https://www.seclaw.com/securities-law/) > [FINRA Rule 8210](https://www.seclaw.com/glossary/finra-rule-8210/) ##### [ Mark J. Astarita](https://seclaw.com/author/admin/) Securities Attorney at [Sallah Astarita & Cox](http://www.sallahlaw.com) | [212-509-6544](tel:212-509-6544) | [mja@sallahlaw.com](mailto:mja@sallahlaw.com) | [Website](http://www.securitieslawyer.us) | [\+ postsBio](#) Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings. He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links. * Mark J. Astarita https://seclaw.com/author/admin/ [![SEC subpoena](https://seclaw.com/wp-content/uploads/2015/12/shutterstock_139897957-150x150.jpg)](https://seclaw.com/tips-responding-sec-subpoena/) June 2, 2025 [SEC Subpoenas – Tips for Responding – 2025](https://seclaw.com/tips-responding-sec-subpoena/) * Mark J. Astarita https://seclaw.com/author/admin/ [![securities arbitration](https://seclaw.com/wp-content/uploads/2017/07/shutterstock_335441990-150x150.jpg)](https://seclaw.com/what-is-securities-arbitration/) June 1, 2025 [What is Securities Arbitration?](https://seclaw.com/what-is-securities-arbitration/) * Mark J. Astarita https://seclaw.com/author/admin/ [![Tips for a successful securities mediation](https://seclaw.com/wp-content/uploads/2020/10/Depositphotos_42522815_xl-2015-150x150.jpg)](https://seclaw.com/tips-for-a-successful-securities-mediation/) February 19, 2025 [Tips for a Successful Securities Mediation](https://seclaw.com/tips-for-a-successful-securities-mediation/) * Mark J. Astarita https://seclaw.com/author/admin/ [![](https://seclaw.com/wp-content/uploads/2025/02/create-a-highly-detailed-and-visually-appealing-image-that-represents-150x150.png)](https://seclaw.com/exemption-from-exchange-act-rule-13f-2-and-related-form-sho/) February 8, 2025 [Exemption From Exchange Act Rule 13f-2 and Related Form SHO](https://seclaw.com/exemption-from-exchange-act-rule-13f-2-and-related-form-sho/) ### Share this: * [ Click to share on Facebook (Opens in new window) Facebook ](https://seclaw.com/brokerlegalinformation/?share=facebook) * [ Click to share on X (Opens in new window) X ](https://seclaw.com/brokerlegalinformation/?share=x) ### Like this: Like Loading... ### Information Center Source: [https://seclaw.com/brokerlegalinformation/](https://seclaw.com/brokerlegalinformation/) *Content available at [https://seclaw.com/brokerlegalinformation/](https://seclaw.com/brokerlegalinformation/)* ### FINRA Rule 8210 – Avoiding Enforcement Proceedings Source: [https://seclaw.com/finra-rule-8210-request-response/](https://seclaw.com/finra-rule-8210-request-response/) *Content available at [https://seclaw.com/finra-rule-8210-request-response/](https://seclaw.com/finra-rule-8210-request-response/)* ### CRD Expungement Source: [https://seclaw.com/expungement/](https://seclaw.com/expungement/) *Content available at [https://seclaw.com/expungement/](https://seclaw.com/expungement/)* ### Broker Center Archives Source: [https://seclaw.com/category/brokers/](https://seclaw.com/category/brokers/) *Content available at [https://seclaw.com/category/brokers/](https://seclaw.com/category/brokers/)* ### Investors Source: [https://seclaw.com/investingcenter/](https://seclaw.com/investingcenter/) *Content available at [https://seclaw.com/investingcenter/](https://seclaw.com/investingcenter/)* ### Recover Losses Source: [https://seclaw.com/overview-securities-arbitration-process/](https://seclaw.com/overview-securities-arbitration-process/) *Content available at [https://seclaw.com/overview-securities-arbitration-process/](https://seclaw.com/overview-securities-arbitration-process/)* ### Glossary Source: [https://seclaw.com/glossary-2/](https://seclaw.com/glossary-2/) *Content available at [https://seclaw.com/glossary-2/](https://seclaw.com/glossary-2/)* ### SEC Investor Publications Source: [https://seclaw.com/secpub/](https://seclaw.com/secpub/) *Content available at [https://seclaw.com/secpub/](https://seclaw.com/secpub/)* ### Corp Finance Source: [https://seclaw.com/category/corp-finance/](https://seclaw.com/category/corp-finance/) *Content available at [https://seclaw.com/category/corp-finance/](https://seclaw.com/category/corp-finance/)* ### Private Placements Source: [https://seclaw.com/introduction-private-placements/](https://seclaw.com/introduction-private-placements/) *Content available at [https://seclaw.com/introduction-private-placements/](https://seclaw.com/introduction-private-placements/)* ### Public Offerings Source: [https://seclaw.com/public-offering-legal-center/](https://seclaw.com/public-offering-legal-center/) *Content available at [https://seclaw.com/public-offering-legal-center/](https://seclaw.com/public-offering-legal-center/)* ### Hedge Funds Source: [https://seclaw.com/category/hedge-funds/](https://seclaw.com/category/hedge-funds/) *Content available at [https://seclaw.com/category/hedge-funds/](https://seclaw.com/category/hedge-funds/)* ### Mutual Funds – ETFs Source: [https://seclaw.com/category/mutual-funds-etfs/](https://seclaw.com/category/mutual-funds-etfs/) *Content available at [https://seclaw.com/category/mutual-funds-etfs/](https://seclaw.com/category/mutual-funds-etfs/)* ### Law/Compliance Source: [https://seclaw.com/securitieslawcenter/](https://seclaw.com/securitieslawcenter/) *Content available at [https://seclaw.com/securitieslawcenter/](https://seclaw.com/securitieslawcenter/)* ### Securities Laws, Rules and Regulations Source: [https://seclaw.com/securities_regulations/](https://seclaw.com/securities_regulations/) *Content available at [https://seclaw.com/securities_regulations/](https://seclaw.com/securities_regulations/)* ### Recent FINRA Rule Filings Source: [https://seclaw.com/recent-finra-rule-filings/](https://seclaw.com/recent-finra-rule-filings/) *Content available at [https://seclaw.com/recent-finra-rule-filings/](https://seclaw.com/recent-finra-rule-filings/)* ### 2 Source: [https://seclaw.com/page/2/](https://seclaw.com/page/2/) *Content available at [https://seclaw.com/page/2/](https://seclaw.com/page/2/)* ### 3 Source: [https://seclaw.com/page/3/](https://seclaw.com/page/3/) *Content available at [https://seclaw.com/page/3/](https://seclaw.com/page/3/)* ### 134 Source: [https://seclaw.com/page/134/](https://seclaw.com/page/134/) *Content available at [https://seclaw.com/page/134/](https://seclaw.com/page/134/)* ### Next » Source: [https://seclaw.com/page/2/](https://seclaw.com/page/2/) *Content available at [https://seclaw.com/page/2/](https://seclaw.com/page/2/)* ## Documentation ### Introduction to Private Placements – A Securities Lawyer Guide Source: [https://seclaw.com/introduction-private-placements/](https://seclaw.com/introduction-private-placements/) ### [![](https://seclaw.com/wp/wp-content/uploads/2018/03/PRIVATE-PLACEMENT.jpg)](http://www.securitieslawyer.us/private-placements/?322) ### Introduction By[ Mark Astarita, a New York Securities Lawyer](http://securitieslawyer.us) This overview of the private placement process is not legal advice, and is intended solely for information and educational purposes. If you are contemplating a private placement, or any legal transaction, you should consult an attorney who can provide you with the advice that you need, for your specific circumstances. Securities law, and corporate finance, is not the area for novices to play. Incorrect documentation can have serious ramifications for all involved parties. --- [Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist](https://www.amazon.com/gp/product/1119259754/ref=as%5Fli%5Ftl?ie=UTF8&camp=1789&creative=9325&creativeASIN=1119259754&linkCode=as2&tag=thesecuritlawhom&linkId=eed38c73a9cfa26abc7f00b2f28d62b3) --- The term “private placement” as used in this text refers to the offer and sale of any security by a brokerage firm not involving a public offering. Private offerings are not the subject of a [registration statement](https://seclaw.com/glossary/registration-statement/) filed with the [SEC](https://seclaw.com/glossary/sec/) under the 1933 Act. Private placements are done in reliance upon Sections 3(b) or 4(2) of the 1933 Act as construed or under Regulation D as promulgated by the SEC, or both. Regulation D, promulgated in 1982, sets forth certain guidelines for compliance with the Private Offering Exemption. Any registered representative who are involved in the private placement process are expected to have a working familiarity with Regulation D. [Links to the various statutes and rules](https://seclaw.com/securities%5Fregulations) are in the law section of our site. --- **_Related Publication_**: [Hedge Fund](https://seclaw.com/glossary/hedge-fund/) Disclosure Documents Line by Line, 2nd Edition: A User’s Guide to Private Placement Memoranda for Funds Formed as Limited Liability Companies --- To qualify as a private placement, an offering by an issuer must meet either the requirement of Sections 3(b) or 4(2) of the 1933 Act as developed through SEC interpretation and court decisions or must follow the conditions set out under Regulation D of the 1933 Act. Persons claiming the exemption from the 1933 Act carry the burden of proving that its activities came within that exemption. ### Regulation D #### Overview [Regulation D](https://seclaw.com/glossary/reg-d-private-placement-exemption/) is a series of six rules, Rules 501-506, establishing three transactional exemptions from the registration requirements of the 1933 Act. Rules 501-503 set forth definitions, terms and conditions that apply generally throughout the Regulation. Specific exemptions are set out in Rules 504-506. [Rule 504 ](https://seclaw.com/secs-fast-answers-rule-504-reg-d/)applies to transactions in which no more than $1,000,000 of securities are sold in any consecutive twelve-month period. Rule 504 imposes no ceiling on the number of investors, permits the payment of commissions, and imposes no restrictions on the manner of offering or resale of securities. Further, Rule 504 does not prescribe specific disclosure requirements. Generally, the intent of Rule 504 is to shift the obligation of regulating very small offerings to state “Blue Sky” administrators, though the offerings continue to be subject to federal anti-fraud provisions and civil liability provisions of the Exchange Act. --- Related Articles * [SEC Advisory Committee to Examine Regulation A and “Finders” in July 2025 Meeting](https://seclaw.com/sec-small-business-advisory-committee-to-discuss-regulatory-framework-for-finders-and-continue-exploring-regulation-a/) * [SEC Committee to Examine Pass-Through Voting and Other Means of Reaching the Ultimate Beneficial Owner; Discuss Market Perspectives on Non-GAAP Financial Disclosures at June 5 Meeting](https://seclaw.com/sec-investor-advisory-committee-to-examine-pass-through-voting-and-other-means-of-reaching-the-ultimate-beneficial-owner-discuss-market-perspectives-on-non-gaap-financial-disclosures-at-june-5-meetin/) * [SEC Announces 44th Annual Small Business Forum to Impact Capital-Raising Policy](https://seclaw.com/sec-announces-44th-annual-small-business-forum-to-impact-capital-raising-policy/) * [Bitcoin Fraud On the Rise](https://seclaw.com/bitcoin-fraud-rise/) * [Digital Asset Scam Alert](https://seclaw.com/digital-asset-scam-alert/) * [$119 Million Securities Fraud Targeting South Asian American Community](https://seclaw.com/sec-charges-company-and-ceo-for-119-million-securities-fraud-targeting-members-of-the-south-asian-american-community/) * [SEC Publishes Data on Regulation A, Crowdfunding Offerings, and Private Fund Beneficial Ownership Concentration](https://seclaw.com/sec-publishes-data-on-regulation-a-crowdfunding-offerings-and-private-fund-beneficial-ownership-concentration/) * [SEC Enhances EDGAR System Security with New Filer Management Dashboard](https://seclaw.com/filer-transition-to-new-and-improved-edgar-begins-march-24/) * [SEC Small Business Advisory Committee to Continue Discussing Challenges Facing Emerging Fund Managers, and Explore Hurdles for Small Public Companies Not Listed on a National Securities Exchange](https://seclaw.com/sec-small-business-advisory-committee-to-continue-discussing-challenges-facing-emerging-fund-managers-and-explore-hurdles-for-small-public-companies-not-listed-on-a-national-securities-exchange/) * [What Happens If I Ignore an SEC Subpoena?](https://seclaw.com/what-happens-if-i-ignore-an-sec-subpoena/) * [What Does a Securities Lawyer Do?](https://seclaw.com/what-does-a-securities-lawyer-do/) * [SEC Small Business Advisory Committee to Explore Recent Changes to U.S. Small Business Administration’s Small Business Investment Company Program](https://seclaw.com/sec-small-business-advisory-committee-to-explore-recent-changes-to-u-s-small-business-administrations-small-business-investment-company-program/) * [Finders Explained – Be Careful](https://seclaw.com/finders083101/) * [SEC’s OMWI FY 2023 Annual Report Highlights the Agency’s Diversity, Equity, Inclusion and Accessibility Initiatives and Progress](https://seclaw.com/secs-omwi-fy-2023-annual-report-highlights-the-agencys-diversity-equity-inclusion-and-accessibility-initiatives-and-progress/) * [Deciphering Form 10-K and 10-Q](https://seclaw.com/deciphering-form-10-k-and-10-q/) --- Rule 505 applies to transactions in which not more than $5,000,000 of securities is sold in any consecutive twelve-month period. Sales to thirty-five “non-accredited” investors and to an unlimited number of [accredited investors](../accreditedinvestordefinition.htm) are permitted. An issuer under Rule 505 may not use any general solicitation or general advertising to sell its securities. [Rule 506](https://www.seclaw.com/sec-rule-506/) has no dollar limitation of the offering. Rule 506 is available to all issuers for offerings sold to not more than thirty-five non-accredited purchasers and an unlimited number of accredited investors. Rule 506, however, unlike 504 and 505, requires an issuer to make a subjective determination that at the time of acquisition of the investment each non-accredited purchaser meets a certain sophistication standard, either individually or in conjunction with a “Purchaser Representative.” Like Rule 505, Rule 506 prohibits any general solicitation or general advertising. ## Accredited Investor [“Accredited Investor”](https://www.seclaw.com/can-a-non-citizen-be-an-accredited-investor/) is defined in Rule 501(a). The principal categories of accredited investors are as follows: > 1) Directors, executive officers, and general partners of the issuer, including general partners of general partners in two-tier syndicating. (The term “executive officers” is more fully defined in the Regulation.) > > (2) Purchasers whose net worth either individually or jointly with their spouse equals or exceeds $1 million. It is important to note that while there is no definition of “net worth” in Regulation D, the value of the purchaser’s home is excluded in Section 501(a)(5)(i)(A) > > (3) Natural person purchasers who have “income” in excess of $200,000 in each of the two most recent years and who reasonably expect an income in excess of $200,000 in current year (or $300,000, jointly with their spouse). > > (4) A business entity will be treated as a single accredited investor unless it was organized for the specific purpose of acquiring the securities offered, in which case each beneficial owner of the security is counted separately. Section 201(a) of the JOBS Act required the SEC to remove the general solicitation prohibition under Rule 506, in the situations where all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors. ## General Solicitation and Rule 506(c) In September 2013, the SEC adopted paragraph (c) of Rule 506\. Under Rule 506(c), issuers can offer securities through means of general solicitation, provided that: * all purchasers in the offering are accredited investors * the issuer takes reasonable steps to verify their accredited investor status, and * certain other conditions in Regulation D are satisfied. Issuers wishing to engage in general solicitation take “reasonable steps” to verify the accredited investor status of purchasers. Rule 506(c) sets forth a principles-based method of verification which requires an objective determination by the issuer (or those acting on its behalf) as to whether the steps taken are “reasonable” in the context of the particular facts and circumstances of each purchaser and transaction. Among the factors that an issuer should consider under this principles-based method are: ” * the nature of the purchaser and the type of accredited investor that the purchaser claims to be; * the amount and type of information that the issuer has about the purchaser; and * the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount. ## How to Verify Accredited Investor Status In addition to this flexible, principles-based method, Rule 506(c) includes a non-exclusive list of verification methods that issuers may use, but are not required to use, when seeking greater certainty that they satisfy the verification requirement with respect to natural person purchasers. This non-exclusive list of verification methods consists of: Rule 506(b) remains unchanged following the adoption of Rule 506(c) and continues to be available for issuers that wish to conduct a Rule 506 offering without the use of general solicitation or that do not wish to limit sales of securities in the offering to accredited investors. * verification based on income, by reviewing copies of any Internal Revenue Service form that reports income, such as Form W-2, Form 1099, Schedule K-1 of Form 1065, and a filed Form 1040; * verification on net worth, by reviewing specific types of documentation dated within the prior three months, such as bank statements, brokerage statements, certificates of deposit, tax assessments and a credit report from at least one of the nationwide consumer reporting agencies, and obtaining a written representation from the investor; * a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a certified public accountant stating that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the last three months and has determined that such purchaser is an accredited investor; and * a method for verifying the accredited investor status of persons who had invested in the issuer’s Rule 506(b) offering as an accredited investor before September 23, 2013 and remain investors of the issuer. ## Additional Compliance Considerations Under Regulation D The SEC has pointed out the following regarding Regulation D: 1. Regulation D does not exempt offerings from the anti-fraud and civil liability provisions of the various federal securities laws. 2. Further, Regulation D in no way relieves issuers of their obligation to furnish to investors whatever material information may be needed to make any required disclosures not misleading. 3. Similarly, notwithstanding exemption from registration at the federal level, Regulation D in no way obviates an issuer’s obligation to comply with applicable state law. 4. Regulation D is interpreted as providing “transactional” exemptions to issuers only. An investor whose purchase was exempt from registration cannot resell his or her interest without establishing an independent basis of exemption. 5. The three exemptions are not intended to be mutually exclusive, that a reliance on one exemption is not deemed to be an election to the exclusion of any other applicable exemption. 6. Finally, the exemptions of Regulation D may not be claimed with respect to any plan or scheme to evade the registration provisions of the act. Existing state securities regulations at times impose substantially more onerous limitations on issuers than Regulation D. Issuer’s counsel must be consulted regarding the requirements of the securities law of each state in which an offering is going to be sold. ## Form D Notices, on [Form D](https://www.sec.gov/files/formd.pdf), are due within fifteen days after the first sale of securities in an offering under Regulation D. It will be prepared by Issuer’s counsel. ## Private Placement of Restricted Securities Outside Regulation D The specific requirements to be satisfied in establishing an exemption under Section 4(2) for a private placement are not stated in that section of the Securities Act of 1933\. By studying SEC interpretations and court decisions dealing with Section 4(2), the basic requirements which a private placement must meet can be determined. They are summarized below: 1. All the offerees and purchasers must have access to the same kind of information concerning the issuer which would appear in an SEC registration statement, and these persons must be able to comprehend and evaluate such information. It must be kept in mind that any offer to an offeree who would not qualify, as well as a sale to a purchaser who would not qualify, may destroy the private placement exemption and result in a violation of Section 5 of the 1933 Act. 2. The issuer and any parties acting for the issuer, including the broker-dealer, must take all reasonable steps to insure that the information given to the offerees and purchasers is complete and accurate. This is “due diligence.” All information passed on in the course of the private placement, either orally or by memorandum (or offering circular), is subject to the anti-fraud provisions of the federal securities laws. The fact that the offering memorandum is not reviewed by the SEC does not lower the standards for accuracy which would be applicable to any registered offering. 3. All of the offerees must have access to meaningful current information concerning the issuer. The fact than an offeree has considerable financial resources or is a lawyer, accountant or businessperson, and thus may be considered sophisticated, does not eliminate the need for appropriate information to be made available. 4. While there is no specific limitation on the number of offerees, the greater the number of offerees, the greater the likelihood that the offering will not qualify for the exemption. In this connection, a private placement cannot be the subject of advertising, general promotional seminars or public meetings in connection with the offering. This limitation does not preclude meeting with offerees to discuss the terms of the offer or to present information concerning the issuer or the offer. After the private placement has been completed, a general announcement (such as a tombstone ad) concerning it may be made if this is desired. 5. Purchasers in a private placement must acquire the securities for investment and not for the purpose of further distribution. If the purchaser acts in such a manner so as to participate in distribution of the securities to the public, either directly or indirectly as a link between the issuer and the public, he or she will be deemed to be an underwriter and the selling broker-dealer and other participants in the distribution, including the issuer, will be in violation of Section 5 of the 1933 Act. Each of the purchasers must intend to acquire for investment at the time the securities are purchased. Whether or not investment intent was present will be determined from all the circumstances surrounding the acquisition. Such circumstances would include the financial capability of the purchaser to hold the securities for the long term and whether the purchaser signed a letter of investment intent. The amount of time the securities have been held (the holding period) is one of the factors in a hindsight determination that an investment intent existed at the time of purchase. A two-year holding period is deemed to be the bare minimum. What is readily apparent from the foregoing is that current and accurate information about the offerees in a private placement transaction is absolutely essential for the making of judgments as to [suitability](https://seclaw.com/glossary/suitability/), ability to evaluate an offering, and investment intent. ## Private Placement Offering Memorandum To meet the requirement of Regulation D or the requirements of Section 4(2) of the 1933 Act (the private placement exemption), the issuer is almost always required to make extensive disclosures regarding the nature, character and risk factors relating to an offering. The disclosure document often is labeled “Offering Memorandum” or given a similar title, which, in the normal course, is based upon information provided to counsel to the issuer. While a properly executed private placement is exempt from the registration provisions (i.e. Section 5 of the 1933 Act) of the federal securities laws, the transaction (and the disclosures made or a lack thereof) is subject to the anti-fraud provisions. If the offering memorandum is a particular private placement turns out to be materially misleading in terms of disclosures which have been made (or which should have been made), the broker-dealer and its principals may be deemed to have violated or aided or abetted violations of the anti-fraud provisions of the federal securities laws. Unfortunately, because of the nature of a private offering, those looking to review an offering memorandum for educational purposes will have a very difficult time finding one. We did manage to locate a sample, and have it on line – [sample private placement memorandum](https://seclaw.com/docs/ref/sampleprivateplacementmemorandum.pdf). Another source that we have found is Hedge Fund Disclosure Documents Line by Line, 2nd Edition: A User’s Guide to Private Placement Memoranda for Funds Formed as Limited Liability Companies While a hedge fund PPM is slightly different than a “traditional” PPM, the book will give the reader a great deal of insight into the contents of a private placement memorandum. ## Supplementary or Corrective Material During the course of private placement activities on a particular issue, or prior to the closing, it may become necessary to update or correct information supplied in the private placement memorandum as originally prepared. The corrected information must be brought to the attention of the offerees by means of a cover or transmittal letter which describes the changes or additions. Depending upon the information transmitted, reconfirmation of an investors desire to invest may be required. The files maintained with respect to a particular offering must contain a record of what has been done. Prior to closing an offering, meaning the acceptance of investors in a transaction, a brokerage firm Principal must verify that all such amendments have been sent to all subscribing offerees and that the files are accurate and complete. ## Offeree Access To Information In most private placement offering memoranda, it is stated that the memorandum has been prepared by counsel to the issuer (i.e., the corporation) from documents which have been provided by representatives of the issuer. Offerees are invited to meet with representatives of the issuer to make an independent investigation and verification of the matters disclosed in the offering memorandum. Courts, reviewing private placements when challenged, weigh investor access to underlying information about the transaction very heavily in the determination of whether there has been compliance with the private placement exemption. The brokerage firm’s designated Principal should obtain a commitment from the Issuer that potential purchasers and their representatives shall be given access to underlying information about the transaction if they desire to pursue such information. The fact that information is available to offerees should be specifically disclosed to the offerees at a conspicuous point in the offering documents. ## PRIVATE PLACEMENT OFFERING PROCESS ### Offering Commencement and Termination The commencement date of private offerings is fixed generally at the date of the availability of the approved offering documents, for distribution to sales personnel. The termination date for a private offering is dependent on the type of offering being made. An “all or nothing” offering contains, by its terms, a fixed or defined date for the termination of the offering. A “best efforts” offering may have an indeterminate termination period meaning that the offering continues until the full number of Securities is placed and the subscribers are formally accepted by both the issuer (or a duly authorized representative) and by a Principal of the brokerage firm. The sales objectives in a best efforts offering, of course, is that all securities will be placed with suitable investors. However, short of all securities being placed, it is required that a minimum amount of money need be raised which shall be sufficient, after the funding of all of the organizational and offering expenses, and giving consideration to the fixed contractual obligations of the issuer, without changing the nature of the investment called for by the general terms of the offering. The issuer may be given the option of funding required issuer obligations by the making of loans or deferral of fees. In such a case where the issuer funds financial requirements prior to the placement of all of the securities, it is the obligation of the brokerage firm to assure itself that appropriate disclosure to all offerees (and subscribers) be made and to assure itself that the basic nature and character of the transaction called for by the terms of the offering are maintained. If it appears that they cannot be maintained, then the transaction must be rescinded and monies paid by subscribers must be refunded. ### Possible Need for a Purchaser Representative A judgment must be made as to the business sophistication of a purchaser. If it is determined that a particular purchaser is not sufficiently sophisticated in business matters to effectively evaluate the investment opportunity, then he or she must be assisted by a “purchaser representative,” i.e., a person possessing the requisite sophistication (chosen by the purchaser) who is able to and does assist in evaluating the investment opportunity and who is not an affiliate of the issuer, not the brokerage firm. Also, State Blue Sky laws impose additional requirements for their investors. Only customers known to registered representative personally should be sent only brokerage firm approved offering materials. If there is doubt about the individual’s need for a purchaser representative, the subscriber should be required to obtain one. ### No Fee Sharing Fees may not be split with non-registered persons such as lawyers, accountants or investment advisers. ### Investment Intent Purchasers of private placement securities must purchase for investment purposes and not for the purpose of resale. The typical subscription documents used in private placements contains what is called “investment letter language.” This representation should be personally verified. Consideration should be given as to whether the investment representation makes sense in view of the surrounding circumstances of the proposed purchaser. #### Oral Representations Offerees, having received private placement offering documents, frequently request oral explanations or supplements to the information presented. Great care should be taken in making oral disclosures regarding a private placement. Deviation from the printed material is prohibited. Written notes of conversations with offerees (and their representatives) should be made, dated and placed in the client’s file. #### Acceptance Of Offerees As Purchasers In all private placement offerings, the subscribers must be formally accepted by the issuer. The acceptance of subscribers is based upon a subscriber questionnaire and, possibly, the customers account information (a document signed by the client). A review of the contents of this form by a representative of the firm who is qualified to make such determinations is imperative. Following the acceptance of the subscribers in an offering by both the issuer and the principal, the offering shall be terminated by notification to all involved sales persons or entities. ### Mechanics of Offering Process 1. The offering documents should be numbered. Unnumbered copies should be marked “For Information Only”, “File Copy” and other appropriate notation. 2. A distribution control sheet will be created, and monitored. As offering documents are assigned to particular registered representatives, the number of the offering documents, together with the registered representative’s name, should be placed on the control sheet. 3. A sales control sheet will be maintained reflecting current sales. 4. Incoming checks, subscription agreements, and executed suitability documents will be logged on the Sales Blotter on a daily basis. 5. Checks should be reviewed for acceptability by the firm, recorded on the brokerage firm’s receipts blotter, and forwarded to the individual bank escrow agent, and where appropriate to the Issuer, together with the purchaser’s name, address, social security number, and number of shares/units. 6. Incoming subscription agreements should be approved by the firm, recorded on the sales blotter and forwarded to the Issuer for acceptance. A copy must be maintained for the brokerage firm files. 7. Confirmations should be sent immediately to the subscriber upon acceptance, to the registered representatives, and a file copy should be retained (e.g. a copy of the Subscription Documents.) 8. Form D will be filed, on a timely basis, by counsel to the Issuer, with the SEC and with those states that require it. 9. Care should be taken that any other forms necessary to comply with the state Blue Sky authorities will be timely filed. Counsel to the issuer or brokerage firm counsel should generally be consulted as to the required forms in the states where the securities have been sold. Generally, this is accomplished by counsel to the issuer. (Some states require no forms.) 10. A complete file containing the above-described documents for each private placement should be maintained as part of the brokerage firm’s records. ### Escrow Account – Private Placements Only The federal securities law (the Exchange Act) is very specific with respect to the required treatment of an escrow account maintained in an “all or none” or “part or none” offering. The rules applicable to “all or none” or “part or none” offerings relating to the maintenance of an escrow account for a given offering are Rules 10b-9 and 15c2-4 of the Securities Exchange Act of 1934\. Rule 10b-9 requires, in general, that in an “all or none” or “part or none” offering (as opposed to a “best efforts” offering) monies paid for the purchase of securities must be returned to the investors if the specified number/dollar amount of securities is not sold within a specified time. In other words, the “all or none” or “part or none” offering requires specification of the number of securities and the time of the selling period. Both terms must be adhered to. Rule 15c2-4 requires, in general, that the monies received from investors be deposited into a separate segregated bank account (Independent Bank as Escrow Agent) and held for the investors’ benefit until the “all or none” or “part or none” terms have been complied with. If the terms of the offering are met, the money is to be transmitted to the issuer. If not, the monies are to be returned to subscribers. The specific procedures to be followed in the handling of escrow accounts for “all or none” or “part or none” transactions are as follows: 1. When an “all or none” or “part or none” offering is commenced, an escrow agreement shall be created. This document should be executed by the brokerage firm and the bank. The brokerage firm is required to keep a copy of all escrow agreements on file to demonstrate compliance with Rule 15c2-4. 2. An escrow account should be opened by the bank. The escrow account is governed by the escrow agreement. The account typically requires signatures of representatives of both the brokerage firm and the Issuer before any checks can be issued from the account. 3. Incoming monies should be deposited immediately into the escrow account, along with the purchaser’s name, address, social security number and number of shares/units. 4. Upon the completion of the “all or none” or “part or none” terms of the agreement or upon the expiration of the specified time period, the escrow agent verifies that the terms of the escrow agreement have been or have not been met by the designated date and that the funds should be released from escrow. 5. The issuer then transmits written confirmation stating that a determination has been made that the conditions of the escrow have or have not been complied with and request a release of the funds. 6. Upon receipt of the written confirmation described above, the funds are transmitted to the proper entity or persons. 7. The documentation created by these procedures is then retained in a segregated file for audit or regulatory review. 8. In a “best efforts” offering, the brokerage firm is contractually bound to use its “best efforts” to place the securities with suitable investors. The brokerage firm will follow the procedures as outlined above regarding placement of subscriber’s funds in an independent bank escrow account. Hopefully, this introduction has provided you with an overview of the legal requirements of a private placement, and the importance of every step of the process. For information on the practical side of the process, try other sites listed in our [Financial Resources](https://seclaw.com/finres.htm) page. --- **_Related Publication_**: [Hedge Fund Disclosure Documents Line by Line: A User’s Guide to Private Placement Memoranda for Funds Formed as Limited Liability Companies ](http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2Fgp%2Fproduct%2F1596220902%2F&tag=thesecuritlawhom&linkCode=ur2&camp=1789&creative=9325) ## Related Articles * [SEC Advisory Committee to Examine Regulation A and “Finders” in July 2025 Meeting](https://seclaw.com/sec-small-business-advisory-committee-to-discuss-regulatory-framework-for-finders-and-continue-exploring-regulation-a/) * [SEC Committee to Examine Pass-Through Voting and Other Means of Reaching the Ultimate Beneficial Owner; Discuss Market Perspectives on Non-GAAP Financial Disclosures at June 5 Meeting](https://seclaw.com/sec-investor-advisory-committee-to-examine-pass-through-voting-and-other-means-of-reaching-the-ultimate-beneficial-owner-discuss-market-perspectives-on-non-gaap-financial-disclosures-at-june-5-meetin/) * [SEC Announces 44th Annual Small Business Forum to Impact Capital-Raising Policy](https://seclaw.com/sec-announces-44th-annual-small-business-forum-to-impact-capital-raising-policy/) * [Bitcoin Fraud On the Rise](https://seclaw.com/bitcoin-fraud-rise/) * [Digital Asset Scam Alert](https://seclaw.com/digital-asset-scam-alert/) * [$119 Million Securities Fraud Targeting South Asian American Community](https://seclaw.com/sec-charges-company-and-ceo-for-119-million-securities-fraud-targeting-members-of-the-south-asian-american-community/) * [SEC Publishes Data on Regulation A, Crowdfunding Offerings, and Private Fund Beneficial Ownership Concentration](https://seclaw.com/sec-publishes-data-on-regulation-a-crowdfunding-offerings-and-private-fund-beneficial-ownership-concentration/) * [SEC Enhances EDGAR System Security with New Filer Management Dashboard](https://seclaw.com/filer-transition-to-new-and-improved-edgar-begins-march-24/) * [SEC Small Business Advisory Committee to Continue Discussing Challenges Facing Emerging Fund Managers, and Explore Hurdles for Small Public Companies Not Listed on a National Securities Exchange](https://seclaw.com/sec-small-business-advisory-committee-to-continue-discussing-challenges-facing-emerging-fund-managers-and-explore-hurdles-for-small-public-companies-not-listed-on-a-national-securities-exchange/) * [What Happens If I Ignore an SEC Subpoena?](https://seclaw.com/what-happens-if-i-ignore-an-sec-subpoena/) * [What Does a Securities Lawyer Do?](https://seclaw.com/what-does-a-securities-lawyer-do/) * [SEC Small Business Advisory Committee to Explore Recent Changes to U.S. Small Business Administration’s Small Business Investment Company Program](https://seclaw.com/sec-small-business-advisory-committee-to-explore-recent-changes-to-u-s-small-business-administrations-small-business-investment-company-program/) * [Finders Explained – Be Careful](https://seclaw.com/finders083101/) * [SEC’s OMWI FY 2023 Annual Report Highlights the Agency’s Diversity, Equity, Inclusion and Accessibility Initiatives and Progress](https://seclaw.com/secs-omwi-fy-2023-annual-report-highlights-the-agencys-diversity-equity-inclusion-and-accessibility-initiatives-and-progress/) * [Deciphering Form 10-K and 10-Q](https://seclaw.com/deciphering-form-10-k-and-10-q/) ##### [ Mark J. Astarita](https://seclaw.com/author/admin/) Securities Attorney at [Sallah Astarita & Cox](http://www.sallahlaw.com) | [212-509-6544](tel:212-509-6544) | [mja@sallahlaw.com](mailto:mja@sallahlaw.com) | [Website](http://www.securitieslawyer.us) | [\+ postsBio](#) Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and [FINRA](https://seclaw.com/glossary/finra/) investigations and enforcement proceedings. He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links. * Mark J. Astarita https://seclaw.com/author/admin/ [![SEC subpoena](https://seclaw.com/wp-content/uploads/2015/12/shutterstock_139897957-150x150.jpg)](https://seclaw.com/tips-responding-sec-subpoena/) June 2, 2025 [SEC Subpoenas – Tips for Responding – 2025](https://seclaw.com/tips-responding-sec-subpoena/) * Mark J. Astarita https://seclaw.com/author/admin/ [![securities arbitration](https://seclaw.com/wp-content/uploads/2017/07/shutterstock_335441990-150x150.jpg)](https://seclaw.com/what-is-securities-arbitration/) June 1, 2025 [What is Securities Arbitration?](https://seclaw.com/what-is-securities-arbitration/) * Mark J. Astarita https://seclaw.com/author/admin/ [![Tips for a successful securities mediation](https://seclaw.com/wp-content/uploads/2020/10/Depositphotos_42522815_xl-2015-150x150.jpg)](https://seclaw.com/tips-for-a-successful-securities-mediation/) February 19, 2025 [Tips for a Successful Securities Mediation](https://seclaw.com/tips-for-a-successful-securities-mediation/) * Mark J. Astarita https://seclaw.com/author/admin/ [![](https://seclaw.com/wp-content/uploads/2025/02/create-a-highly-detailed-and-visually-appealing-image-that-represents-150x150.png)](https://seclaw.com/exemption-from-exchange-act-rule-13f-2-and-related-form-sho/) February 8, 2025 [Exemption From Exchange Act Rule 13f-2 and Related Form SHO](https://seclaw.com/exemption-from-exchange-act-rule-13f-2-and-related-form-sho/) ### Share this: * [ Click to share on Facebook (Opens in new window) Facebook ](https://seclaw.com/introduction-private-placements/?share=facebook) * [ Click to share on X (Opens in new window) X ](https://seclaw.com/introduction-private-placements/?share=x) ### Like this: Like Loading... ## Optional ### About Us Source: [https://seclaw.com/about-us/](https://seclaw.com/about-us/) *Optional content available at [https://seclaw.com/about-us/](https://seclaw.com/about-us/)*