Securities Arbitration:

How Investors Fare

GGD-92-74: Published: May 11, 1992. Publicly Released: May 12, 1992.

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Pursuant to a congressional request, GAO: (1) provided information on securities broker-dealer policies that require investors to settle disputes through arbitration; (2) analyzed the results of securities arbitration at industry-sponsored forums; and (3) compared those results with results from an independent forum for securities arbitration.

GAO found that: (1) broker-dealers' policies on the use of mandatory arbitration clauses vary by firm size and account type; (2) large firms usually do not require such clauses for individual accounts or individual investors, but do require them for individual investors' margin and options accounts; (3) about 40 percent of medium and small firms require arbitration clauses for individual cash and institutional accounts, but over 90 percent of the medium firms and over 70 percent of the small firms require arbitration clauses for individual investors margin and options accounts; (4) the number of large firms requiring arbitration clauses has remained constant, while the number of small and medium firms requiring the clauses has increased; (5) the forum in which decisions were made in cases initiated by investors did not affect the investors' chances of receiving an award; (6) decision outcomes vary depending on such factors as attorney representation and claim size; (7) when broker-dealers initiate claims, arbitrators' decisions usually favor the broker-dealers and such cases usually involve well-documented debt to the broker-dealer; (8) disputing parties settled about one-third to one-half of the cases reviewed without requiring arbitrators' decisions; (9) there is no indication of pro-industry bias in arbitration decisions at industry-sponsored forums; and (10) the results of securities arbitration at all industry-sponsored forums and independent associations are similar. GAO also found that industry forums lack formal procedures to select and train arbitrators.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: SEC has requested the self-regulatory organizations to determine how this recommendation could be implemented. The SROs have implemented clearer standards for selecting arbitrators, including minimum experience requirements and formalizing procedures for collecting background data on potential arbitrators.

    Recommendation: The Chairman, Securities and Exchange Commission (SEC), should require self-regulatory organizations that administer arbitration forums to develop formal standards for selecting arbitrators.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: SEC has requested the self-regulatory organizations to determine how this recommendation would be implemented. SROs have implemented procedures (1) to verify information submitted by potential arbitrators, (2) to review a central registration depository when an arbitrator applies and once a year thereafter, and arbitrators are asked at the beginning of each panel whether they have been a party to disciplinary proceedings.

    Recommendation: The Chairman, SEC, should require self-regulatory organizations that administer arbitration forums to verify information submitted by prospective and existing arbitrators.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: SEC has requested the self-regulatory agencies to determine how this recommendation could be implemented. The American Arbitration Association has changed its training requirements. The SROs have started requiring new arbitrators to receive mandatory training that addresses areas such as ethical considerations, conduct and arbitration procedures.

    Recommendation: The Chairman, SEC, should require self-regulatory organizations that administer arbitration forums to establish a system to ensure those arbitrators are adequately trained in the arbitration process.

    Agency Affected: United States Securities and Exchange Commission

 

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