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Highlights

Pursuant to a congressional request, GAO provided information on issues relating to the arbitration process in the securities industry, focusing on: (1) whether arbitration forums had implemented recommendations made in GAO's 1992 report and whether the changes were effective; (2) how investors fared in award decisions; and (3) the extent to which investors were paid the amounts awarded by arbitration panels.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
United States Securities and Exchange Commission The Chairman, Securities and Exchange Commission (SEC), should require NASD to adopt procedures for monitoring the payment of arbitration awards. Such procedures should include requesting the parties in an arbitration to notify NASD, by the end of the 30-day payment period, about the payment status of any monetary award, so NASD can begin timely suspension proceedings against nonpaying broker-dealers, as appropriate.
Closed - Implemented
On September 18, 2000, arbitration claimants and NASD member firms are to begin to certify the payment of awards.
United States Securities and Exchange Commission The Chairman, SEC, should require NASD to develop procedures addressing the problem of unpaid awards caused by failed broker-dealers to help reduce costs and increase options for investors, such as the changes NASD is considering.
Closed - Implemented
Effective September 2000, NASD-Dispute Resolution (NASD-DR) began requiring NASD member firms to certify in writing that they have complied with awards against them or their individual brokers. A member must, within 30 days, notify NASD-DR that it paid an award, or that it has a valid basis for nonpayment, such as the filing of a notice to vacate the award. In addition, NASD-DR asks investors to notify it promptly if their awards have not been paid within 30 days of the date that they received the award.
United States Securities and Exchange Commission The Chairman, SEC, should work with the SROs to: (1) develop and publicize information to focus investor attention on the possibility of unpaid arbitration awards; and (2) encourage investors to more thoroughly evaluate the backgrounds of broker-dealers and individual brokers with whom they intend to do business.
Closed - Implemented
SEC and NASD-DR have taken steps to make investors aware that awards may not be paid. SEC has revised its online publications to contain information about the potential for unpaid arbitration awards, and to underscore the importance of thoroughly investigating a broker's disciplinary history. SEC has also added language to the standard letter that it sends to investors who contact it about problems. SROs have also taken action to educate investors about the potential for unpaid awards, and have added detailed information to their websites.
United States Securities and Exchange Commission The Chairman, SEC, should periodically examine the extent of nonpayment of SRO arbitration awards to determine the effectiveness of actions taken to improve the payment of awards. To the extent unpaid awards remain a problem, the Chairman should establish a process to assess the feasibility of alternative approaches to addressing the problem of unpaid awards.
Closed - Implemented
SEC plans to periodically inspect NASD-DR's procedures for monitoring award payment and taking disciplinary action against member broker-dealer firms and individual brokers that have not paid awards. SEC agreed to consider the feasibility of other approaches to addressing the problem if unpaid awards remain a problem. SEC has identified options to explore with NASD and is monitoring award payment data. In the Follow-up report on Matters Relating to Securities Arbitration (GAO-03-162R), GAO found the rate of unpaid awards to have diminished since the June 2000 report, and that SEC and the SROs have taken steps to contain the problem of unpaid awards. In responding to the follow-up report, SEC agreed to continue to consider how SEC and NASD programs can continue to reduce the incidence of unpaid awards.

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