Summary: The securities industry uses arbitration to resolve disputes between industry members and individual investors that involve hundreds of millions of dollars each year. A 1992 GAO report found no indication of a proindustry bias in the arbitration process but concluded that the forums sponsored by the securities self-regulatory organizations lacked internal controls to provide investors with reasonable assurances that arbitrators were independent and competent. (See GAO/GGD-92-74, May 1992.) GAO recommended ways for the industry to improve arbitrator selection, qualifications, and training. Eight years later, GAO found that the securities industry self-regulatory organizations--the National Association of Securities Dealers and the New York Stock Exchange--have implemented GAO's earlier recommendations by giving arbitration participants a larger role in selecting arbitrators, periodically surveying arbitrators to verify background information, and improving arbitrator training. GAO could not reach conclusions about the fairness of the arbitration process from case outcome statistics. More importantly, GAO found that a number of broker-dealers that had left the securities industry often did not pay the arbitration awards rendered against them. Ultimately, recovering losses caused by undercapitalized, financially irresponsible, or unscrupulous broker-dealers is difficult--if not impossible--for investors.
