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Securities Arbitration: Background and Questions of Fairness

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Publication Date: April 2005

Publisher(s): Library of Congress. Congressional Research Service

Series: RS22127

Topic: Banking and finance (Investments and securities)

Abstract:

When an investor has a dispute with a broker-dealer in which damages of a certain size or more are alleged, it may be mediated by a panel of securities industry and nonsecurities industry arbitrators under the auspices of the NASD. Although the process has been criticized for having a pro-industry bias, research on the issue has not substantiated the bias claims.

A smoothly functioning discovery process is integral to the fairness of arbitration hearings. In recent years, in the wake of the market collapse of 2000, there has been a surge in reported abuse of the discovery process largely concerning brokerage firms. Incidents of abuse have attracted the attention of the NASD and others. But due to the persistence of potentially perverse incentives, the efforts of the NASD to remedy the problems may prove to be unsuccessful. This report provides background on the NASD's securities arbitration process and examines concerns over its fairness. It will be updated as developments warrant.