Investor Arbitration Reform Urged

While arbitration of customer complaints against Wall Street firms has surged, the system lacks the controls needed to ensure that investors get a fair shake, a congressional study released Tuesday said.

The General Accounting Office, an investigative arm of Congress, also found a tendency among securities arbitrators to “split the baby” and award only a portion of the damages claimed by investors.

The report said that while the arbitration system does not have a pro-industry bias, investors cannot be assured of receiving an independent decision from a qualified arbitrator.

No formal standards exist for selecting arbitrators, and they do not require formal training.

On Capitol Hill, lawmakers seized on the 144-page study as evidence that reforms are needed for the most frequently used method to resolve disputes between investors and brokers.

Typical cases involve investors charging brokerages with misrepresenting investment risks, negligence and unauthorized trading.

Cases are handled by self-regulated organizations such as the nation’s stock exchanges and the National Assn. of Securities Dealers, which oversees over-the-counter trading.

Forums are also provided by independent groups such as the American Arbitration Assn., or AAA.

The study, which did not address the fairness of the arbitration process, found that over the past decade the number of cases filed with self-regulatory groups has skyrocketed 540%--to 5,332 in 1990 from 830 in 1980.

Much of that is believed to be linked to a 1987 Supreme Court ruling that upheld the industry’s right to mandatory arbitration. Firms can require prospective clients to resolve disputes through arbitration rather than the courts.

The GAO said problems exist in the forums offered by self-regulatory groups as well as the AAA.

It cited a lack of internal controls that would provide “a reasonable level of assurance” about “the independence of the arbitrators or their competence in arbitrating disputes.”