Fairness in Securities Arbitration: A Constitutional Mandate?

Abstract:     
This article posits that the close relationship between the Securities Exchange Commission (SEC) and securities employers, known as "SROs," creates state action when the SROs mandate that their employees participate in arbitration as a condition of employment. State action is present because the SEC requires all persons working in the securities industry to register with an SRO (all of whom require employees to arbitrate their disputes), participates actively in developing rules and procedures governing the SRO arbitration process, and encouraged and continues to encourage SROs to utilize arbitration as the primary means for resolving employment disputes. In effect, the SEC is implicitly mandating participation in arbitration through the combination of its registration requirement and its approval and encouragement of the use of arbitration.

The presence of state action in securities arbitration mandates reform of the securities arbitration process. While other changes may be necessary, at the very least, two major alterations are necessary. First, when parties enter peremptory challenges of arbitrators for discriminatory reasons, the party affected by the illicit challenge has a right to dispute the arbitration award. Second, and perhaps more significant, a party's employment claim is entitled to the appropriate amount of procedural due process before the state (here, the SRO) may deprive the individual of the claim. While the securities arbitration process largely comports with due process, one glaring omission is the lack of well-reasoned written opinions. Requiring well-reasoned opinions would dramatically increase arbitrators' accountability. Increased accountability should result in a "better" opinion - better reasoned and more carefully considered. Given the limited increase in cost of requiring a well-reasoned written opinion, the benefits that would accrue in terms of accountability and public perception of the fairness of the securities arbitration process clearly demonstrate the importance of requiring a well-reasoned opinion.

Number of Pages in PDF File: 40

Keywords: Shearson, Gilmer, NASD, NYSE, SICA

JEL Classification: G10, G18, K22, K23, K40, K42

Accepted Paper Series