Employment Disputes: Recommendations to Better Ensure That
Securities Arbitrators Are Qualified (29-AUG-03, GAO-03-790).
Employees in the securities industry must submit to binding
arbitration in most employment disputes. The Securities and
Exchange Commission (SEC) is responsible for overseeing these
arbitration programs--the largest being run by NASD and the New
York Stock Exchange (NYSE). The Congress asked GAO to examine (1)
the circumstances under which NASD and NYSE will arbitrate
employment and employment discrimination disputes, and their
procedures for selecting and evaluating their arbitrators; (2)
the characteristics and outcomes of arbitrated employment and
employment discrimination disputes at NASD and NYSE over the last
10 years; and (3) how SEC oversees the arbitration programs at
NASD and NYSE and the results of these oversight activities.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-790
ACCNO: A08261
TITLE: Employment Disputes: Recommendations to Better Ensure
That Securities Arbitrators Are Qualified
DATE: 08/29/2003
SUBJECT: Arbitrators
Brokerage industry
Disputes clauses
Employment discrimination
Performance measures
Personnel evaluation
Self-regulatory organizations
Dispute resolution
Personnel qualifications
******************************************************************
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GAO-03-790
Report to Congressional Requesters
United States General Accounting Office
GAO
August 2003 EMPLOYMENT DISPUTES
Recommendations to Better Ensure That Securities Arbitrators Are Qualified
GAO- 03- 790
Arbitration is generally required for most employment disputes, except
those dealing with discrimination claims. NYSE will only arbitrate
discrimination cases when parties involved agree to arbitrate after the
dispute occurs. NASD will arbitrate employment discrimination cases based
on agreements entered into between employees and firms before or after a
dispute occurs. NASD has instituted additional requirements, however, for
these cases, such as requiring that arbitrators not be affiliated with the
securities industry. In addition, those chairing hearings for employment
discrimination cases must hold a law degree, have 10 years of legal
experience, have substantial familiarity with employment laws, and must
not have primarily represented employers or employees in the last 5 years.
To qualify to hear cases, NASD and NYSE require that arbitrators have at
least 5 years of work experience, supply two letters of recommendation,
and complete training in basic arbitration procedures. Arbitrators must
also provide information on their complete employment history, including
any affiliation with the securities industry, as well as information on
whether they have any regulatory or criminal history. Neither organization
independently verifies the qualifications for applicants not associated
with the securities industry. In addition NASD and NYSE have standard
procedures for ensuring that arbitrators selected to hear cases do not
have conflicts and for evaluating arbitrator performance. However,
evaluations of arbitrators by staff, parties in disputes and other
arbitrators on cases are not always completed. Officials at NASD and NYSE
noted that if they receive no information about an arbitrator*s
performance on a case, they assume that the arbitrator*s performance was
adequate.
Over the last 10 years, 261 (17 percent) of the 1,546 employment disputes
arbitrated at NASD or NYSE included a discrimination claim. Discrimination
cases differed from cases with disputes that did not involve
discrimination in the following ways:
Discrimination cases required more hearing sessions.
Employees won discrimination cases less often than cases not involving
discrimination claims.
In cases that employees won, the monetary award in discrimination cases
was generally larger than in cases not involving discrimination.
SEC periodically inspects NASD and NYSE arbitration programs. On the basis
of its inspections, SEC has recommended improvements. In its most recent
inspections of NASD and NYSE, SEC made various recommendations concerning
procedures for ensuring that arbitrators are qualified. In addition, SEC
recommended that one or both improve procedures for recording information
on arbitrator performance in a central database and for disqualifying
arbitrators who are poor performers. Employees in the securities industry
must submit to binding
arbitration in most employment disputes. The Securities and Exchange
Commission (SEC) is responsible for overseeing these arbitration programs*
the largest
being run by NASD and the New York Stock Exchange (NYSE). The Congress
asked GAO to examine (1) the circumstances under which NASD and NYSE will
arbitrate employment and employment discrimination disputes, and their
procedures for selecting and evaluating their arbitrators; (2) the
characteristics and outcomes of arbitrated employment and employment
discrimination disputes at NASD and NYSE over
the last 10 years; and (3) how SEC oversees the arbitration programs at
NASD and NYSE and the results of these oversight activities.
To help ensure that only qualified arbitrators hear employment and
employment discrimination cases at NASD and NYSE, GAO recommends that SEC
direct NASD and NYSE to verify the background
information provided by all arbitrator applicants. In addition, GAO
recommends that SEC, during its next inspections, continue to review the
adequacy of NASD*s and NYSE*s procedures for evaluating arbitrator
performance. SEC, NASD and NYSE all expressed support for the second
recommendation, but SEC and NYSE raised concerns about
requiring verification at NYSE.
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 790. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Robert Robertson at (202) 512- 9889 or robertsonr@
gao. gov. Highlights of GAO- 03- 790, a report to
congressional requesters
August 2003
EMPLOYMENT DISPUTES
Recommendations to Better Ensure That Securities Arbitrators Are Qualified
Page i GAO- 03- 790 Employment Disputes in the Securities Industry Letter
1 Results in Brief 2 Background 4 Both NASD and NYSE Have Policies and
Procedures Intended to
Promote Fair Arbitration for all Cases 7 Over the Last 10 Years,
Relatively Few Employment Disputes Involved Discrimination, and Some
Variations Existed between These Cases and Other Employment Disputes 17
SEC Oversight Found SROs Could Improve Procedures to Ensure
Arbitrators Are Qualified and Perform Well 28 Conclusions 32
Recommendations 33 Agency and SRO Comments 33 Appendix I Scope and
Methodology 36 Determining the Characteristics and Outcomes of Arbitrated
Employment Disputes 36 Determining Arbitrator Performance 37 Determining
the Content of SEC Complaint Letters 38 Appendix II Comments from the
Securities and Exchange Commission 39
Appendix III Comments from NASD 41
Appendix IV Comments from the New York Stock Exchange 47
Appendix V GAO Contacts and Staff Acknowledgments 51 GAO Contacts 51 Staff
Acknowledgments 51 Contents
Page ii GAO- 03- 790 Employment Disputes in the Securities Industry Table
Table 1: Types of Discrimination Claims in Employment Cases at NASD and
NYSE, 1993 through 2002 18 Figures Figure 1: Application Process 11 Figure
2: Types of Evaluations Arbitrators Received at NASD 15 Figure 3: How NASD
Arbitrators Were Rated 16 Figure 4: Number of Cases Involving
Discrimination at NASD and
NYSE, 1993 through 2002 19 Figure 5: Median Number of Hearing Sessions for
Discrimination and Nondiscrimination Cases at NASD, 1993 through 2002 20
Figure 6: Median Number of Hearing Sessions for Discrimination and
Nondiscrimination Cases at NYSE, 1993 through 2002 21 Figure 7: Percentage
of Discrimination and Nondiscrimination Cases at NASD and NYSE from 1993
through 2002, by Amount Claimed 22 Figure 8: Percentage of Cases at NASD
and NYSE in Which
Employees Were Awarded Compensatory Damages, 1993 through 2002 24 Figure
9: Percentage of Discrimination and Nondiscrimination
Cases at NASD and NYSE in Which Employees Were Awarded Compensatory
Damages, 1993 through 2002 25 Figure 10: Percentage of Cases Won at NASD
and NYSE from 1993
through 2002 by Amount Awarded 26 Figure 11: Percentage of Discrimination
and Nondiscrimination Cases at NASD and NYSE from 1993 through 2002, by
Amount Awarded 27 Figure 12: Focus of SEC Inspections of NASD and NYSE,
1995- 2002 29
Page iii GAO- 03- 790 Employment Disputes in the Securities Industry
Abbreviations
CRD Central Registration Depository EEOC Equal Employment Opportunity
Commission NYSE New York Stock Exchange SAC Securities Arbitration
Commentator SEC Securities and Exchange Commission SRO self- regulatory
organization
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materials separately from GAO*s product.
Page 1 GAO- 03- 790 Employment Disputes in the Securities Industry
August 29, 2003 The Honorable John D. Dingell Ranking Minority Member
Committee on Energy and Commerce House of Representatives
The Honorable Edward J. Markey Ranking Minority Member Subcommittee on
Telecommunications
and the Internet Committee on Energy and Commerce House of Representatives
Most employment disputes in the securities industry must be arbitrated*
resolved by a neutral third party* because mandatory arbitration of such
disputes is often a condition for employment in the securities industry.
Arbitrators have the authority to make legally binding decisions that can
only be appealed on limited grounds. Their decisions can have serious
consequences for an employee*s career or livelihood since employee cases
can involve such issues as salary, performance evaluations, and alleged
discrimination. To resolve disputes filed by employees, the securities
firms rely on the arbitration programs run by self- regulatory
organizations (SRO) 1 , which regulate the firms in the securities
industry that are their members. Two SROs, NASD 2 and the New York Stock
Exchange (NYSE), run the largest arbitration programs. While NASD and NYSE
are responsible for operating arbitration programs, the federal
government, through the Securities and Exchange Commission (SEC), oversees
NASD and NYSE to help ensure that arbitration procedures are fair and the
rights of all parties to the arbitration process are protected.
1 SROs have an extensive role in regulating the U. S. securities markets,
including ensuring that members comply with federal securities laws and
SRO rules. SROs include all the registered U. S. securities exchanges and
clearing organizations, NASD, and the Municipal Securities Rulemaking
Board. 2 NASD was formerly known as the National Association of Securities
Dealers, but now
goes solely by the acronym.
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 03- 790 Employment Disputes in the Securities Industry
Recently you raised concerns about the fairness of the arbitration process
and the quality of arbitrators, especially in cases involving alleged
employment discrimination.
In response to your concerns about the arbitration of employment cases,
this report examines (1) the circumstances under which NYSE and NASD will
arbitrate employment and employment discrimination disputes and each SRO*s
procedures for selecting and evaluating their arbitrators; (2) the
characteristics and outcomes of arbitrated employment and employment
discrimination disputes at NYSE and NASD over the last 10 years; and (3)
how SEC oversees the arbitration programs at NYSE and NASD and the results
of these oversight activities. In response to your request, we conducted
interviews with officials from
SEC, NYSE, NASD, and other established arbitration forums. In addition, we
analyzed existing rules and procedure manuals governing NASD and NYSE. To
determine how employees fared in securities arbitration, we analyzed data
on 10 years of arbitration cases filed by employees at NASD or NYSE in
which arbitrators had issued decisions (referred to as awards).
Specifically, we calculated the rates reflecting the extent to which
employees won awards, how much employees were compensated in awards, and
various factors that could influence arbitration outcomes. Finally, to
review SEC*s oversight activities, we reviewed a random sample of
complaint letters SEC received concerning arbitration and its inspection
reports for NYSE and NASD over the last 10 years, concentrating on issues
concerning arbitrator qualifications and arbitrator performance. Appendix
I contains a detailed description of our scope and methodology and
describes the reliability and limitations of our data. We performed our
work between August 2002 and June 2003 in accordance with generally
accepted government auditing standards.
Both NASD and NYSE have policies and standard procedures intended to
ensure fair arbitration in all disputes, but the circumstances under which
they will arbitrate employment and employment discrimination cases differ.
Arbitration is required for most employment disputes in the securities
industry, except for discrimination cases. NASD will arbitrate employment
discrimination cases based on agreements entered into between employees
and firms before or after a dispute occurs. NASD has instituted additional
requirements, however, for these cases, such as requiring that arbitrators
not be affiliated with the securities industry. In addition, those
chairing hearings for employment discrimination cases must hold a law
degree, have 10 years of legal experience, have substantial Results in
Brief
Page 3 GAO- 03- 790 Employment Disputes in the Securities Industry
familiarity with employment laws, and must not have primarily presented
employers or employees in the last 5 years. NYSE, on the other hand, will
only arbitrate if both parties agree after a discrimination claim has been
asserted. To qualify to hear cases, NASD and NYSE require that applicants
provide information on their employment history, including their
affiliation with the securities industry as well as information on whether
they have any regulatory or criminal disciplinary history, have at least 5
years of work experience, supply two letters of reference, and complete
training in basic arbitration procedures. Neither organization verifies
the qualifications submitted by applicants not associated with the
securities industry. In addition, NASD and NYSE have standard procedures
for ensuring that arbitrators selected to hear cases do not have
conflicts, for evaluating arbitrator performance, and for removing poorly
performing arbitrators from their rosters. As an indication of how well an
arbitrator conducts hearings and makes decisions, NASD and NYSE rely
primarily on the evaluations of arbitrators by staff, parties in disputes,
and other arbitrators on cases. However, since some of these evaluations
are voluntary, not all NASD or NYSE arbitrators are evaluated for every
case they hear. Officials at each SRO reported that if they receive no
information about an arbitrator*s performance on a case, they assume that
the arbitrator*s performance was adequate.
Over the last 10 years, 261 (17 percent) of the 1,546 employment disputes
arbitrated by NYSE and NASD involved one or more discrimination claim( s),
most often related to age or sex, and the characteristics and outcomes of
discrimination cases were somewhat different from those cases not
involving discrimination. Disputes involving discrimination required more
hearing sessions and took longer to complete than cases with no
discrimination claims. The compensatory damages claimed for the majority
of cases, whether or not it included a discrimination claim, was over
$100,000. Although the majority of employees were awarded some
compensatory damages, employees in discrimination cases were less likely
to be awarded any compensatory damages. Most employees in discrimination
cases who were awarded compensatory damages, however, received more than
their counterparts in cases not involving discrimination.
Based on periodic inspections of NASD and NYSE and reviews of complaint
letters, SEC has found problems with procedures that one or both SROs used
to oversee arbitrator qualifications and track arbitrator performance. SEC
inspections generally include a review of arbitration procedures,
interviews with staff, and a review of arbitrator profiles and closed
cases, including both employment and employment discrimination
Page 4 GAO- 03- 790 Employment Disputes in the Securities Industry
cases. According to SEC officials, complaint letters can affect the focus
of an inspection, but we found that SEC receives relatively few letters
concerning employment arbitration. In its most recent inspections of NASD
and NYSE, SEC made various recommendations concerning procedures for
ensuring that arbitrators are qualified. In addition, SEC recommended
improving procedures for recording information on arbitrator performance
in a central database and for disqualifying arbitrators who are poor
performers. For example, SEC recommended that arbitrators* files be
updated to reflect changes submitted by arbitrators that affect their
qualifications. Both NYSE and NASD have taken steps to implement SEC*s
recommendations.
To help ensure that all NASD and NYSE arbitrators possess the
qualifications required by their SRO, we recommend that SEC direct NASD
and NYSE to verify the basic background information provided by all new
applicants for their arbitrator rosters. We also recommend that SEC,
during its next inspections, continue to review the adequacy of NASD and
NYSE procedures for evaluating arbitrator performance. SEC, NASD, and NYSE
all expressed support of the second recommendation, but SEC and NYSE
raised concerns about requiring verification of information for arbitrator
applicants at NYSE. We continue to believe the value of authenticating
basic background information of arbitrator applicants outweighs these
concerns because it will increase party confidence in arbitration, a
process that is required for the majority of disputes. NASD
indicated the steps they have taken to begin verifying the background
information for all new arbitrator applicants.
The arbitration of disputes first occurred at NYSE in the late nineteenth
century but eventually became the practice within the securities industry
in general. Arbitration was used to settle disputes over employee
contracts, and in 1991 the U. S. Supreme Court ruled that an age
discrimination claim brought forth by a securities industry employee could
be subject to mandatory arbitration. 3 Subsequent court decisions
permitted the use of mandatory arbitration for resolving other employment
discrimination disputes, including sexual harassment. 4 3 Gilmer v.
Interstate/ Johnson Lane Corp., 500 U. S. 20 (1991).
4 Alford v. Dean Witter Reynolds, Inc., 939 F. 2d 229 (5th Cir. 1991);
Cremin v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 957 F. Supp. 1460
(N. D. Ill. 1997); andCircuit City v. Adams, 532 U. S. 105 (2001).
Background
Page 5 GAO- 03- 790 Employment Disputes in the Securities Industry
Proponents of mandatory arbitration believe it is an efficient,
costeffective way to resolve conflicts between employers and their
employees. Opponents of mandatory arbitration believe that it puts
employees at a disadvantage. They argue that discovery, the process by
which parties exchange documents and other information relevant to their
case, is limited, hearings take place outside of public scrutiny, and
arbitrators favor employers, who are more likely to be *repeat users* than
employees. 5 SROs include NYSE that operates and regulates its market, as
well as
NASD, a private- sector provider of financial regulatory and dispute
resolution services. 6 Their responsibilities include overseeing the
arbitration of claims brought in the securities industry by customers,
firms, 7 and employees as required by the Securities and Exchange Act of
1934 (the Exchange Act). 8 In 2000, NASD established a separate subsidiary
to administer its arbitration program. The subsidiary is headquartered in
Washington, D. C., and New York City, but also maintains staff in five
regional offices. NYSE administers fewer arbitration cases than NASD and
its arbitration program, which is administered by its Department of
Arbitration in New York, is much smaller. NASD*s subsidiary operates with
a staff of about 200 while NYSE maintains a staff of approximately 18. In
addition, NASD currently has approximately 7,000 arbitrators on its
roster,
while NYSE has 1,905. Arbitrators play a key role in resolving disputes
brought forth in the securities industry and their performance has a
direct bearing on the fairness of a hearing. Like judges, they oversee the
administration of proceedings, including determining the number of hearing
sessions a case
5 According to NYSE, the overwhelming majority of employees in arbitration
are represented by attorneys who specialize in employment law. 6 Although
NASD and Nasdaq are in the process of separating, as of this date NASD is
the
SRO and Nasdaq is a subsidiary of NASD. Nasdaq*s application for Exchange
Registration status as a registered securities exchange under Section 6 of
the Exchange Act is still pending before SEC. NASD delegates to NASD
Regulation, its wholly owned subsidiary, SRO responsibilities as its
regulatory arm. 7 Firms must register with an SRO to operate within the
securities industry and must abide by its rules. 8 Customers bring the
majority of arbitration cases in the securities industry. For example,
in 2002, 78 percent of all decided cases at NASD were customer cases.
Similarly, in 2002, only approximately 9 percent of all cases filed with
NYSE were filed by employees.
Page 6 GAO- 03- 790 Employment Disputes in the Securities Industry
requires and what evidence can be admitted. 9 Unlike judges, arbitrators
are not required to base their decisions on legal precedent or to provide
any reasoning for their decisions. In addition, their decisions* unlike
those rendered in court* can only be appealed on limited grounds.
SEC is responsible for regulating securities market participants,
including SROs such as NASD and NYSE. In addition to overseeing SROs
through its inspections, SEC approves the rules they use to administer
their arbitration programs to ensure they comply with the Exchange Act and
other securities laws and rules. When SROs propose new rules or change
existing rules, they are required to file them with SEC for approval. 10
SEC then provides interested parties an opportunity to comment on proposed
rules or rule changes. In general, SEC is to approve certain new or
amended rules within 90 days after they are published or institute
proceedings to determine whether they should be disapproved.
9 At both NASD and NYSE, arbitrators are classified as either public or
nonpublic (NYSE uses the term industry). A nonpublic arbitrator is someone
from the securities industry, retired from or has spent a substantial part
of their career in the securities industry, or is an attorney, accountant,
or professional who devoted more than 20 percent of his or her
professional work to securities industry clients in the last 2 years.
Public arbitrators then are those arbitrators who do not fall into the
industry category and in addition do not have a spouse or a household
member (referred to as an immediate family member at NASD) who is
associated with someone in the securities industry. In June 2003, NASD
filed proposed amendments to rules contained in its Code of Arbitration
Procedure regarding the classification of public arbitrators. The purpose
of proposed rule amendments was to
further ensure that individuals with significant ties to the securities
industry may not serve as public arbitrators. 10 Certain rules proposed by
SROs that deal with a narrow list of topics, such as rules that establish
or change dues, fees, or other charges that can become effective upon
filing with SEC without action by SEC. SEC is required to publish notice
of the proposed rule changes filed by the SRO and the rule change is
subject to a 21- day comment period that begins when the notice of the
filing is published. Within 60 days of SRO*s filing of a rule that is
effective upon filing, SEC can annul the rule change and require that the
rule be refiled under the normal notice and comment period.
Page 7 GAO- 03- 790 Employment Disputes in the Securities Industry
In most employment disputes, arbitration is mandatory, although for
discrimination cases NYSE rules strictly limit its use and NASD has
instituted additional requirements. For both customer and employment
disputes, both SROs require that all arbitrators have certain
qualifications in order to be on their rosters of available arbitrators.
However, neither
SRO verifies the qualifications for all of the arbitrators on their
rosters. Both SROs have procedures designed to ensure that the arbitrators
selected to hear cases do not have conflicts and have procedures for
evaluating arbitrator performance. Yet, arbitrators who hear cases at both
SROs may not be receiving evaluations on a routine basis.
Prior to 1999, both NASD and NYSE rules required the mandatory arbitration
of all employment- related disputes, including discrimination claims. 11
In the 1990s, as discrimination claims filed at NASD rose, 12 some Members
of Congress challenged the use of mandatory arbitration for discrimination
disputes. In 1997, the Equal Employment Opportunity Commission (EEOC),
which is responsible for enforcing the nation*s employment discrimination
laws, published a policy statement opposing the use of mandatory
arbitration agreements for these disputes. Opposition to mandatory
arbitration for these claims stemmed from concerns that arbitration
eliminated the role the courts played in deterring discrimination and
protecting employees. In addition, others believed that many arbitrators
were unfamiliar with antidiscrimination laws and,
therefore, could not provide a fair hearing on these claims. NASD and NYSE
took different approaches in changing their rules to address these
concerns. NYSE followed EEOC*s recommendation and only arbitrates
discrimination claims when all parties agree to arbitration after the
dispute occurs. NASD, on the other hand, no longer requires that employees
arbitrate employment discrimination disputes, but will arbitrate these
disputes, based on agreements employees have made before or after the
dispute occurs. 13 The net result is that NASD will administer arbitration
11 Associated persons of broker- dealers accept the rules of SROs by
signing the U- 4, the application they must complete to become registered
with a SRO. Within the U- 4, applicants agree to arbitrate any dispute
claim or controversy that is required to be arbitrated under the rules,
constitutions, or by- laws of the SRO. 12 Discrimination claims filed rose
from 4 in 1991 to 109 in 1996 (see Federal Register, 62, 242). 13 As
approved by SEC, effective January 1, 1999, NASD*s Code of Arbitration
Procedures were amended so that registered persons were no longer required
to arbitrate claims of statutory employment. Both NASD and NYSE
Have Policies and Procedures Intended to Promote Fair Arbitration for all
Cases
Arbitration Is Required for Most Employment Disputes, Although for
Discrimination Cases NYSE Has Strictly Limited Its Use and NASD Has
Instituted Additional Requirements
Page 8 GAO- 03- 790 Employment Disputes in the Securities Industry
cases that include discrimination claims if the parties have entered into
an agreement to do so. This includes policies employees sign as a
condition of employment. According to NASD, in conjunction with this rule
change, they assembled a working group 14 to consider recommendations
contained in a document known as *A Due Process Protocol for Mediation and
Arbitration of Statutory Disputes Arising out of the Employment
Relationship.* This Due Process Protocol was developed in 1995 by a
committee of representatives from a range of organizations, 15 to provide
arbitration procedures for statutory employment claims. Following NASD*s
review of this protocol NASD introduced additional requirements for these
types of claims. 16 Changes ranged from setting qualifications for
arbitrators who chair
arbitrator panels 17 to specifying how arbitrators documented their
decisions.
The arbitrator chairing a discrimination case at NASD must hold a law
degree, have 10 years of legal experience, have substantial familiarity
with employment law, and must not have primarily 18 represented employers
or employees in the last 5 years. 19 In addition to special chair
qualifications, all the arbitrators who hear cases with discrimination
claims must also be classified as *public** that is, individuals who are
not affiliated with the securities industry either professionally or
through their family relationships. For employment discrimination claims
of $100,000 or less, a
14 The working group included attorneys representing employees, general
counsels of member firms, and arbitrators with expertise in employment
matters. 15 Organizations represented were involved in labor, employment
law, and alternative dispute resolutions. 16 NASD has also adopted rules
to allow claims to be consolidated in one case, meaning if someone chooses
to take a discrimination claim to court they will also be allowed to
combine nondiscrimination claims in that case. 17 Arbitration cases are
heard by one or three arbitrators, depending on the size of the claim. In
discrimination cases where there is only one arbitrator, that arbitrator
must also meet
these requirements. 18 Primarily is defined as 50 percent or more of the
arbitrator*s business or professional activities. 19 Arbitrators who
qualify to serve as chairs on discrimination disputes are asked to provide
a summary description of their qualifications for discrimination disputes,
which is
presented to the parties in the case. This summary is in addition to the
narrative summary that all arbitrators must provide regarding their
general arbitrator qualifications.
Page 9 GAO- 03- 790 Employment Disputes in the Securities Industry
single public arbitrator is appointed, and for claims greater than this
amount a panel of three public arbitrators is selected. 20 In disputes
subject to arbitration that arise out of the employment or
termination of employment of an associated person, and that relate
exclusively to disputes involving employment contracts, promissory notes
or receipt of commissions, a single *nonpublic* arbitrator* that is
someone who is affiliated with the securities industry* can only hear
nondiscrimination claims of $50,000 or less. In similar cases with claims
of $50,000 or more, a panel composed of three nonpublic arbitrators is
appointed. Currently, arbitrator chairs in cases without discrimination
claims need the same qualifications as any arbitrator. 21 At NYSE, all
employment disputes, at the option of the employee, are entitled to a
panel of three arbitrators, and a majority of the arbitrators cannot be
from the industry unless the employee requests it. NASD rules, adopted in
2000, also made two changes to procedures
concerning arbitrator decisions in cases with employment discrimination
claims. First, the rules specifically state that arbitrators can award
*reasonable* attorney*s fees for discrimination claims. 22 This change
also creates an incentive for attorneys to take discrimination cases
because it provides greater assurance that they will be compensated for
their work if
they are successful. Second, NASD*s rule change requires arbitrators to
document the disposition of discrimination claims, something not required
for the other claims. While this rule still does not require arbitrators
to explain their decisions, it requires arbitrators to specify for the
parties how they ruled on any statutory discrimination claim.
20 Parties may agree to have the case determined by a single arbitrator.
21 NASD is now considering expanding the qualifications for arbitrator
chairs by requiring them to take the chair- training course and to have
participated in a certain number of arbitration cases. According to NASD
officials, having chairs be more familiar with the legal process would
help the arbitration process.
22 SEC stated in its order approving NASD*s rule that it approved *the
specific provision governing attorneys fees in cognizance of the special
attention to them under the civil rights laws* and that *awards of
attorney*s fees by arbitrators remain available to all parties in other
cases administered under the Code of Arbitration Procedure, if applicable
law permits such an award.* Self- Regulatory Organizations; Order
Approving a Proposed Rule Change by the National Association of Securities
Dealers, Inc., Relating to the Arbitration Process for Claims of
Employment Discrimination, Release No. 34- 42061 (Oct. 27, 1999).
Page 10 GAO- 03- 790 Employment Disputes in the Securities Industry
Both SROs require that all applicants for the arbitrator roster provide
information on their affiliation with the securities industry, have 5
years of work experience, supply two letters of recommendation, and
complete
training in basic arbitration procedures. 23 Recommendation letters must
include particular information about the person writing the letter, the
prospective arbitrator, and an attestation as to the character and fitness
of the nominee. NASD also requires that applicants take a multiple choice
examination and receive a passing score of at least 80 percent. (See fig.
1.) After receiving arbitrator applications from applicants who work or
worked in the securities industry, the SROs check the Central Registration
Depository (CRD), a computerized database that contains the educational,
work, and disciplinary history for current and former securities
registered persons. 24 Therefore, the CRD only covers arbitrators
classified as
nonpublic. Currently, information from arbitrator applicants not employed
in the securities industry is not checked by the SROs, but NASD is
proposing a rule change that would require the verification of background
information on all new arbitrators. 25 23 On the application form
arbitrators are also asked to answer a series of questions on
whether they have engaged in criminal activities and provide information
on their affiliation to the securities industry* something arbitrators are
required to update on an ongoing basis. For more information on arbitrator
disclosure requirements, see U. S. General Accounting Office, Follow- up
Report on Matters Relating to Securities
Arbitration, GAO- 03- 162R (Washington, D. C.: Apr. 11, 2003) and Michael
A. Perino, Report to the Securities and Exchange Commission Regarding
Arbitrator Conflict Disclosure Requirements in NASD and NYSE Securities
Arbitrations (Nov. 4, 2002).
24 NASD and the North American Securities Administrators Association
established the CRD in 1981 and its use allows individual brokers and
firms to meet both state and federal reporting requirements. NASD has
instituted a statistical quality control process to measure the accuracy
of disclosures and has periodic examinations done of the data by data
quality professionals.
25 In August 2003, NASD filed a rule proposal with SEC, which would
require that new arbitrator applicants have background information
verified for federal and county criminal records, employment information,
and professional licenses (SR- NASD- 2003- 122). Both SROs Have Similar
Qualifications for Arbitrators and Neither Verify the Qualifications of
All Applicants
Page 11 GAO- 03- 790 Employment Disputes in the Securities Industry
Figure 1: Application Process
a A computerized database that holds the educational, work, and
disciplinary history for current and former securities registered persons.
NASD reported that verifying the background information on all new
arbitrators would enhance the reputation of its arbitration program. If
SEC approves its rule change, NASD will use an independent firm to conduct
the background checks and will pass the cost of this process* expected to
be between $60 and $85* onto the applicant. NYSE did not report any plans
to change its procedures at this time.
At NASD, once arbitrators* applications are approved, they must take a
half- day introductory training course, be evaluated by the trainer, and
pass a 25- question multiple choice examination on arbitration procedures.
Once
they pass the examination and evaluation by the trainer, they are included
on the NASD arbitrator roster. At NYSE, on the other hand, once an
application is reviewed and approved by staff, the applicant is considered
able to arbitrate any case once he or she participates in one training
course on arbitration procedures and conduct issues. 26 Ongoing training
at both SROs is limited. NYSE requires that arbitrators
continue to attend at least one training course every 4 years. 27 NASD
does not have such a requirement but does offer chairperson training for
those
26 Arbitrators can fulfill their training requirement by reviewing the
arbitrator conduct and procedures with NYSE staff prior to a hearing. In
addition, NYSE reported that many of their new applicants have experience
and training from other arbitration forums.
27 NYSE can waive this requirement.
Basic information applicant must provide
NYSE & NASD:
. Work experience and education. . Information on all affiliations with
the securities industry.
. Information on all regulatory and criminal activities.
. Two letters of reference.
Verification of background information
NYSE & NASD:
. Check CRD a for those applicants who worked in the securities industry.
. Neither checks background information of applicants who did not work in
the securities
industry.
Arbitrator training requirements
NASD:
. Applicants attend training and pass a written test before being placed
on the roster.
NYSE:
. Arbitrators attend training within 1 st year on the roster and before
arbitrating a case.
Source: NASD and NYSE.
Page 12 GAO- 03- 790 Employment Disputes in the Securities Industry
arbitrators wanting to chair cases. 28 One SEC official raised concerns
about mandating ongoing training for arbitrators, arguing that it may
discourage the most experienced arbitrators from serving.
Both SROs, recognizing that arbitrators are one of the key factors to
ensuring a fair and efficient process, have developed procedures to help
ensure that the selection of arbitrators for a case is unbiased. Prior to
1998, NASD staff selected arbitrators based on the issues in the case and
the expertise the arbitrators held. In 1996, a NASD task force, organized
to review the securities arbitration process, reported that claimants and
their
representatives were concerned that staff could be biased in selecting
arbitrators. To address this concern, NASD changed how arbitrators were
selected. Since 1998, NASD has allowed both parties involved in a dispute
to choose the arbitrators, which limited NASD staff involvement in the
selection process. 29 NASD provides parties with a computer- generated
list of up to 15 arbitrators with profiles for each arbitrator. 30 An
arbitrator*s
profile includes a paragraph on the arbitrator*s background, a summary of
the arbitrator*s education and work history, the arbitrator*s experience,
the arbitrator*s disclosure and conflict information, and a list of all
the publicly available award decisions that the arbitrator has rendered.
Each party may peremptorily strike any arbitrator from the list, then
ranks the arbitrators who remain by order of preference. If the parties do
not mutually agree on an acceptable number of arbitrators after striking
and ranking, the list is extended by the computer and the parties are
assigned the next available arbitrator( s) on the computerized roster.
While this process reduces the potential for staff bias, some arbitrators
have raised concerns that a computer- generated list may not contain
arbitrators with substantial experience.
In 2000, NYSE also began giving parties three options for selecting
arbitrators: (1) choosing randomly from a list drawn from all available
28 In mid- 2003, NASD Chairperson training was converted to an online
interactive program. 29 At that time, NASD reviewed all arbitrators on its
roster and sent out letters to all arbitrators requesting that they update
their profiles; in the process, NASD removed 800 to 1,000 arbitrators on
its roster. 30 The composition of the lists depends on the size of the
claim and the nature of the dispute. For example, in employment
discrimination cases being heard by three arbitrators (claims of more than
$100,000), the list will contain the names of 10 public arbitrators, plus
the names of 5 public arbitrators who meet the special additional
requirements to chair discrimination cases. Both SROs Have Procedures for
Selecting
Arbitrators for Cases Intended to Ensure That They Are Unbiased
Page 13 GAO- 03- 790 Employment Disputes in the Securities Industry
arbitrators; (2) choosing from a list the staff compiles; or (3) having
NYSE staff attorneys select, the only procedure used prior to 2000. If all
parties cannot agree on one of these options, staff attorneys determine
who will arbitrate. According to NYSE, staff selection has remained the
most common method for selecting arbitrators, with parties using it for
about 85 percent of the cases. Since this method is the default if parties
cannot agree, it is not possible to determine how often this method was
actually chosen by parties, or used as the default.
At both NASD and NYSE, arbitrators selected to serve on cases are asked to
review the case and determine if they have any possible conflicts of
interest. In addition, arbitrators must update their profile, which
includes information on their employment history and affiliation with the
securities industry. Both NYSE and NASD will remove arbitrators from their
roster if they misstate or fail to disclose information concerning
conflicts of interest.
Each SRO has developed three types of evaluations for arbitrators: (1)
party evaluations, completed by either party or their attorneys; (2) peer
evaluations, completed by other arbitrators who hear the case; and (3)
staff evaluations. Both SROs summarize evaluation results and
input them into a centralized arbitrator database. According to NASD
officials, staff are required to summarize and input only negative
comments on an arbitrator, although SEC staff noted that in practice it
also often sees positive comments from NASD staff recorded in the files.
NYSE officials, on the other hand, reported recording a complete summary
of the evaluations. NASD conducts quarterly audits in which they check to
see if staff members are consistently entering information in the
centralized database and documenting actions taken concerning any
evaluations. In addition, the audits review how complaint letters have
been recorded, reviewed, and resolved.
Both SROs reported that it has been difficult for them to get parties to
return evaluations. 31 Yet, NYSE reported that response rates have
increased since it began requiring that arbitrator chairs encourage
parties to complete the evaluations and reiterate that the evaluations are
31 NASD reported that it is currently working to allow parties and
arbitrators to complete and return evaluations online and that this
feature would increase the number of evaluations completed. Both SROs Have
Procedures to Track Arbitrator Performance, Although Many Arbitrators May
Not Be Evaluated
Page 14 GAO- 03- 790 Employment Disputes in the Securities Industry
confidential and will not affect the case outcome. NYSE said that peers
are very responsive with evaluations. NYSE said it requires that staff
observe new arbitrators for their first hearing at NYSE and said it sought
to evaluate all arbitrators, who serve on a case that goes to a hearing,
at least once a year. Although NYSE said that it had fulfilled this
requirement in 2002, NYSE could not provide data on evaluations showing
that arbitrators had been observed. NASD could not report how often staff
evaluate arbitrators. Officials from both SROs said that if no information
is received about an arbitrator on a case, they assume the arbitrator
performed
adequately. To gain a better understanding of how often arbitrators were
evaluated, we reviewed the records of 124 out of the 494 arbitrators at
NASD who had heard discrimination claims and/ or other employment claims
between January 2001 and June of 2002. 32 On the basis of this sample, we
estimate that about 45 percent of arbitrators who heard cases during this
time had received some type of evaluation and of those only about 2
percent received all three types of evaluations* peer, party, and staff.
(See fig. 2 for a breakdown of the types of evaluations arbitrators
received.)
32 We did not review arbitrator records at NYSE because its current
computer system did not allow NYSE to provide us with the data we sought,
within the time frame for this report.
Page 15 GAO- 03- 790 Employment Disputes in the Securities Industry
Figure 2: Types of Evaluations Arbitrators Received at NASD
Although NASD supplements its evaluations by rating arbitrators on a
quarterly basis, 33 our review showed that ratings are often based on
little or no information. Every quarter NASD rates those arbitrators who
have been active during that time, using a 3- point scale, with 1 being
the lowest and 3 being the highest. Staff bases the rating on evaluations
and complaints received that quarter and any notes recorded during that
time frame in the arbitrator database. In general, NASD reported that any
arbitrator who did not have any evaluations during the quarter is likely
to be rated adequate (* 2*). We estimate that the majority of the
arbitrators
that were rated received an adequate rating of 2, whether or not they
received any evaluations during this time, and 57 percent of arbitrators
with a 2 rating had not received any evaluations during this time frame.
(See fig. 3.) Some arbitrators without evaluations during this time frame
were also rated excellent, which could be a result of the rating from the
prior quarter.
33 NYSE reported that it does not have a numerical rating system and did
not think it would add anything to the evaluation process it has in place.
0 5
10 15
20 25
30 35
40 45
All three Party and
staff Peer
and staff Peer
and party Staff
only Party only Peer only Percentage of arbitrators
Source: NASD.
Type of evaluations
40 14 14 14
11 4
2
Page 16 GAO- 03- 790 Employment Disputes in the Securities Industry
Figure 3: How NASD Arbitrators Were Rated Both NASD and NYSE have
mechanisms in place to address poor performance by arbitrators. If NYSE or
NASD receives either a poor arbitrator evaluation or complaints about an
arbitrator on a case, staff will take steps to respond. For example, the
staff member assigned to the case may be asked to corroborate the
complaint or be asked to consult other arbitrators assigned to the case to
see if they support the allegation. A staff member who confirms the
complaint may then speak to the arbitrator and
suggest how he or she could improve his or her behavior. If the complaint
suggests no corrective action is possible, both SROs reported that the
arbitrator would be removed from the active roster immediately. All
complaints are recorded in the arbitrator database, and both SROs reported
that staff input how the complaint will be resolved. In reviewing the
records of NASD arbitrators, we found that staff did not
always document how they responded to poor evaluations and complaints. We
estimate that 10 percent of all 494 NASD arbitrators that heard cases
between January 2001 and June of 2002, received some kind of complaint,
either from a staff member, a party member, or another arbitrator. In our
sample, 6 of the 16 arbitrators that received negative complaints were
0 10
20 30
40 50
60 70
80 90
100 Arbitrators
rated 3 Arbitrators rated 2 Arbitrators rated 1 Percentage of NASD
arbitrators
Arbitrators with evaluations Arbitrators without evaluations Source: NASD.
8 0
75 79 17 21
Page 17 GAO- 03- 790 Employment Disputes in the Securities Industry
permanently dropped from NASD*s arbitrator list and 1 was temporarily made
unavailable pending further review. One arbitrator, who had been
permanently dropped in 2001, appeared to have complaints going back to
1993, yet the notes showed that no changes had been made to the adequate
rating of 2. For another permanently dropped arbitrator, staff noted they
were concerned that no negative comments were recorded on the computer
file since other staff and arbitrators had complained about this
arbitrator*s conduct. Of the 9 remaining arbitrators, information provided
by NASD indicated that staff had followed- up on the complaints raised for
5 arbitrators.
Of the 1,546 employment cases 34 decided by arbitrators at NASD and NYSE
over the last 10 years, 35 261 (17 percent) included at least 1
discrimination claim. Cases with discrimination claims required more
hearing sessions and took longer to complete than those with no
discrimination claims. At the same time, the compensatory damages claimed
in all cases was generally over $100,000, with claimed amounts generally
higher at NYSE than at NASD. In over half of all employment cases,
employees won some level of monetary compensation, although in cases with
discrimination claims employees were generally less likely to win. In most
cases, when employees won they received less than half of the compensatory
damages they claimed, with over 50 percent of the awards over the last 10
years being $50,000 or less. When compensatory damages were awarded in
cases involving discrimination, it tended to be higher than compensatory
damages awarded in other employment cases, with just over 60 percent of
discrimination cases receiving more than $50,000. Appendix 1 describes the
reliability and limitations of these data.
34 Our analysis was conducted on cases decided by arbitrators and does not
include cases that were settled or withdrawn. According to NASD, in recent
years, parties agreed on a resolution in nearly 60 percent of all cases.
35 The data analyzed spanned from January 1993 through June 2002* the most
current data available. Over the Last 10
Years, Relatively Few Employment Disputes Involved Discrimination, and
Some Variations Existed between These Cases and Other Employment Disputes
Page 18 GAO- 03- 790 Employment Disputes in the Securities Industry
Employment cases arbitrated at NASD and NYSE can contain 1 or more claims,
some of which might involve discrimination. Of all 1, 546 employment cases
heard (1,289 at NASD and 257 at NYSE) at NASD and NYSE over the last 10
years, 261 (17 percent) included at least 1 type of discrimination claim.
NASD arbitrated 202 of the cases that involved discrimination allegations.
NYSE arbitrated the remaining 59. Given that some cases involved more than
1 type of discrimination claim, in 261 cases a total of 324 discrimination
claims were made. As shown in table 1, the
majority of these 324 discrimination claims was either age (33 percent) or
sex- based (32 percent). 36 Table 1: Types of Discrimination Claims in
Employment Cases at NASD and NYSE, 1993 through 2002
Note: Year 2002 includes cases decided in January through June. Over the
last 10 years, the number of cases with discrimination claims has
generally decreased at NYSE. In more recent years, this has also occurred
at NASD, although prior to 2000 the number of cases at NASD involving
discrimination fluctuated. (See fig. 4.) NASD and NYSE officials reported
that the rule changes in 1999, which altered if and how discrimination
36 Sex discrimination includes sexual harassment claims. Age and Sex
Discrimination Were Most Prevalent in the Relatively Few Employment Cases
That Included Discrimination Claims
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Tot al Year
Age
1 6 15
9 8 18
3 8 7 4
79 NASD
7 8 4 2 2 2 2 0 1 1
29 NYSE
Sex discrimination/
harassment
2 11
9 10 15 13
9 5 6 1
81 NASD
6 6 2 2 5 2 0 0 0 0
23 NYSE
Race/ national origin
2 3 4 2 6 5 5 5 2 1
35 NASD
1 2 0 1 0 0 0 0 0 0
4 NYSE
Disability
0 1 2 3 6 7 2 4 1 0
26 NASD
1 0 0 2 2 3 1 0 1 0
10 NYSE
Religion
0 2 1 0 3 1 2 2 1 0
12 NASD
0 1 0 0 1 2 0 0 0 0
4 NYSE
Total 20 41 39 32 52 55 25 29 22
9 324
Source: Securities Arbitration Commentator.
Unspecified
0 1 0 0 3 2 0 5 3 2
16 NASD
0 0 2 1 1 0 1 0 0 0
5 NYSE
Page 19 GAO- 03- 790 Employment Disputes in the Securities Industry
cases are arbitrated, might have reduced the arbitration of these types of
cases. 37 Figure 4: Number of Cases Involving Discrimination at NASD and
NYSE, 1993
through 2002
a Includes only those cases decided in January through June 2002. Over the
last 10 years, the median number of hearing sessions in discrimination
cases ranged from 5 to 10 at NASD (see fig. 5) and from 8 to 15 at NYSE
(see fig. 6). The median number of hearing sessions in cases that did not
involve discrimination ranged from 4 to 5 at NASD and 5 to 11 at NYSE. 37
We were unable to determine what factors caused this decrease. Cases That
Included
Discrimination Claims Required More Hearing Sessions and Took Longer to
Complete
Total number of cases (n = 261) NASD NYSE Source: Securities Arbitration
Commentator.
0 10
20 30
40 2002 a 2001 2000 1999 1998 1997 1996 1995 1994 1993
Page 20 GAO- 03- 790 Employment Disputes in the Securities Industry
Figure 5: Median Number of Hearing Sessions for Discrimination and
Nondiscrimination Cases at NASD, 1993 through 2002
a Median number of hearing sessions based only on cases decided in January
through June. Source: Securities Arbitration Commentator.
Median number of hearing sessions
With at least 1 discrimination claim
With no discrimination claim
4 31
19 68
26 92
19 138
28 153
35 145
16 110
26 105
18 133
8 62 With at least 1 discrimination claim
With no discrimination claim
Total number of cases (n = 1,236)
0 2
4 6
8 10
12 2002 a 2001 2000 1999 1998 1997 1996 1995 1994 1993
Page 21 GAO- 03- 790 Employment Disputes in the Securities Industry
Figure 6: Median Number of Hearing Sessions for Discrimination and
Nondiscrimination Cases at NYSE, 1993 through 2002
a Too few cases with at least 1 discrimination claim were decided in 2001
to calculate the median number of sessions per case for that year. b For
2002, only cases decided in January through June were included in this
analysis; however, not
enough cases with at least 1 discrimination claim were decided during that
time to calculate the median number of sessions per case for cases with at
least 1 discrimination claim.
Not surprisingly, cases requiring more hearing sessions also took longer
to complete. For example, cases requiring 1 to 2 hearing sessions took 438
days on average to complete, while those requiring 5 to 8 hearing sessions
took 490 days on average. According to NASD, discrimination cases could
require more hearing sessions and take longer to complete because they are
more complex.
Source: Securities Arbitration Commentator.
Median number of hearing sessions
With at least 1 discrimination claim
With no discrimination claim
With at least 1 discrimination claim With no discrimination claim
Total number of cases (n = 252)
0 5
10 15
20 2002 b 2001 a 2000 1999 1998 1997 1996 1995 1994 1993
12 29
11 26
7 24
7 34
8 14
7 24
4 14
0 8
1 12
1 9
Page 22 GAO- 03- 790 Employment Disputes in the Securities Industry
In most cases arbitrated at NASD and NYSE over the last 10 years,
employees sought more than $100,000 in compensatory damages, whether or
not the case included a discrimination claim. (See fig. 7.)
Figure 7: Percentage of Discrimination and Nondiscrimination Cases at NASD
and NYSE from 1993 through 2002, by Amount Claimed
Note: For 2002, analysis based only on cases decided in January through
June.
Overall, employees in NYSE cases sought higher compensatory damages than
employees in NASD cases with the average compensatory damage claimed at
NYSE over $2 million and the average compensatory damage claimed at NASD
was under $1 million. These differences might reflect differences in the
membership of the two SROs. For example, members of Amounts Claimed in the
Majority of Employment Cases Were over $100,000
Source: Securities Arbitration Commentator.
Percentage of cases
With at least 1 discrimination claim
With no discrimination claim
With at least 1 discrimination claim With no discrimination claim
Total number of cases (n = 1,295)
0 5
10 15
20 25
30 35
40 >$ 1 million $500,001- $1 million $100,001- $500,000 $50,001- $100,000
$10,000- $50,000 $1-$ 9,999
3 111
9 169
17 124
64 317
39 122
80 240
Award amounts
Page 23 GAO- 03- 790 Employment Disputes in the Securities Industry
NYSE tend to include mostly the larger, more established broker- dealers,
whose employees may seek higher compensatory damages in arbitration cases.
In general, in more than 50 percent of cases at NASD and NYSE, employees
were awarded some level of compensatory damages. (See fig. 8.) Cases
Involving
Discrimination Were Less Likely to Win Some Level of Compensatory Damages
Than Cases with No Discrimination Claims
Page 24 GAO- 03- 790 Employment Disputes in the Securities Industry
Figure 8: Percentage of Cases at NASD and NYSE in Which Employees Were
Awarded Compensatory Damages, 1993 through 2002
a For 2002, analysis based only on cases decided in January through June.
Employees in cases involving discrimination, however, were less likely to
win some compensatory damages than employees in cases with no
discrimination claims. (See fig. 9.) Forty- eight percent of all NASD and
NYSE cases over the last 10 years that included a discrimination claim won
some level of compensatory damages compared with 61 percent of cases with
no discrimination claims. 38 38 Because of data limitations, in cases with
both discrimination and other employment
claims, we could not determine what proportion of the award, if any, was
awarded for a discrimination claim.
Source: Securities Arbitration Commentator.
Percentage of cases
NASD NYSE
NASD NYSE
Total number of cases (n = 1,546)
0 20
40 60
80 100
2002 a 2001 2000 1999 1998 1997 1996 1995 1994 1993
36 42
97 38
124 31
159 42
188 22
189 32
138 19
135 8
153 13
70 10
Page 25 GAO- 03- 790 Employment Disputes in the Securities Industry
Figure 9: Percentage of Discrimination and Nondiscrimination Cases at NASD
and NYSE in Which Employees Were Awarded Compensatory Damages, 1993
through 2002
a For 2002, analysis based only on cases decided in January through June.
Source: Securities Arbitration Commentator.
Percentage of cases
With at least 1 discrimination claim With no discrimination claim
Total number of cases (n = 1,546)
0 20
40 60
80 100
2002 a 2001 2000 1999 1998 1997 1996 1995 1994 1993
17 61
30 105
33 122
26 175
38 172
42 179
21 136
26 117
19 147
9 71 With at least 1
discrimination claim With no discrimination claim
Page 26 GAO- 03- 790 Employment Disputes in the Securities Industry
In cases where employees received a monetary award, over 60 percent of
employees received less than half of the compensatory damages they
claimed. In terms of the amount of compensatory damages awarded, awards in
cases at NYSE tended to be higher. (See fig. 10.) At NASD, just over half
of the cases won had awards of $50,000 or less, while at NYSE 70 percent
of awards were over $50,000.
Figure 10: Percentage of Cases Won at NASD and NYSE from 1993 through 2002
by Amount Awarded
Note: For 2002, analysis based only on cases decided in January through
June.
While Most Employees Received Less Than Half of the Compensatory Damages
They Claimed,
Cases That Included Discrimination Claims Received Higher Awards
Source: Securities Arbitration Commentator.
Percentage of cases
NASD NYSE
0 5
10 15
20 25
30 35
>$ 1 million $500,001- $1 million $100,001- $500,000 $50,001- $100,000
$10,000- $50,000 $1-$ 9,999
Award amounts
NASD NYSE
147 7
199 36
89 29
158 49
29 10
18 13
Total number of cases with monetary awards (n = 784)
Page 27 GAO- 03- 790 Employment Disputes in the Securities Industry
Compared with cases with no discrimination claims, employees in cases
involving discrimination were more likely to receive larger awards. 39
(See fig. 11.) Sixty- two percent of cases with discrimination claims that
received monetary awards had an award amount over $50,000, compared with
48 percent of cases without discrimination claims.
Figure 11: Percentage of Discrimination and Nondiscrimination Cases at
NASD and NYSE from 1993 through 2002, by Amount Awarded Note: For 2002,
analysis based only on cases decided in January through June.
39 On average, the amount claimed in discrimination cases was also higher.
Source: Securities Arbitration Commentator.
Percentage of cases
With at least 1 discrimination claim
With no discrimination claim
With at least 1 discrimination claim With no discrimination claim
Total number of cases with monetary awards (n = 784)
0 5
10 15
20 25
30 35
>$ 1 million $500,001- $1 million $100,001- $500,000 $50,001- $100,000
$10,000- $50,000 $1-$ 9,999
Award amounts
11 143
34 201
23 95
38 169
5 34
6 25
Page 28 GAO- 03- 790 Employment Disputes in the Securities Industry
In addition to receiving monetary compensation, employees sometimes seek
and receive nonmonetary awards. For example, an employee may want
defamatory language removed from his or her record. In the employment
cases that we analyzed, approximately 13 percent of employees won some
type of nonmonetary award without any monetary award.
To assess arbitration programs at NASD and NYSE, SEC conducts periodic
inspections and reviews complaint letters it receives. It has cited
problems at one or both SROs in the procedures used to (1) ensure
arbitrators are qualified and (2) track arbitrator performance. SEC
generally reviews arbitration procedures, arbitrator profiles, disclosure
reports, and closed cases and interviews staff during its inspections.
Although SEC officials indicated that complaint letters could affect the
focus of an inspection, we found that few of the letters SEC receives
focus on employment arbitration. In its most recent inspections, in
addition to problems with procedures both SROs used to ensure arbitrators
are qualified, SEC found that one or both SROs did not record information
on arbitrator performance in a central database or disqualify all
arbitrators who were poor performers from hearing cases. Both SROs have
taken some steps to address the problems.
Since 1995, SEC has examined NASD*s and NYSE*s arbitration programs three
times each and has routinely responded to complaint letters about the
process. Most inspections have focused on either case processing or
recruiting and maintaining arbitrators. In general, inspections also
included reviewing problems raised in previous inspections to determine
whether they had been resolved. (See fig. 12.) SEC Oversight Found
SROs Could Improve Procedures to Ensure Arbitrators Are Qualified and
Perform Well
SEC Conducts Systematic Inspections and Reviews Complaint Letters to
Assess SRO- Administered Arbitration Programs
Page 29 GAO- 03- 790 Employment Disputes in the Securities Industry
Figure 12: Focus of SEC Inspections of NASD and NYSE, 1995- 2002 a
Customers* claims are claims made by investors while industry claims are
made by members of the securities industry.
In conducting inspections, SEC reviews a variety of documents, summarizes
findings, develops recommendations, and provides SRO with the opportunity
to comment on both its findings and recommendations. The documents SEC
reviews generally include case files 40 and arbitrator
40 Prior to 1998, SEC limited its review to customer cases. In its 1998
inspections, SEC began to also review employment cases. An SEC official
reported that because relatively few employment discrimination cases are
arbitrated, typically all cases alleging employment discrimination closed
during the inspection review period are selected for review.
NYSE 2001 SRO Year Focus of inspection
Enrollment, training, selection, and evaluation of the performance of
arbitrators in NYSE*s arbitrator pool.
NASD 2000
Processing customer and industry claims a and maintaining arbitrator pool
by the Midwest Regional Office.
NASD 1998 Recruitment, enrollment, training, and evaluation of arbitrator
performance.
NYSE 1998 Administration and procesing customer and industry claims.
NYSE 1995 Administration and procesing customer claims.
NASD 1995 Processing of customer claims and selection and retention of
arbitrators.
Source: SEC inspection reports.
Page 30 GAO- 03- 790 Employment Disputes in the Securities Industry
profiles and disclosure reports. Some of the case files are chosen
randomly while others are selected based on risk factors that suggest
problems may exist, such as the length of time it took to complete a case.
In addition to reviewing documents, SEC interviews SRO staff to better
understand its operations. In its 2000 inspection of NASD, SEC reviewed
110 arbitrator profiles and disclosure reports and 89 arbitration case
files. In its 2001 inspection of NYSE, SEC reviewed 200 arbitrator
profiles and disclosure reports and 40 customer and employment cases in
addition to other documents. 41 An SEC official noted that under the
Exchange Act, 42 SEC has a broad range of authority to address
deficiencies found in an
inspection. As a practical matter, SEC staff and SROs discuss deficiencies
and document that necessary steps have been taken. 43 In addition to
carrying out inspections to oversee SRO arbitration
programs, SEC reviews complaint letters from individuals employed in the
securities industry and other interested parties regarding SROadministered
arbitration programs. Of all the complaint letters SEC receives, however,
only a small percentage raise concerns about the arbitration and an even
smaller percentage deal with employment cases. According to SEC*s
complaint letter log, of the over 12,000 complaint letters SEC received
from January 1992 through October 2002, approximately 500 contained a
specific reference to arbitration. We reviewed a random sample of 100 of
the letters that referred to arbitration and found 16 that discussed the
arbitration of employment clams. 44 Of the 16, 6 raised concerns about the
use of mandatory arbitration to address employment or employment
discrimination claims. The other 10 letters dealt with a variety of
issues, including the amount of time allocated to address a claim, the
scheduling of hearings, and a proposal to limit damages that can be
claimed.
41 SEC was unable to provide the total number of closed cases their sample
was drawn from. 42 Securities Exchange Act of 1934 Section 19( h), 15 U.
S. C. S: 78s( h). 43 In the event deficiencies were not adequately
addressed, SEC has authority under Section 19( h) of the Exchange Act to
institute administrative proceedings to remove SRO officials, limit or
suspend SRO activities, or revoke SRO registration. 44 Twenty- five of the
100 letters in our sample were missing from SEC files. The issues raised
in the remaining 59 letters were either unclear or dealt with issues
unrelated to employment cases.
Page 31 GAO- 03- 790 Employment Disputes in the Securities Industry
An SEC official with the division that approves SRO rules said the
division responds to all complaint letters it receives, which are tracked
using the database letter log. 45 The official indicated that when letters
register general discontent with the arbitration process but do not
contain a specific allegation, parties are provided general information
about arbitration, including information on the narrow procedural
mechanism for challenging awards. When letters contain specific
allegations, SEC attorneys contact the SRO or use other means to
investigate the allegation before providing a response. SEC attorneys may
also forward a copy of the letter to the office that oversees periodic
inspections, so it can assess the allegation in its inspection activities.
For example, an SEC official reported that SEC had placed special emphasis
in a recent inspection on reviewing updates SRO staff made to arbitrator
profiles and disclosure reports in response to concerns raised in a
complaint letter.
In recent inspections, SEC staff identified a number of ways NASD and NYSE
could improve their procedures for ensuring that arbitrators are qualified
and for tracking arbitrator performance. For example, to ensure that
arbitrators are qualified, SEC staff recommended that one or both
SROs ensure that they consistently conduct CRD checks of all industry
arbitrators and document those reviews in arbitrator profiles; ensure
that all arbitrator profiles are complete and reflect new or
updated information arbitrators submit about themselves; lengthen
training courses for new arbitrators; include in arbitrator training
manuals guidance on certain arbitration
procedures and certain problems arbitrators are likely to encounter; and
develop policy on how often arbitrators must attend ongoing training,
the circumstances under which it can be waived, and documentation of
reasons waivers are granted.
45 The official reported that although other SEC divisions receive
complaint letters, the division that approves SRO rules receives the most
letters dealing with employment issues. SEC Has Made a Variety of
Recommendations to Improve SRO Procedures
Page 32 GAO- 03- 790 Employment Disputes in the Securities Industry
On the basis of our review of SRO documents containing policies and
standard procedures and interviews with SRO officials, we found that each
SRO had taken steps to address SEC*s recommendations. One or both SROs now
require that CRD checks be recorded in arbitrator profiles; have an online
reporting form arbitrators can use to submit updated information about
themselves; 46 and have a basic training course for new arbitrators, more
comprehensive training manuals, and a written policy regarding ongoing
arbitrator training.
In addition, in recent inspections, SEC staff found that the procedures in
place to track arbitrator performance could be improved. For example, SEC
staff recommended that one or both SROs
ensure that all pertinent information on arbitrator performance, whether
negative or positive, is recorded in a central database and
do more to address complaints of poor arbitrator performance, including,
if appropriate, removing arbitrators from the active pool and better
documenting actions taken in response to complaints of poor performance.
SEC staff reported that it appears from recent ongoing and completed
inspections that the SROs have taken steps to address these
recommendations. 47 In general, to determine if any issues raised in past
inspections remain
unresolved, SEC, at the beginning of each new inspection, reviews
recommendations from prior inspections. SEC is currently inspecting NASD
and will report on the results, including unresolved issues, if any,
within the next year. NYSE will be reexamined beginning in 2003, at which
time SEC will assess what additional steps, if any, NYSE has taken to
address the issues reported here.
SEC oversees NYSE and NASD, which regulate their member firms in the
securities industry. All three are responsible for ensuring that the
procedures for arbitrating discrimination and other employment disputes
46 GAO- 03- 162R (Washington, D. C.: Apr. 11, 2003). 47 In GAO- 03- 162R,
we report that one SRO has implemented procedures making it easier to
remove arbitrators from ongoing cases. Conclusions
Page 33 GAO- 03- 790 Employment Disputes in the Securities Industry
are fair and the requirements of the Exchange Act are met. Although SEC*s
approval of rules governing arbitration programs and its periodic
inspections of these programs has resulted in improvements, there are
aspects of these programs that deserve closer scrutiny.
Currently, NASD and NYSE verify the qualifications for those arbitrators
who have worked in the securities industry and neither SRO verifies the
information provided by nonindustry arbitrators. While we did not find
instances where arbitrators provided false statements of qualifications,
verifying the qualifications of all arbitrator applicants is an important
step in ensuring that employees and employers receive accurate information
on the arbitrators they select to hear their cases. Additionally, while
SEC has reviewed both SROs procedures for evaluating arbitrator
performance, we found evidence that arbitrators are not evaluated on a
routine basis. Although NASD has procedures for peer, party, and staff to
evaluate arbitrators and identify poor performers, these evaluations are
not always completed. While NYSE officials indicated that NYSE has similar
procedures and reported staff generally evaluate active arbitrators at
least once a year, we were unable to confirm this information. Securities
industry employees must use NASD and NYSE arbitration programs to resolve
most employment disputes. Therefore, more effort should be made to verify
that arbitrators meet the qualifications SROs require and to
encourage parties, other arbitrators, and staff to submit evaluations more
regularly, so that only arbitrators who perform adequately are maintained
on SRO rosters.
To help ensure that all NASD and NYSE arbitrators possess the
qualifications required by their SRO, we recommend that the Chairman of
SEC direct NASD and NYSE to verify basic background information of all new
applicants for their arbitrator rosters. We also recommend that SEC
continue to review the adequacy of procedures for evaluating arbitrator
performance in their next inspections at NASD and NYSE.
We provided a draft of this report to SEC, NASD, and NYSE for their
review. A copy of their written comments is in appendixes II, III, and IV,
respectively. SEC, NASD, and NYSE also provided technical comments on the
draft report, which were incorporated as appropriate.
SEC agreed with the focus of our recommendation concerning the
verification of background information. However, SEC believed that in the
absence of any indication that the falsification of information is a
problem, Recommendations
Agency and SRO Comments
Page 34 GAO- 03- 790 Employment Disputes in the Securities Industry
it might not be necessary for NYSE, as a smaller arbitration forum than
NASD, to add this cost to the arbitration process. As a result, SEC
indicated that it should be up to NYSE to decide whether the independent
verification of basic background information of arbitrator applicants is
needed. NASD noted that although it has had no evidence that arbitrators
ever falsified information, it is planning to verify the background
information on all new applicants to increase party confidence in the
accuracy of arbitrator records. NASD reported that a one- time fee for
arbitrator applicants would cover the cost of this procedure. NYSE
reported that since it has found no proof of anyone providing false
information, there is insufficient justification for independently
verifying application information and adding costs to the process. In
addition, NYSE believes that it has already taken steps to ensure that its
application procedures are adequate, such as having applicants affirm that
the information they provide is correct and requiring two recommendation
letters. NYSE also indicated that counsel for employees can and do take
further actions to review the background of arbitrators.
Despite concerns raised by SEC and NYSE, we continue to believe that
verifying background information for all new arbitrators is an important
part of ensuring the integrity of arbitration, a process required for most
disputes. While adding costs to the process is a legitimate concern,
NASD*s approach of instituting a one- time application fee of $80 would
not increase the expense of arbitration for the parties involved.
Additionally, the fact that lawyers representing parties are already
sometimes verifying information suggests that verification is valued and
further supports the need for it to be done independently and
systematically for all new arbitrators. Moreover, although our report has
focused on the arbitration of employment cases, a small percentage of all
the cases arbitrated in the securities industry, our recommendation will
benefit all parties, since NASD and NYSE arbitrators are available for
both employment and customer cases.
Concerning our recommendation that SEC continue to review evaluation
procedures at SROs, SEC, NASD, and NYSE, all indicated that they
understand the importance of evaluating arbitrators. Specifically, SEC
agreed that evaluating arbitrator performance is a fundamental element of
the arbitration process and reported that it will continue to review the
adequacy of procedures for evaluating arbitrator performance during its
inspections of SRO arbitration programs. NASD noted that it would strive
to provide better documentation of the actions it takes in response to
complaints or evaluations. NYSE reported it has a new computer system that
creates a centralized, easily accessible record of all feedback and
Page 35 GAO- 03- 790 Employment Disputes in the Securities Industry
comments from arbitrator evaluations, which will allow staff to have a
more comprehensive view of an arbitrator*s performance.
As arranged with your offices, unless you announce its contents earlier,
we plan no further distribution of this report until 30 days after the
date of this report. At that time, we will provide copies of this report
to the
Chairman of SEC, the President of NASD, and the Director of Arbitration
for NYSE, appropriate congressional committees, and other interested
parties. We will also make copies available to other interested parties,
upon request. This report will be available at no charge on GAO*s Web site
at http:// www. gao. gov.
If you have any questions about this report, please contact me on
(202) 512- 9889. Other contacts and staff acknowledgments are listed in
appendix V. Robert E. Robertson Director, Education, Workforce, and Income
Security Issues
Appendix I: Scope and Methodology Page 36 GAO- 03- 790 Employment Disputes
in the Securities Industry
This appendix provides a detailed description of the scope and methodology
we used to determine (1) the characteristics and outcomes of arbitrated
employment and employment discrimination disputes in the securities
industry; (2) who evaluates arbitrators and what performance ratings they
receive; and (3) how the Securities and Exchange Commission (SEC) responds
to complaint letters it receives concerning arbitration of employment and
employment discrimination cases.
To determine the nature and outcomes of employment and employment
discrimination disputes in the securities industry, we analyzed a database
containing employment disputes in which arbitration decisions had been
made by NASD 1 or the New York Stock Exchange (NYSE) from January 1993
through June 2002. We obtained this database from Securities Arbitration
Commentator, Inc. (SAC), Maplewood, New Jersey. SAC is a commercial
research firm that maintains a database of information from publicly
available records on decided cases from all self- regulatory organizations
(SRO) arbitration forums, as well as the American Arbitration Association.
The SAC database contained information on arbitration awards that resulted
from employee claims for damages against SRO member firms. By definition,
this database did not include cases that were settled or withdrawn before
an arbitration decision was reached. The 1,564 cases in the database
included fields describing a range of variables, such as the name of the
forum, the parties involved in the case, types of claims in the case,
amounts of compensatory damages claimed, and amounts of compensatory
damages awarded. Data on every variable we analyzed were not available for
all 1,546 employment cases arbitrated at NASD and NYSE over the last 10
years. Our analyses of the median number of hearing sessions were based on
96 percent of the total 1,546 cases. The amounts claimed in discrimination
and nondiscrimination cases, overall, were based on 84 percent of the
1,546 cases. All other analyses presented in this report were based on the
total 1,546 employment cases arbitrated over the last 10 years, unless
otherwise noted.
To assess the reliability of the data we received from SAC, we reviewed
100 randomly sampled cases in the database, 50 with discrimination claims
1 NASD was formerly known as the National Association of Securities
Dealers, but now goes solely by the acronym. Appendix I: Scope and
Methodology
Determining the Characteristics and Outcomes of Arbitrated Employment
Disputes
Appendix I: Scope and Methodology Page 37 GAO- 03- 790 Employment Disputes
in the Securities Industry
and 50 without discrimination claims. To verify the accuracy of the
information for cases in the database, we compared this information with
information in copies of the original awards for the same cases as issued
by the forums or as reprinted by Lexis/ Nexis. For most variables, data
reliability was adequate for the analysis we conducted. We did not use any
variables in the SAC database with high error rates. However, we were
unable to verify that the SAC database included all cases decided by NASD
or NYSE from January 1993 through June 2002.
To determine who evaluates arbitrators and what performance ratings they
receive, we first generated a list from the SAC data file of all NASD
arbitrators who had decided at least 1 employment case that did not
include a discrimination claim. We stratified this list of 494 arbitrators
into two groups* those that had also decided at least 1 case involving
discrimination during this time and those that had not decided any cases
involving discrimination. We selected all 60 arbitrators from the group
that had heard at least 1 discrimination case and selected a random sample
of 64 of those that had not heard any and obtained NASD*s files containing
evaluation and rating information for each of these 124 arbitrators. 2
From the files associated with the sampled arbitrators, we extracted data
on the number of evaluations, if any, these arbitrators received from the
parties and/ or other arbitrators in the cases they had decided and on
performance ratings these arbitrators received.
Each arbitrator in our study population of 494 had a nonzero probability
of being selected for our sample. In analyzing data about the arbitrators
in our sample, we weighted each sampled arbitrator to account
statistically for all arbitrators in the study population, including those
who were not selected.
Because we followed a probability procedure based on random selections,
our sample is only one of a large number of samples that we might have
drawn. Since each sample could have provided different estimates, we
express our confidence in the precision of our particular sample*s results
as 95 percent confidence intervals. These are intervals that would contain
the actual population value for 95 percent of the samples we could have
2 Our initial list contained 496 arbitrators, but we later learned that 2
of the 62 arbitrators we believed had decided a discrimination case had
not, in fact, decided any cases during this time. We removed the
arbitrators from the population and from the sample. Therefore, the actual
study population was 494 arbitrators, from which 124 arbitrators were
sampled. Determining Arbitrator
Performance
Appendix I: Scope and Methodology Page 38 GAO- 03- 790 Employment Disputes
in the Securities Industry
drawn. As a result, we are 95 percent confident that each of the
confidence intervals in this report will include the true value in the
study population. The width of a confidence interval is also referred to
as the sampling error associated with the estimate. Sampling errors
associated with estimates from our file review do not exceed plus or minus
15 percentage points.
SEC tracks complaint letters in a computerized database and has logged
over 12,000 from 1992 through October 2002. To determine how SEC responds
to complaint letters it receives concerning arbitration of employment and
employment discrimination cases, first we asked SEC staff to search its
database and identify those letters that mention arbitration. SEC found
that approximately 500 of the logged letters mentioned arbitration. We
reviewed the content of a random sample of 100 of these letters to
determine how many dealt specifically with arbitration of employment or
employment discrimination claims. Out of the 100 letters, we found 16 that
dealt with the arbitration of employment or employment discrimination
claims. Twenty- five of the 100 letters in our sample were missing from
SEC files, and the issues raised in the remaining 59 letters were either
unclear or unrelated to employment cases. Determining the
Content of SEC Complaint Letters
Appendix II: Comments from the Securities and Exchange Commission Page 39
GAO- 03- 790 Employment Disputes in the Securities Industry
Appendix II: Comments from the Securities and Exchange Commission
Appendix II: Comments from the Securities and Exchange Commission Page 40
GAO- 03- 790 Employment Disputes in the Securities Industry
Appendix III: Comments from NASD Page 41 GAO- 03- 790 Employment Disputes
in the Securities Industry
Appendix III: Comments from NASD
Appendix III: Comments from NASD Page 42 GAO- 03- 790 Employment Disputes
in the Securities Industry
Appendix III: Comments from NASD Page 43 GAO- 03- 790 Employment Disputes
in the Securities Industry
Appendix III: Comments from NASD Page 44 GAO- 03- 790 Employment Disputes
in the Securities Industry
Appendix III: Comments from NASD Page 45 GAO- 03- 790 Employment Disputes
in the Securities Industry
Appendix III: Comments from NASD Page 46 GAO- 03- 790 Employment Disputes
in the Securities Industry
Appendix IV: Comments from the New York Stock Exchange Page 47 GAO- 03-
790 Employment Disputes in the Securities Industry
Appendix IV: Comments from the New York Stock Exchange
Appendix IV: Comments from the New York Stock Exchange Page 48 GAO- 03-
790 Employment Disputes in the Securities Industry
Appendix IV: Comments from the New York Stock Exchange Page 49 GAO- 03-
790 Employment Disputes in the Securities Industry
Appendix IV: Comments from the New York Stock Exchange Page 50 GAO- 03-
790 Employment Disputes in the Securities Industry
Appendix V: GAO Contacts and Staff Acknowledgments
Page 51 GAO- 03- 790 Employment Disputes in the Securities Industry
Clarita A. Mrena (202) 512- 3022 Margaret A. Holmes (202) 512- 3283
In addition to those named above, Susan S. Pachikara, Joan K. Vogel, and
Sidney H. Schwartz made significant contributions to this report. Appendix
V: GAO Contacts and Staff
Acknowledgments GAO Contacts Staff Acknowledgments
(130174)
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