Employment Discrimination: How Registered Representatives Fare In
Discrimination Disputes (Letter Report, 03/30/94, GAO/HEHS-94-17).

To work in the security industry, registered representatives--mainly
stockbrokers--must agree to submit any employment controversy, including
discrimination disputes, to arbitration panels comprised of neutral
third parties.  In recent years, the number of discrimination cases
filed by registered representatives for arbitration at the New York
Stock Exchange (NYSE) and the National Association of Securities Dealers
(NASD) has remained low and relatively constant.  Six discrimination
cases were filed for arbitration with NYSE in 1990 and 14 in both 1991
and 1992. Between August 1990 and December 1992, NASD's New York Office
and NYSE decided 18 discrimination cases.  In 4 of the 10 cases
involving financial awards, the monetary compensation was directly
linked to discriminatory practices.  Sex and age discrimination were
cited most often in such cases.  Some NYSE and NASD procedures for
selecting arbiters need improvement.  For example, NASD lacks written
criteria for excluding potential arbiters with a history of disciplinary
actions or regulatory infractions while working in the securities
industry.  In addition, NYSE and NASD differ in their requirements for
arbiter disclosure of criminal convictions.  The Securities and Exchange
Commission's (SEC) oversight of arbitration programs focuses on
customer-firm disputes rather than on employee-employer disputes.
Because SEC does not review discrimination cases during its inspection
of arbitration programs, it does not know the extent to which
discrimination cases are filed and whether the industry has fairly and
impartially resolved them.  In addition, SEC has not established a
formal inspection cycle--a set time for conducting inspections of
securities' arbitration programs--to ensure that all programs are
inspected regularly.  SEC also does not know whether the securities
industry corrects problems flagged by its inspections.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-94-17
     TITLE:  Employment Discrimination: How Registered Representatives 
             Fare In Discrimination Disputes
      DATE:  03/30/94
   SUBJECT:  Employment discrimination
             Civil rights
             Brokerage industry
             Arbitrators
             Monitoring
             Stock exchanges
             Disputes clauses
             Labor negotiations
             Securities regulation

             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Telecommunications and
Finance, Committee on Energy and Commerce, House of Representatives

March 1994

EMPLOYMENT DISCRIMINATION - HOW
REGISTERED REPRESENTATIVES FARE IN
DISCRIMINATION DISPUTES

GAO/HEHS-94-17

Employment Discrimination


Abbreviations
=============================================================== ABBREV

  CRD - Central Registration Depository
  EEOC - Equal Employment Opportunity Commission
  NASD - National Association of Securities Dealers
  NYSE - New York Stock Exchange
  SEC - Securities and Exchange Commission
  SICA - Securities Industry Conference on Arbitration
  SRO - self-regulatory organization

Letter
=============================================================== LETTER


B-205955

March 30, 1994

The Honorable Edward J.  Markey
Chairman, Subcommittee on
 Telecommunications and Finance
Committee on Energy and Commerce
House of Representatives

Dear Mr.  Chairman: 

The securities industry uses arbitration to resolve disputes between
securities firms, between securities firms and investors (customers),
and between securities firms and their employees.  Arbitration is the
submission of a dispute between parties to a neutral third party--an
arbitrator--for resolution.  The industry uses arbitration because it
believes arbitration is faster and less expensive than litigation and
that arbitration provides for more informed decisionmaking. 

In this report, we focus on the use of arbitration to resolve
employment discrimination disputes between securities firms and their
registered representatives.\1

Registered representatives are firm employees who accept and execute
customers' buy-and-sell orders.  To work in the securities industry,
they must agree to arbitrate any dispute, claim, or controversy that
may arise, including discrimination disputes.  Registered
representatives constitute approximately 32 percent of securities
industry employees in the largest 50 securities firms in the United
States. 

In response to your request and later discussions with your office we
agreed to provide the following data: 

  information on employment discrimination cases filed by registered
     representatives for arbitration at the New York Stock Exchange
     (NYSE) and the National Association of Securities Dealers
     (NASD), and on the nature and outcomes of discrimination cases
     in which NYSE and NASD arbitrators rendered a decision;

  the demographic characteristics of arbitrators serving NYSE and
     NASD; and

  NYSE and NASD procedures for arbitrating employment disputes and
     selecting arbitrator pools and panels. 

We also obtained information on the Securities and Exchange
Commission's (SEC) oversight responsibilities for the industry's
arbitration programs.  We did not evaluate the fairness of the
decisions reached in the cases we reviewed. 


--------------------
\1 In May 1992, we reported to you on the arbitration of disputes
between securities firms and their customers.  See Securities
Arbitration:  How Investors Fare (GAO/GGD-92-74, May 11, 1992). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

In recent years, the number of discrimination cases filed by
registered representatives for arbitration at NYSE and NASD has
remained low and relatively constant.  Registered representatives
filed 6 discrimination cases for arbitration at NYSE in 1990 and 14
in both 1991 and 1992.  NASD did not compile data on the number of
discrimination cases filed, but NASD officials said that to their
knowledge few discrimination cases were filed during these years with
their arbitration department.  SEC does not require NYSE and NASD to
compile or to track data on discrimination cases. 

Between August 1990 and December 1992, NASD's New York office and
NYSE decided few--18--discrimination cases.  Ten resulted in
financial awards to the employees and 8 did not.  In 4 of the 10
cases in which awards were granted, the awards were to compensate for
discriminatory practices.  The other 6 cases involved issues in
addition to discrimination disputes, and information in the case
files did not directly link the awards to the discrimination
disputes.  Registered representatives alleged several types of
discrimination in these cases; they cited sex and age discrimination
most frequently. 

NYSE and NASD do not systematically collect demographic data on
arbitrators in their pools.  We estimate that most of the NYSE New
York arbitrators (about 89 percent of 726 at the end of 1992) are
white men, averaging 60 years of age.  NASD officials said the
demographic composition of their arbitrator pools would generally
resemble that of the NYSE New York pool. 

Some NYSE and NASD procedures for selecting arbitrators for their
pools and for serving on arbitration panels need improvement.  NASD
does not have written criteria for excluding from their pools
arbitrators who have a history of disciplinary actions or regulatory
infractions while working in the securities industry.  NASD, however,
has provided informal guidance to its National Arbitration Committee
for consideration when deciding whether to exclude arbitrators who
have histories of disciplinary actions or regulatory infractions.  As
a result of our review, NYSE developed written criteria and, after we
completed our work, began using them as a basis for excluding
arbitrators from the NYSE arbitrator pool. 

In addition, NYSE and NASD have different requirements for their
arbitrators to disclose information on criminal convictions.  Both
require industry-affiliated arbitrators to disclose prior criminal
convictions when they register to work in the industry.  At the time
we completed our work, NYSE did not require nonindustry-affiliated
arbitrators to provide information about criminal convictions.  In
commenting on a draft of this report, SEC told us that NYSE plans to
start collecting this information.  NASD requires its
nonindustry-affiliated arbitrators to disclose criminal convictions. 

Further, NYSE and NASD require that arbitrators be "knowledgeable in
the areas of controversy," but neither systematically assigns
arbitrators to panels on the basis of subject matter expertise. 

SEC's oversight of the securities industry's arbitration programs
focuses on customer-firm disputes, as opposed to employee-employer
disputes, such as discrimination disputes.  SEC believes that
discrimination cases need not be reviewed separately since they are
processed in the same manner as customer-firm cases.  However,
because SEC does not review discrimination cases during its
inspections of securities' arbitration programs, it does not know the
extent to which discrimination cases are filed and arbitrated and
whether the industry is fairly and impartially resolving these
disputes.  In addition, SEC has not established a formal inspection
cycle--a set time for conducting inspections of securities'
arbitration programs--to ensure that all such programs are inspected
with reasonable frequency.  SEC also does not know whether the
securities industry corrects problems identified in its inspections. 
SEC plans to formalize a schedule for systematically inspecting
industry arbitration programs.  As part of its monitoring of the
arbitration programs, SEC will include, during its inspections,
reviews of employment discrimination case files.  SEC is also taking
steps to improve self-regulatory organizations' (SRO) administration
of their arbitration programs. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Arbitration of disputes is a long-standing practice in the securities
industry, predating federal nondiscrimination laws.  In 1872, NYSE
became the first securities exchange to provide arbitration as an
alternative to litigation in resolving disputes. 

The basic right to equal employment opportunity regardless of race,
color, religion, sex, national origin, age, or disability is
guaranteed in federal legislation enacted during the past 30 years. 
The Civil Rights Acts of 1964 and 1991, as well as the Equal
Employment Opportunity Act of 1972, protect employees against
discrimination on the basis of race, color, religion, sex, or
national origin.  The Equal Pay Act of 1963 prohibits payment of
different wages to men and women doing the same work.  The Age
Discrimination in Employment Act of 1967 prohibits discrimination
against workers aged 40 and over on the basis of age.  The Americans
With Disabilities Act of 1990 protects the employment rights of
workers with physical or mental disabilities. 

The Equal Employment Opportunity Commission (EEOC) enforces these
laws.  EEOC receives and investigates charges of employment
discrimination against private sector employers.  It also initiates
investigations of alleged discrimination on behalf of groups of
employees.  If it finds reasonable cause to believe that
discrimination has occurred, EEOC attempts to persuade the accused
employer to voluntarily eliminate and remedy the discrimination. 
Remedies may include reinstatement in a job that was lost, back pay,
or an award of damages to compensate for actual monetary loss.  If
this fails, EEOC or the employee may initiate court action. 

In the securities industry, SROs, which are groups of industry
professionals such as NYSE and NASD, operate and regulate their
markets.  SROs have been delegated primary regulatory responsibility
to adopt and enforce standards of conduct for their member securities
firms.  SROs administer securities arbitration activities. 

SEC regulates the securities industry, including arbitration
activities, generally through its oversight of SROs.  As part of its
oversight of securities arbitration, SEC (1) reviews and approves
SROs' rule filings and (2) inspects SROs' arbitration programs. 
SEC's Division of Market Regulation inspects arbitration programs to
ensure that SROs have systems in place to comply with securities laws
and their own rules. 

Securities firms' registered representatives are required to file
with the SROs a registration and disclosure document, known as a U-4
agreement.  Filing a U-4 agreement is a condition of employment for
registered representatives, and the U-4 agreement requires
signatories to arbitrate disputes that may arise with their firms. 

Federal and state courts have upheld the legality of the U-4
agreements that registered representatives are required to sign. 
They interpreted the provision for mandatory arbitration as
precluding registered representatives from litigating discrimination
disputes in court.  This does not preclude registered representatives
from filing complaints with EEOC alleging employment discrimination
and requesting EEOC to investigate their allegations.  If EEOC finds
reasonable cause to believe that discrimination has occurred, it may
initiate court action, but registered representatives may not. 

SROs are required to administer arbitration programs in accordance
with rules they develop and submit to SEC for approval, pursuant to
section 19(b) of the Securities Exchange Act of 1934.  SROs
administer industry arbitration cases using procedures largely
modeled on the Uniform Code of Arbitration, which was developed by
the Securities Industry Conference on Arbitration (SICA).  SICA was
formed in 1977, at SEC's invitation, to review then-existing
arbitration procedures. 

SROs use the same procedures to resolve discrimination disputes as
they use for all other types of arbitrated disputes, such as disputes
between customers and securities firms:  When a registered
representative files a discrimination complaint for arbitration with
an SRO, the SRO selects arbitrators from its arbitrator pool to serve
on an arbitration panel.  Panel members review evidence presented by
both parties in the dispute; the panel renders its decision based on
the arbitrators' views of the case.  With few exceptions, arbitration
decisions are final and binding. 


      ARBITRATOR AND PANEL
      SELECTION
---------------------------------------------------------- Letter :2.1

Any person interested in becoming an arbitrator at NYSE or NASD must
submit a disclosure document, known as a profile, to the SROs'
arbitration department.  The profile includes information on the
applicant's educational background, work experience, knowledge of and
relation to the securities industry, and professional or other
qualifications.  NYSE and NASD also require applicants to provide two
letters of recommendation.  NYSE and NASD decide informally on a
case-by-case basis whether an applicant is initially qualified as an
arbitrator, using the information in the applicant's profile. 

According to SRO rules, individuals selected for the arbitrator pools
are classified as "industry" or "public" arbitrators.  Industry
arbitrators are those currently affiliated with a member firm of the
SRO or those affiliated with a member firm within the past 3 years. 
Industry arbitrators can also be retirees from the industry or
attorneys, accountants, or other professionals who have devoted 20
percent or more of their professional work to securities industry
clients within the last 2 years. 

Public arbitrators are people who are not from the securities
industry.  However, if a person who is not from the securities
industry has a spouse or other member of his or her household who is
associated with the securities industry, that person is not to be
classified as a public arbitrator. 

The NYSE and NASD arbitration department administrators and their
staffs use a number of factors to select three arbitrators from their
arbitrator pools to decide discrimination cases.  These include the
information in arbitrators' profiles, conflict-of-interest
considerations, and availability on the date selected to hear the
case.  SROs provide the arbitrator profile information to both
parties in the dispute--the registered representative and the firm. 
Both sides may request additional information about any of the
arbitrators.  The information may be used to challenge a particular
arbitrator selected for the panel.  Both sides may exercise one
peremptory challenge--that is, a challenge for which no reason need
be given--to the selection of an arbitrator and an unlimited number
of challenges for cause--that is, challenges based on a specific
cause or reason, for example, a conflict of interest. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To respond to your request, we interviewed NYSE and NASD officials
concerning their policies and procedures for arbitrating employment
disputes.  We obtained information on discrimination cases filed by
registered representatives for arbitration at NYSE in calendar year
1992 from NYSE's computerized database and on cases filed between
January 1990 and December 1991 from records maintained by NYSE. 
Since NASD did not compile statistical data on discrimination cases,
we looked at the universe of all employment cases decided at NASD's
New York office to determine those that involved a discrimination
complaint. 

To determine the nature and outcomes of arbitrated discrimination
cases, we reviewed case files for all such cases arbitrated
nationwide at NYSE and arbitrated at NASD's New York office between
August 1990 and December 1992.  We discussed the cases with NYSE and
NASD officials.  At NASD, we chose to review cases arbitrated at its
New York office because the vast majority of employment cases were
arbitrated in this office.  We selected the August 1990-December 1992
period because they were the earliest and latest dates that automated
information needed for our review was available at both NYSE and
NASD. 

We compiled demographic information on the arbitrator pools at NYSE
and NASD, to the extent possible.  In addition, we obtained
information from SEC about its (1) oversight responsibilities of the
industry's arbitration activities and (2) monitoring of the
arbitration of discrimination cases.  As agreed, we did not attempt
to determine the number, nature, and outcomes of discrimination
disputes settled by the firms and the registered representatives that
were not filed for arbitration.  We also did not assess the
effectiveness of arbitration as a means of resolving discrimination
disputes.  (See app.  I for details on our scope and methodology.)


   REGISTERED REPRESENTATIVES HAVE
   FILED FEW DISCRIMINATION
   COMPLAINTS AT NYSE AND NASD;
   FEW DISCRIMINATION CASES HAVE
   BEEN ARBITRATED
------------------------------------------------------------ Letter :4

Registered representatives have filed few discrimination complaints
for arbitration at NYSE and NASD during the last several years, and
the number of complaints filed each year has remained relatively
constant.  Specifically, 34 discrimination complaints were filed at
NYSE between January 1990 and December 1992:  6 in calendar year
1990, 14 in calendar year 1991, and 14 in calendar year 1992.  NASD
does not compile data on the numbers of discrimination complaints
filed.  But NASD officials indicated that very few discrimination
complaints have been filed with their arbitration department. 

Between August 1990 and December 1992, NASD's New York office and
NYSE decided few employment discrimination cases; these cases
represent a small fraction of their arbitration caseloads.  In total,
these SROs arbitrated 18 employment discrimination cases during this
period.  During all of calendar years 1991 and 1992, NYSE arbitrated
a total of 1,110 cases.  Of these, 798 (72 percent) were
customer-firm cases and 312 (28 percent) were employment cases.  Of
the 312 employment cases, 16 (5 percent) were discrimination cases.\2

NASD's New York office arbitrated 1,886 cases between January 1991
and December 1992, of which 1,626 (86 percent) were customer-firm
cases and 260 (14 percent) were employment cases.  Two of these
cases, less than 0.1 percent of all employment cases, were
discrimination cases. 

Some of the 18 employment discrimination cases decided by NYSE and
NASD between August 1990 and December 1992 also involved one or more
issues other than discrimination, such as employee compensation. 
Outcomes of the 18 cases are summarized in table 1.1.  As shown, 10
cases resulted in an award to the employee and 8 did not.  However,
of the 10 cases in which an award was granted, we could link the
award directly to the discrimination dispute in 4 cases, but not in 6
cases.  Because SROs have no requirement that an arbitration decision
explain the disposition of each issue, arbitration awards in cases
involving discrimination and other issues did not always indicate
whether the award was related to the discrimination dispute.  The
types of discrimination alleged in these cases included age, race,
national origin, sex, pay, and disability.  However, the two most
frequently cited types of alleged discrimination were sex and age. 



                          Table 1.1
           
           Discrimination Case Outcomes at NYSE and
                NASD (Aug. 1990 to Dec. 1992)



SRO                            Known       Unknown
------------------------  ----------  ------------  --------
NYSE                               4             5         7
NASD                               0             1         1
============================================================
Total                              4             6         8
------------------------------------------------------------

--------------------
\2 Before January 1991, NYSE did not record the number of
customer-firm cases and employment cases.  Therefore, we are only
able to report this information for the period January 1991 through
December 1992.  This means that the data reported are not totally
comparable with that for the period used for our case file review. 


   DEMOGRAPHIC CHARACTERISTICS OF
   NYSE AND NASD ARBITRATORS
------------------------------------------------------------ Letter :5

The NYSE and NASD arbitration departments are not required by SEC to
maintain data on the demographic characteristics of arbitrators
serving in their pools, and neither does.  To develop statistical
information on the characteristics of the NYSE and NASD arbitrators,
we analyzed data provided to us by NYSE and NASD officials.  When
more reliable data were not available, we relied upon the personal
knowledge of NYSE arbitration staff.  (See app.  I for details.)

We estimate that most arbitrators serving in NYSE's New York
arbitrator pool are white males, averaging 60 years of age.  As of
December 31, 1992, NYSE had 726 arbitrators in its New York pool.  Of
these, we estimate that 89 percent were men and 11 percent, women. 
We were able to identify the race of 349 arbitrators (48 percent of
the NYSE pool) through discussions with staff attorneys.  Of these,
97 percent were white, 0.9 percent were black, 0.6 percent were
Asian, and 1 percent were other.  The average age for men was 60 and
the average age for women was 49.  (Age information was available for
85 percent of the NYSE pool.) NYSE officials confirmed that the NYSE
arbitrator pool was predominantly white men. 

NASD does not collect demographic data on arbitrators'
characteristics.  However, NASD officials said that in their opinion
the characteristics of NASD's arbitrator pool would generally
resemble those of the NYSE pool. 


   SOME NYSE AND NASD ARBITRATION
   PROCEDURES COULD BE
   STRENGTHENED
------------------------------------------------------------ Letter :6

Perceptions of the fairness of the arbitration process depend on the
impartiality and competence of the arbitrators who decide the cases. 
When considering candidates for their arbitrator pools, NYSE and NASD
(1) require applicants to disclose their past educational and
professional work experience on arbitrator profiles, (2) conduct
computerized checks on industry-affiliated applicants to determine
whether they had been subjected to disciplinary actions that should
disqualify them from serving as arbitrators, and (3) require
potential arbitrators to submit two letters of recommendation.  NYSE
and NASD select arbitrators from their pools for panels based on
factors such as whether they are industry or public arbitrators,
their availability on specific dates, and whether a conflict of
interest exists. 

While we did not address the fairness of the NYSE and NASD
arbitration processes or the outcomes of the individual
discrimination cases we reviewed, we identified weaknesses and
inconsistencies in some NYSE and NASD procedures that could result in
inappropriate decisions on which arbitrators they select for their
pools and to serve on panels arbitrating discrimination cases.  NASD
does not have written criteria for excluding arbitrators who have had
disciplinary actions taken against them or who have been cited for
regulatory infractions; NYSE began using such criteria as a result of
our work.  In addition, although in 1987, to help assess the
qualifications of securities arbitrators, the SROs agreed to require
arbitrators to submit information on criminal convictions, NYSE until
recently did not require public arbitrators to disclose such
information.  Finally, neither NYSE nor NASD assigns arbitrators to
arbitration panels on the basis of their knowledge of the subject
matter in the dispute. 


      NYSE AND NASD LACKED
      SPECIFIC CRITERIA FOR
      EXCLUDING ARBITRATORS WHO
      HAVE RECORDS OF DISCIPLINARY
      ACTIONS OR REGULATORY
      INFRACTIONS
---------------------------------------------------------- Letter :6.1

Under the Securities Exchange Act, persons may be precluded from
working in the securities industry for reasons such as disciplinary
actions taken against them and regulatory infractions.  In connection
with its oversight inspections, SEC recommended in September 1987
that the SROs determine whether arbitrators have records of
disciplinary actions or regulatory infractions and exclude from their
arbitrator pools those whose records warrant such action. 

SROs have direct access to NASD's Central Registration Depository
(CRD), which is a computerized database on current and former
securities registered representatives, including those who are
securities arbitrators.  Information in the CRD comes from a variety
of sources, such as registered representatives' U-4 agreements;
customer complaints; regulatory violations data submitted by SROs,
SEC, or state regulators; and Justice Department criminal arrest and
conviction data.  Information taken from the U-4 agreements includes
information on any securities disciplinary action taken against the
registered representative and regulatory infractions committed by the
representative. 

The NYSE and NASD arbitration departments' staffs use information
from the CRD to determine whether an industry arbitrator has a
history of disciplinary or regulatory infractions.  NYSE's Director
of Arbitration told us that he considered the answers to certain
questions when deciding whether to exclude people who have histories
of disciplinary actions or regulatory infractions from the NYSE
arbitrator pool.  These questions include (1) Did the person fully
disclose the incident on his or her profile?  (2) Did any incident
involve "moral turpitude"?  (3) Was there more than one incident? 
and (4) Was the incident a technical or regulatory infraction?  As a
result of our study, NYSE developed and began using written criteria
for excluding such persons from its pool. 

According to NASD's Deputy Director of Arbitration, its National
Arbitration Committee's Qualifications Subcommittee decides who is
selected for NASD's arbitrator pool.  However, NASD does not have
specific criteria for the Subcommittee to use in determining if
arbitrators with records of disciplinary actions or regulatory
infractions related to their work in the securities industry should
be excluded from its arbitrator pool.  NASD developed informal
guidance in June 1992, which the Subcommittee uses to help decide
whether to exclude arbitrators who have such records.  The guidance,
however, does not set specific criteria or standards on which actions
and infractions are significant enough to warrant exclusion from the
arbitrator pool. 

To determine whether arbitrators with disciplinary actions or
regulatory infractions on their records were in the NYSE and NASD
arbitrator pools, we randomly sampled 100 industry arbitrator
profiles at NYSE and NASD.  We found arbitrator profiles in both
samples that disclosed disciplinary actions or regulatory
infractions.  However, without specific criteria, we could not
determine whether they were significant or whether the arbitrators
should have been removed from the SROs' arbitrator pools.  We did not
determine whether any of these arbitrators served on a panel. 

The lack of specific criteria hinders the ability of SRO arbitration
staff to uniformly apply a selection standard for arbitrators serving
in their pools, precludes SEC from assessing whether SROs are using
appropriate criteria for selecting arbitrators, and may raise equity
issues over differences in the quality of the arbitration process
administered by various SROs. 


      NYSE AND NASD HAVE DIFFERENT
      REQUIREMENTS FOR DISCLOSURE
      OF ARBITRATORS' CRIMINAL
      CONVICTIONS
---------------------------------------------------------- Letter :6.2

SROs require registered representatives to disclose criminal
convictions on their U-4 agreements.  Many industry arbitrators are,
or have been, registered representatives and would, therefore, have
disclosed this information as part of the registration process.  SROs
can access this information through the CRD when registered
representatives apply to be arbitrators.  However, public arbitrators
are not subject to industry registration requirements and do not file
U-4 agreements.  SROs, therefore, do not have access to criminal
conviction information for public arbitrators through the CRD. 

To obtain criminal conviction information for all arbitrators in its
pool, NASD has incorporated the criminal disclosure questions asked
in the U-4 agreement as part of its arbitrator profile.  The U-4
agreement specifically asks registrants if they have ever been
convicted of a felony or a misdemeanor.  By incorporating these
sections of the U-4 agreement as an arbitrator disclosure
requirement, NASD obtains information needed to help it determine
whether an arbitrator--industry or public--should be excluded from
its pool because of critical convictions. 

NYSE does not require its arbitrators to disclose prior criminal
convictions on their profiles.  By failing to do so, NYSE does not
have this critical information to help it make informed judgments on
whether public arbitrators should serve in its pool.  NYSE endorsed a
December 14, 1987, SICA letter in which it agreed that its arbitrator
profile would elicit information concerning whether an arbitrator has
ever been convicted of or, in a regulatory proceeding, found to have
engaged in conduct involving any offenses relating to theft, the
taking of a false oath, or fraud.  NYSE tries to maintain an
arbitrator pool, an NYSE official indicated, comprised of people of
high moral character.  Yet NYSE's ability to make this determination
for public arbitrators may be thwarted because this information is
not collected.  About 58 percent of all arbitrators making up the
NYSE pool are public arbitrators. 

As a result of our review, NYSE included the topic of arbitrator
disclosure of criminal convictions on the agenda for SICA's July 1993
meeting.  SICA members discussed this issue but, as of February 1994,
they had not reached a final decision on what disclosure questions
should be asked of arbitrators regarding criminal convictions. 
Nevertheless, the NYSE Arbitration Department, in October 1993,
revised its arbitrator profile and will begin asking arbitrators to
disclose information on criminal convictions.  In its comments on a
draft of this report, SEC told us that NYSE had provided its staff
with an amended arbitrator profile that includes questions on
arbitrators' criminal convictions. 


      NYSE AND NASD ARBITRATORS
      ARE NOT ASSIGNED TO PANELS
      ON THE BASIS OF EXPERTISE
---------------------------------------------------------- Letter :6.3

The arbitrator panel selection procedure is largely subjective. 
Given the industry's practice of classifying arbitrators as industry
or public, the procedure for selecting arbitrators for a panel is
predicated on an arbitrator's affiliation or lack of affiliation with
the securities industry.  SRO arbitration staff consider many other
factors when selecting an arbitrator to serve on a panel, such as the
arbitrator's education and employment background; the arbitrator's
availability on a specific date; whether there is any conflict of
interest in the case; the frequency with which the arbitrator has
served; and, when selecting a chairperson, whether an arbitrator is
an attorney. 

According to SICA's Arbitration Procedures, which have been adopted
by all SROs, arbitrators should be "knowledgeable in the areas of
controversy." However, NYSE and NASD do not necessarily consider, as
a primary criterion for arbitration panel selections, arbitrators'
expertise in the subject matter of the dispute.  In fact, NYSE and
NASD arbitration staff do not routinely assess the expertise of the
members of their arbitrator pools.  According to one NYSE official,
the determining issue in assigning an arbitrator to a panel is
whether the arbitrator can determine the facts of a dispute, not
whether he or she has expertise appropriate to the type of dispute
being decided. 

Since discrimination cases involving registered representatives raise
issues that are different from the securities-related disputes
administered by SROs, it may be appropriate to consider whether the
panels for these cases should be comprised differently, and include
at least one arbitrator with expertise in employment or
discrimination law.  Discrimination disputes are inherently different
from the usual types of employment disputes arbitrated by SROs
because they involve issues in federal civil rights law that lie
beyond the scope of securities statutes and industry practices.  In
addition, by industry practice, registered representatives are
subject to mandatory and binding arbitration in all employment
disputes, including discrimination disputes. 


   IMPROVEMENTS NEEDED IN SEC
   OVERSIGHT OF SRO ARBITRATION
   PROGRAMS
------------------------------------------------------------ Letter :7

SEC focuses its SRO arbitration inspections on customer-firm disputes
because of its mandate for customer protection.  It does not monitor
SROs' arbitration of discrimination cases even though employees'
civil rights are at issue.  Because SEC does not require SROs to
report to it on discrimination cases filed and arbitrated, it does
not know the nature, types, and outcomes of these cases and whether
there are changing trends.  Discrimination cases may merit some type
of review by SEC. 


      SEC DOES NOT MONITOR SROS'
      ARBITRATION OF
      DISCRIMINATION DISPUTES
---------------------------------------------------------- Letter :7.1

SEC does not include employment dispute cases, including
discrimination disputes, as part of its inspections of SRO
arbitration programs.  Rather, SEC's inspections of SRO arbitration
activities focus on customer-firm disputes.  Therefore, SEC does not
know (1) how efficiently and effectively discrimination dispute cases
are processed by SRO arbitration departments or (2) the outcomes of
these cases. 

These cases are not a priority, SEC officials said, since SEC, as it
interprets the 1934 Securities Exchange Act, views its primary
responsibility to be customer protection.  Employment dispute cases,
they said, often may involve collections or salary disputes between
firms and employees. 

Most employment disputes may be disputes about collections, but
discrimination disputes are different in nature from collections
disputes.  In discrimination disputes, employees' civil rights are at
issue.  For securities registered representatives, arbitration is
mandatory and decisions rendered by arbitrators, who may have no
understanding of the civil rights laws that protect workers from
discriminatory practices in the workplace, are binding.  SEC
officials acknowledged that SEC does not review securities industry
cases involving firms and their employees.  However, SEC monitors the
procedures that affect all arbitration cases handled by SROs,
including discrimination disputes brought by registered
representatives. 


      SEC LACKS INFORMATION TO
      ASSESS CHANGES IN THE
      NUMBERS OF DISCRIMINATION
      CASES FILED FOR ARBITRATION
---------------------------------------------------------- Letter :7.2

SEC does not require SROs to report the numbers, types, and outcomes
of discrimination cases that they arbitrate.  We found that NYSE and
NASD differ in the extent to which they maintain data on
discrimination cases.  NYSE has an automated tracking system that
identifies the number and type of cases, including discrimination
cases, filed with its arbitration department.  The system generates
case summaries for active cases.  NASD's automated system for
tracking arbitration cases does not track discrimination cases, other
than sexual harassment cases, as a distinct category of employment
dispute cases.  This system tracks the status of cases arbitrated at
NASD beginning in August 1990. 

Because SEC does not require SROs to track discrimination cases, SEC
does not receive information to assess trends in the number, types,
and outcomes of these cases.  Despite the small number of
discrimination cases now filed for arbitration, having SROs track
these data would enable SEC to select discrimination cases for
review.  This information would also alert SEC to caseload increases
that may warrant further scrutiny. 


      SEC NEEDS A FORMAL
      INSPECTION CYCLE FOR SRO
      ARBITRATION PROGRAMS
---------------------------------------------------------- Letter :7.3

SEC conducted its first SRO arbitration inspection at NASD in 1986,
but postponed inspections at other SROs to allow them to develop rule
changes for their arbitration programs, based upon concerns raised by
its 1986 NASD arbitration inspection.  In a September 10, 1987,
letter to SICA, SEC recommended changes to SICA's Uniform Code of
Arbitration.  These recommendations included (1) revising standards
for eligibility to serve as a public arbitrator, (2) disclosing to
the parties the arbitrators' backgrounds and affiliations, (3)
instituting programs for arbitrator training and evaluation, and (4)
instituting procedures to provide for public disclosure of the
results of arbitration cases.  Individual SROs responded to SEC's
recommendations by drafting proposed rule changes for their
arbitration programs.  SEC formally approved these changes in 1989. 

In 1990, SEC's division of market regulation established an
inspection team to review SRO arbitration departments for compliance
with its rules.  According to SEC officials, their SRO arbitration
inspections include all aspects of the departments' administration
and processing of customer-firm arbitration, including examining such
issues as the timeliness of various aspects of case processing,
whether arbitrators are properly classified, and the content of
arbitrator profiles.  SEC officials stated they do not attempt to
reevaluate the outcomes of arbitration disputes. 

SEC has completed arbitration program inspections of eight SROs since
1990 and expects to complete a second inspection at NASD in March
1994.  SEC intends to establish a cycle for systematically conducting
these inspections after it completes the NASD inspection.  SEC
officials anticipate that the inspection cycle will include a review
of some part of NASD's arbitration program each year, NYSE's every
other year, and the other SROs' every third year.  By establishing a
formal inspection cycle, SROs may be more inclined to respond
expeditiously to SEC recommendations made during previous
inspections. 


      SEC INSPECTIONS IDENTIFIED
      DEFICIENCIES THAT STILL
      EXIST
---------------------------------------------------------- Letter :7.4

SEC's inspection reports included recommendations to correct
deficiencies in SRO's arbitration programs.  Although SEC's
inspections focused on customer-firm disputes, the concerns raised
also apply to employment disputes, including discrimination disputes,
since the arbitration process is fundamentally the same. 

For example, in its inspection reports and in a July 16, 1992, letter
to the SROs regarding follow-up on issues raised in our May 1992
report, SEC cited concerns about the completeness and meaningfulness
of information contained in SROs' arbitrator profiles.  The fact that
the arbitrator profile is incomplete and fails to contain meaningful
information may affect the arbitrator panel selection process.  Both
NYSE and NASD agreed to implement SEC's recommendations and both
initiated efforts to update arbitrator profiles to improve the
quality of information contained in them.  In November 1992, NYSE
revised its arbitrator profile.  NASD sent letters to its arbitrators
in December 1992 and in April 1993 asking for information from them
to update and complete their profiles. 

However, we found that NYSE and NASD had not fully implemented all of
SEC's recommendations and that the problems still existed.  To
determine whether NYSE and NASD updated their arbitrator profiles
with meaningful and complete information as recommended by SEC, we
reviewed a second random sample of 100 arbitrator profiles from both
NYSE and NASD.  At NYSE, 97 of the 100 profiles we sampled lacked
detailed professional background information for the arbitrators.  Of
these 97, 11 percent also lacked other information despite NYSE's
attempts to periodically update records.  Of the 100 arbitrator
profiles sampled, 15 were for arbitrators who had served on a panel
since November 1992, when NYSE revised its arbitrator profile.  Of
the 15 who served on a panel, 8 had incomplete profiles when they
were appointed and they did not update their profiles after they were
appointed to the panel, 4 had updated their profiles when appointed
to the panel, and 3 had entered information in the wrong place on the
profile. 

At NASD, of the 100 arbitrator profiles we sampled, 61 lacked
background information for the arbitrators.  Of those missing this
information, 31 percent also lacked other information.  We did not
determine how many NASD arbitrators in our sample with incomplete
profiles served on arbitration panels. 


   RECOMMENDATIONS TO THE
   CHAIRMAN, SEC
------------------------------------------------------------ Letter :8

In our May 1992 report, Securities Arbitration:  How Investors Fare,
we recommended that SEC require SROs that administer arbitration
programs to (1) develop formal standards for selecting arbitrators,
(2) verify information submitted by prospective and existing
arbitrators, and (3) establish a system to ensure these arbitrators
are adequately trained in the arbitration process.  SEC agreed to
follow up with the SROs on these recommendations. 

As SEC continues to work with the SROs to implement these prior
recommendations, we recommend that SEC direct SROs to

  use existing information systems to track the numbers, types, and
     outcomes of discrimination cases that are filed at, and
     arbitrated by, their arbitration departments;

  establish written criteria and standards for excluding from SRO
     arbitrator pools industry arbitrators who have histories of
     disciplinary actions or regulatory infractions;

  require all arbitrators to disclose criminal convictions on their
     arbitrator profiles; and

  assess and maintain information on arbitrators' expertise and use
     this information when selecting arbitrators to serve on panels,
     especially those deciding discrimination disputes. 

We also recommend that SEC (1) establish a formal inspection cycle
for inspecting SROs' arbitration programs, (2) follow up more
vigorously on the implementation of its recommendations, and (3) when
selecting arbitration case files to review during inspections,
include those involving discrimination complaints. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

SEC provided written comments on a draft of this report.  (See app. 
II.) SEC generally agreed with most of our findings and
recommendations.  It said that changes have been made or would be
implemented to respond to our recommendations.  We clarified our
recommendations on the basis of their comments. 

SEC, while agreeing with us that securities SROs should be able to
distinguish discrimination cases from other types of cases submitted
for arbitration, disagreed with our recommendation that it should
require SROs to track the numbers, types, and outcomes of the
discrimination cases.  SEC believes the small number of
discrimination cases filed and arbitrated that we identified at NYSE
and NASD does not "warrant any sort of institutional program" for
monitoring them.  SEC said that "[e]fficient retrieval of
discrimination cases [from the SROs' computer databases] is
sufficient at this point" and that "[t]his will allow the SROs to
monitor effectively any future developments in the volume, types or
administration of these cases." We agree.  Our intent is not to
require the SROs to establish costly monitoring programs.  Rather,
our intent is that the SROs periodically retrieve the data on
discrimination cases that they already have in their information
systems so that they can identify emerging trends in the numbers of
cases filed and arbitrated as they occur.  Having such information
will help the SROs and SEC to oversee the securities arbitration
process. 

Regarding our recommendation on requiring SROs to establish written
criteria for excluding from their arbitrator pools arbitrators who
have histories of disciplinary actions or regulatory infractions, SEC
stated that it agrees that the SROs should exclude arbitrators with
significant disciplinary histories.  SEC also said that SICA, in
response to our findings, established a subcommittee in October 1993
to address the issue of written criteria for excluding arbitrators. 
SEC said that it will encourage the subcommittee to identify the
types of issues that have arisen in the past in order to determine
whether useful criteria can be established.  To conform to the intent
of our recommendation, we believe that SEC, rather than relying on
SICA to ascertain whether criteria can be established, should take
steps to require the SROs to establish such criteria. 

Regarding our recommendation on requiring SROs to assess, maintain,
and use arbitrators' expertise when selecting arbitrators to serve on
discrimination panels, SEC seemed to agree with us.  SEC said that it
might be valuable for the SROs to assess arbitrators' training and
experience when selecting arbitrators for discrimination panels.  SEC
further stated that the issues raised in discrimination disputes may
be sufficiently different from many arbitrators' experience so as to
warrant that the SROs develop additional training in discrimination
law issues.  In this regard, SEC pointed out that NASD has already
expanded its arbitrator training to include sessions on employment
law.  However, SEC said that it would discuss the issue of arbitrator
selection with the SROs in order to determine whether it is
appropriate to have procedures for selecting arbitrators in
discrimination disputes that are different from those for other types
of disputes.  We think SEC needs to do more.  We continue to believe
that SEC should direct the SROs to consider expertise in
discrimination law when selecting arbitrator panels for
discrimination disputes. 

SEC raised several other concerns relating to our findings, which we
address in appendix II.  SEC, NYSE, and NASD provided us technical
comments.  Where appropriate, we used the information to clarify and
update our report. 


---------------------------------------------------------- Letter :9.1

As agreed with your office, unless you publicly disclose its contents
earlier, we plan no further distribution of this report until 7 days
from the date of this letter.  At that time, we will send copies to
the Chairman of SEC; NYSE; NASD; the Director, Office of Management
and Budget; and other interested congressional committees.  We will
also make copies available to others upon request. 

If you or your staff have any questions about the information in this
report, please call me at (202) 512-7014.  Other major contributors
are listed in appendix III. 

Sincerely yours,

Linda G.  Morra
Director, Education and
 Employment Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

Because there are no comprehensive data available on discrimination
cases filed by securities firms' registered representatives and
arbitrated by securities self-regulatory organizations, we conducted
our review at the New York Stock Exchange (NYSE) and the National
Association of Securities Dealers (NASD).  We choose NYSE and NASD
because they both have offices in New York City and, although both
hold arbitration hearings in major cities throughout the United
States, their New York offices hold more hearings than any other
location.  We also performed work at the Securities and Exchange
Commission (SEC) in Washington, D.C. 

To determine trends in the number of discrimination cases filed for
arbitration by registered representatives at NYSE, we used NYSE's
computerized database to obtain information on the number of
discrimination cases filed nationwide at NYSE during the period
January through December 1992.  In addition, from records maintained
at NYSE's New York office, we reviewed case summaries for arbitrated
cases from January 1, 1990, through December 31, 1991, to estimate
the numbers of filings.  NASD's computerized database for arbitration
cases does not track discrimination cases as a distinct category;
therefore, comparable information was unavailable.  NASD officials
told us that few discrimination cases involving registered
representatives were filed for arbitration at NASD in recent years. 

We reviewed records at NYSE and NASD to develop information on the
nature and outcomes of discrimination cases that were arbitrated
(decided) from August 1990 through December 1992.  Because NYSE
stores records for all cases arbitrated nationwide in New York City,
we reviewed the universe of discrimination cases that were arbitrated
at NYSE during this period.  To identify any type of discrimination
case brought by an employee against his/her firm, we manually
reviewed case summary sheets for all cases arbitrated between August
1, 1990, and January 1, 1992.  We used NYSE's automated case-tracking
system, which was implemented as of January 1, 1992, to identify
discrimination cases arbitrated between January 1, 1992, and December
31, 1992. 

In contrast, NASD's automated data system for arbitrated cases, which
was implemented in August 1990, does not identify discrimination
cases, other than sexual harassment cases, as a distinct category of
employment dispute cases.  It also maintains records for its
arbitrated cases at four regional offices located throughout the
United States.  We chose to review cases arbitrated at its New York
office because the vast majority of employment cases were arbitrated
in that office.  We, therefore, reviewed all employment dispute
cases, a total of 115 cases, that were arbitrated during the August
1990-December 1992 period by NASD's New York office to identify any
that involved discrimination issues.  The cases arbitrated by its New
York office, NASD officials told us, represented the largest number
of arbitration cases handled by any NASD regional office. 

We used August 1990 as the beginning date for our case selection
because that was when NASD implemented its automated data system for
arbitrated cases.  We used December 1992 as the end date because,
when we did our work, that was the most recent date the information
was available from both NYSE and NASD. 

NYSE and NASD provided us the files for all arbitrated discrimination
cases that we identified.  We reviewed the details of the
discrimination disputes raised; the arbitration case outcomes; and
the settlements and awards, if any, made.  We discussed the cases
with NYSE and NASD officials.  We also compiled demographic
information (age, race, and sex) from NYSE on arbitrators used to
resolve these arbitrated cases.  We did not review open cases because
information on case outcomes was not available and open cases are not
public information. 

We interviewed NYSE and NASD officials to learn about the arbitration
process for resolving employees' discrimination cases and analyzed
arbitration procedures.  We also discussed with them procedures for
selecting arbitrators to serve in their arbitrator pools and on their
arbitrator panels. 

Because NYSE and NASD do not maintain data on the demographic
characteristics of arbitrators in their arbitrator pools, we compiled
these data, to the extent possible.  This information was
unavailable, NASD officials said, and therefore could not be
provided.  At NYSE, we relied on the personal knowledge of NYSE
arbitration staff when questions arose.  Our data on the racial
composition of the NYSE arbitrator pool are based primarily on the
knowledge of the senior staff attorney in the arbitration department. 
Age data on NYSE arbitrators are based on profile information,
submitted by arbitrators when applying to serve in the arbitrator
pool.  To determine whether industry-affiliated arbitrators in the
NYSE and NASD pools had criminal records or disciplinary histories,
we selected a random sample of 100 industry arbitrator profiles at
NYSE and NASD. 

We interviewed SEC officials to obtain information on (1) their
oversight responsibilities concerning arbitration activities at NYSE
and NASD in general and (2) the extent to which they monitor
self-regulatory organization arbitration of discrimination
complaints.  We obtained follow-up information on SEC's actions to
implement the recommendations in our May 11, 1992, report, Securities
Arbitration:  How Investors Fare.  We also discussed the results of
SEC's inspection reports on arbitration, conducted at NASD in 1986
and at NYSE in 1990.  We reviewed relevant findings and
recommendations presented in those reports and actions taken by NYSE
and NASD to address these concerns.  To determine whether NYSE and
NASD complied with selected SEC recommendations on meaningful and
complete information on the profiles and on arbitrator disclosure
contained in recent inspection reports, we selected a separate random
sample of 100 arbitrator profiles at both NASD and NYSE. 

We did our work in accordance with generally accepted government
auditing standards between October 1992 and June 1993. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE SECURITIES AND
EXCHANGE COMMISSION
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)

and 16. 

and 16. 



(See figure in printed edition.)

and 16. 

and 16. 



(See figure in printed edition.)

and 16. 



(See figure in printed edition.)


The following are GAO's comments on the Securities and Exchange
Commission letter dated December 30, 1993. 

GAO COMMENTS

1.  The discussion on page 3 of SEC's oversight of the securities
industry's arbitration programs was intended to be general and
limited to specific processes and activities related to employment
discrimination disputes.  Based on discussions with the Division of
Market Regulation staff after we received SEC's letter, SEC was
concerned that we did not fully describe the Division's mission and
activities.  The Division staff agreed that we do not mischaracterize
those activities. 

2.  Our finding, discussed on pages 15 and 16, is that the SROs did
not fully implement recommendations in SEC's inspection reports to
correct deficiencies in their arbitration programs.  As an example of
this problem, we found that NYSE and NASD did not fully implement
SEC's recommendations to update their arbitrator profiles.  To
demonstrate this situation, we show that NYSE assigned arbitrators to
panels after it updated its profiles in November 1992 in response to
SEC's recommendation, even though the profiles for these arbitrators
were incomplete.  In some cases, the profiles were not updated after
the arbitrators were assigned. 

NASD took a different approach than NYSE to respond to SEC's
recommendation.  As discussed on pages 15 and 16, to update its
arbitrator profiles, NASD sent letters to its arbitrators, initially
in December 1992 and in a follow-up mailing in April 1993, requesting
them to update and complete their profiles.  We found that 61 of the
100 NASD arbitrator profiles that we sampled lacked background
information.  However, because NASD had not completed its updating of
its arbitrator profiles when we completed our work, we did not
determine whether any NASD arbitrators in our sample with incomplete
profiles had served on an arbitration panel after NASD initiated its
mailings.  We modified the text on page 16 to clarify why we did not
determine how many NASD arbitrators in our sample with incomplete
profiles served on arbitration panels. 

3.  The critical point is that NYSE and NASD do not have specific
criteria for determining what disciplinary actions and regulatory
infractions are significant enough to warrant exclusion from their
arbitrator pools and panels.  Without these criteria, NYSE and NASD
cannot make decisions about excluding arbitrators who have histories
of disciplinary actions and regulatory infractions.  Our intention
was to show that both SROs have in their pools arbitrators whose
profiles indicate prior disciplinary actions or regulatory
infractions.  It is the SROs who must determine which actions and
infractions should result in exclusion from the pools and panels. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

Larry Horinko, Assistant Director, (202) 512-7001
Amy Hutner, Evaluator-in-Charge
John T.  Carney
Helen Creeger
Susan Poling
Laurel H.  Rabin
Bernard Rashes

