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entitled 'Employment Disputes: Recommendations to Better Ensure That
Securities Arbitrators Are Qualified' which was released on September
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Report to Congressional Requesters:
United States General Accounting Office:
GAO:
August 2003:
Employment Disputes:
Recommendations to Better Ensure That Securities Arbitrators Are
Qualified:
Employment Disputes in the Securities Industry:
GAO-03-790:
GAO Highlights:
Highlights of GAO-03-790, a report to congressional requesters
Why GAO Did This Study:
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.
What GAO Found:
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.
What GAO Recommends:
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.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Both NASD and NYSE Have Policies and Procedures Intended to Promote
Fair Arbitration for all Cases:
Over the Last 10 Years, Relatively Few Employment Disputes Involved
Discrimination, and Some Variations Existed between These Cases and
Other Employment Disputes:
SEC Oversight Found SROs Could Improve Procedures to Ensure Arbitrators
Are Qualified and Perform Well:
Conclusions:
Recommendations:
Agency and SRO Comments:
Appendix I: Scope and Methodology:
Determining the Characteristics and Outcomes of Arbitrated Employment
Disputes:
Determining Arbitrator Performance:
Determining the Content of SEC Complaint Letters:
Appendix II: Comments from the Securities and Exchange Commission:
Appendix III: Comments from NASD:
Appendix IV: Comments from the New York Stock Exchange:
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Table:
Table 1: Types of Discrimination Claims in Employment Cases at NASD and
NYSE, 1993 through 2002:
Figures:
Figure 1: Application Process:
Figure 2: Types of Evaluations Arbitrators Received at NASD:
Figure 3: How NASD Arbitrators Were Rated:
Figure 4: Number of Cases Involving Discrimination at NASD and NYSE,
1993 through 2002:
Figure 5: Median Number of Hearing Sessions for Discrimination and
Nondiscrimination Cases at NASD, 1993 through 2002:
Figure 6: Median Number of Hearing Sessions for Discrimination and
Nondiscrimination Cases at NYSE, 1993 through 2002:
Figure 7: Percentage of Discrimination and Nondiscrimination Cases at
NASD and NYSE from 1993 through 2002, by Amount Claimed:
Figure 8: Percentage of Cases at NASD and NYSE in Which Employees Were
Awarded Compensatory Damages, 1993 through 2002:
Figure 9: Percentage of Discrimination and Nondiscrimination Cases at
NASD and NYSE in Which Employees Were Awarded Compensatory Damages,
1993 through 2002:
Figure 10: Percentage of Cases Won at NASD and NYSE from 1993 through
2002 by Amount Awarded:
Figure 11: Percentage of Discrimination and Nondiscrimination Cases at
NASD and NYSE from 1993 through 2002, by Amount Awarded:
Figure 12: Focus of SEC Inspections of NASD and NYSE, 1995-2002:
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:
United States General Accounting Office:
Washington, DC 20548:
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)[Footnote 1], which regulate the
firms in the securities industry that are their members. Two SROs,
NASD[Footnote 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.
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.
Results in Brief:
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 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 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.
Background:
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.[Footnote 3]
Subsequent court decisions permitted the use of mandatory arbitration
for resolving other employment discrimination disputes, including
sexual harassment.[Footnote 4] Proponents of mandatory arbitration
believe it is an efficient, cost-effective 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.[Footnote 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.[Footnote 6] Their responsibilities include
overseeing the arbitration of claims brought in the securities industry
by customers, firms,[Footnote 7] and employees as required by the
Securities and Exchange Act of 1934 (the Exchange Act).[Footnote 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 requires and what evidence can be admitted.[Footnote 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.[Footnote 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.
Both NASD and NYSE Have Policies and Procedures Intended to Promote
Fair Arbitration for all Cases:
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.
Arbitration Is Required for Most Employment Disputes, Although for
Discrimination Cases NYSE Has Strictly Limited Its Use and NASD Has
Instituted Additional Requirements:
Prior to 1999, both NASD and NYSE rules required the mandatory
arbitration of all employment-related disputes, including
discrimination claims.[Footnote 11] In the 1990s, as discrimination
claims filed at NASD rose,[Footnote 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.[Footnote 13] The net result is that
NASD will administer arbitration 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[Footnote 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,[Footnote 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.[Footnote 16] Changes ranged from setting
qualifications for arbitrators who chair arbitrator panels[Footnote 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[Footnote 18]
represented employers or employees in the last 5 years.[Footnote 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 single
public arbitrator is appointed, and for claims greater than this amount
a panel of three public arbitrators is selected.[Footnote 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.[Footnote 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.[Footnote 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.
Both SROs Have Similar Qualifications for Arbitrators and Neither
Verify the Qualifications of All Applicants:
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.[Footnote 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.[Footnote 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.[Footnote
25]
Figure 1: Application Process:
[See PDF for image]
[A] A computerized database that holds the educational, work, and
disciplinary history for current and former securities registered
persons.
[End of figure]
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.[Footnote 26]
Ongoing training at both SROs is limited. NYSE requires that
arbitrators continue to attend at least one training course every 4
years.[Footnote 27] NASD does not have such a requirement but does
offer chairperson training for those arbitrators wanting to chair
cases.[Footnote 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 Have Procedures for Selecting Arbitrators for Cases Intended
to Ensure That They Are Unbiased:
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.[Footnote 29]
NASD provides parties with a computer-generated list of up to 15
arbitrators with profiles for each arbitrator.[Footnote 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
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.
Both SROs Have Procedures to Track Arbitrator Performance, Although
Many Arbitrators May Not Be Evaluated:
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.[Footnote 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 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.[Footnote 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.):
Figure 2: Types of Evaluations Arbitrators Received at NASD:
[See PDF for image]
[End of figure]
Although NASD supplements its evaluations by rating arbitrators on a
quarterly basis,[Footnote 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.
Figure 3: How NASD Arbitrators Were Rated:
[See PDF for image]
[End of figure]
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 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.
Over the Last 10 Years, Relatively Few Employment Disputes Involved
Discrimination, and Some Variations Existed between These Cases and
Other Employment Disputes:
Of the 1,546 employment cases[Footnote 34] decided by arbitrators at
NASD and NYSE over the last 10 years,[Footnote 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.
Age and Sex Discrimination Were Most Prevalent in the Relatively Few
Employment Cases That Included Discrimination Claims:
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).[Footnote 36]
Table 1: Types of Discrimination Claims in Employment Cases at NASD and
NYSE, 1993 through 2002:
[See PDF for image]
Note: Year 2002 includes cases decided in January through June.
[End of figure]
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 cases are arbitrated, might have reduced the
arbitration of these types of cases.[Footnote 37]
Figure 4: Number of Cases Involving Discrimination at NASD and NYSE,
1993 through 2002:
[See PDF for image]
[A] Includes only those cases decided in January through June 2002.
[End of figure]
Cases That Included Discrimination Claims Required More Hearing
Sessions and Took Longer to Complete:
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.
Figure 5: Median Number of Hearing Sessions for Discrimination and
Nondiscrimination Cases at NASD, 1993 through 2002:
[See PDF for image]
[A] Median number of hearing sessions based only on cases decided in
January through June.
[End of figure]
Figure 6: Median Number of Hearing Sessions for Discrimination and
Nondiscrimination Cases at NYSE, 1993 through 2002:
[See PDF for image]
[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.
[End of figure]
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.
Amounts Claimed in the Majority of Employment Cases Were over $100,000:
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:
[See PDF for image]
Note: For 2002, analysis based only on cases decided in January through
June.
[End of figure]
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
NYSE tend to include mostly the larger, more established broker-
dealers, whose employees may seek higher compensatory damages in
arbitration cases.
Cases Involving Discrimination Were Less Likely to Win Some Level of
Compensatory Damages Than Cases with No Discrimination Claims:
In general, in more than 50 percent of cases at NASD and NYSE,
employees were awarded some level of compensatory damages. (See fig.
8.):
Figure 8: Percentage of Cases at NASD and NYSE in Which Employees Were
Awarded Compensatory Damages, 1993 through 2002:
[See PDF for image]
[A] For 2002, analysis based only on cases decided in January through
June.
[End of figure]
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.[Footnote 38]
Figure 9: Percentage of Discrimination and Nondiscrimination Cases at
NASD and NYSE in Which Employees Were Awarded Compensatory Damages,
1993 through 2002:
[See PDF for image]
[A] For 2002, analysis based only on cases decided in January through
June.
[End of figure]
While Most Employees Received Less Than Half of the Compensatory
Damages They Claimed, Cases That Included Discrimination Claims
Received Higher Awards:
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:
[See PDF for image]
Note: For 2002, analysis based only on cases decided in January through
June.
[End of figure]
Compared with cases with no discrimination claims, employees in cases
involving discrimination were more likely to receive larger
awards.[Footnote 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:
[See PDF for image]
Note: For 2002, analysis based only on cases decided in January through
June.
[End of figure]
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.
SEC Oversight Found SROs Could Improve Procedures to Ensure Arbitrators
Are Qualified and Perform Well:
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.
SEC Conducts Systematic Inspections and Reviews Complaint Letters to
Assess SRO-Administered Arbitration Programs:
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.):
Figure 12: Focus of SEC Inspections of NASD and NYSE, 1995-2002:
[See PDF for image]
[A] Customers' claims are claims made by investors while industry
claims are made by members of the securities industry.
[End of figure]
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[Footnote 40] and
arbitrator 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.[Footnote 41] An SEC
official noted that under the Exchange Act,[Footnote 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.[Footnote 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 SRO-
administered 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.[Footnote 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.
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.[Footnote 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.
SEC Has Made a Variety of Recommendations to Improve SRO Procedures:
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.
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;[Footnote 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.[Footnote 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.
Conclusions:
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
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.
Recommendations:
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.
Agency and SRO Comments:
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, 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 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:
Signed by Robert E. Robertson:
[End of section]
Appendix I: Scope and Methodology:
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.
Determining the Characteristics and Outcomes of Arbitrated Employment
Disputes:
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[Footnote 48] 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 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.
Determining Arbitrator Performance:
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.[Footnote 49] 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 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.
Determining the Content of SEC Complaint Letters:
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.
[End of section]
Appendix II: Comments from the Securities and Exchange Commission:
UNITED STATES:
SECURITIES AND EXCHANGE COMMISSION WASHINGTON. D.C. 20549:
DIVISION OF MARKET REGULATION:
August 5, 2003:
Mr. Robert E. Robertson Director:
General Accounting Office Education, Workforce, and Income Security
Issues 441 G Street, N.W. - 5T57 Washington DC 20548:
Re: Draft Report GAO-03-790:
Dear Mr. Robertson:
Thank you for the opportunity to comment on the General Accounting
Office's draft report GAO-03-790, which addresses the arbitration of
employment disputes at NASD and New York Stock Exchange arbitration
forums. The draft report provides helpful discussion of issues
surrounding the administration of employment disputes.
In the draft report, GAO addresses the varieties of employment disputes
that parties bring to NASD and NYSE arbitration forums, actions the two
self-regulatory organizations have taken to provide fair procedures for
the parties, as well as the Commission's oversight of the process.
GAO has concluded correctly, we believe, that ultimately the success
and fairness of the arbitration process comes from the strength of the
arbitrator pool. Accordingly, we agree with the focus in the draft
recommendations on arbitrator qualifications and evaluation. The draft
calls for the SROs to take additional steps to verify basic background
information provided by applicants for their arbitration rosters, and
for the Commission to continue to include in its oversight work
attention to arbitrator evaluation.
We note that NASD - which administers the largest securities
arbitration forum - has filed with the Commission the proposed rule
change, which it discussed with GAO, to address verification of
arbitrator qualifications. NASD's proposal reflects a judgment made by
its Board that routine verification of basic arbitrator application
data would improve its parties' confidence in their arbitrators. The
proposal, if approved by the Commission, would impose the cost of
verification on arbitrator applicants. At the same time, in the absence
of examples of false statements of qualification, it is reasonable to
permit smaller arbitration forums to assess independently benefits and
costs of verifying the application data. We have found that it is
beneficial to the parties to have a choice among a variety of
arbitration forums. Given competing demands on their budgets, it may
not be necessary for all of the smaller forums to
formalize verification. Nevertheless, we intend to share your
recommendation with all of the smaller arbitration forums, and to ask
NASD to advise them of its experience under the new procedure.
As GAO recognizes in its draft report, Commission staff inspections of
SRO arbitration programs already focus on SRO procedures for evaluating
arbitrator performance. The staff closely reviews party, peer and staff
evaluations, along with the SROs' procedures for tracking and
following-up on evaluations of arbitrator performance. We agree with
GAO that evaluating arbitrator performance is a fundamental element of
the arbitration process, and will continue to review the adequacy of
procedures for evaluating arbitrator performance during future
inspections of SRO arbitration programs.
Thank you again for the opportunity to comment on the draft report. We
request that GAO include a copy of this letter in the final report.
Sincerely,
Annette L. Nazareth
Director:
Signed by Annette L. Nazareth:
[End of section]
Appendix III: Comments from NASD:
Linda D. Fienberg
President,
Dispute Resolution
Executive Vice President and Chief Hearing Officer,
Regulatory Policy and Oversight:
August 6, 2003:
Mr. Robert E. Robertson:
Director, Education, Workforce, and Income Security Issues U.S. General
Accounting Office:
441 G Street, N.W. Washington, D.C. 20548:
NASD:
Re: EMPLOYMENT DISPUTES Recommendations to Further Ensure that
Securities Arbitrators are Qualified:
Dear Mr. Robertson:
Thank you for the opportunity to comment on the GAO Report (GAO Report
or Report) to Representatives Dingell and Markey regarding the review
of securities industry employment disputes. NASD considers the
resolution of employment disputes to be an important part of the
services we provide, and we appreciate the acknowledgement in the
Report of NASD's policies and procedures intended to ensure fair
arbitration for all cases.
The GAO Report covered two primary areas:
1. Expanded steps to verify arbitrator qualifications; and:
2. Measures to enhance procedures to evaluate arbitrator performance.
We respond below to the GAO's findings in each area and describe
numerous initiatives NASD has implemented to improve our arbitration
forum. We highlight the actions already taken to implement the GAO
recommendation regarding background verification and discuss NASD
actions to improve collection of arbitrator evaluations from parties,
peer arbitrators, and staff.
Executive Summary:
NASD is committed to providing a fair and efficient forum for the
resolution of discrimination claims and other employment disputes.
Although the GAO Report covered a period of 10 years, the most
significant changes in the arbitration of securities industry
employment disputes have occurred more recently. NASD requires
arbitration of regular employment disputes such as compensation claims
and will arbitrate statutory employment discrimination claims when
employees and firms agree to arbitrate such disputes before or after a
dispute occurs. We have implemented numerous measures in the past
several years to improve our process for resolving employment disputes
and to enhance due process procedures for employment discrimination
matters. In addition, we have adopted special qualification
requirements for arbitrators serving on discrimination cases and
adopted other enhancements.
We have already filed with the Securities and Exchange Commission (SEC)
a rule proposal (NASD-SR-2003-122 on August 5, 2003) to begin
background verification for arbitrator candidates. We also have plans
to supplement our current efforts to encourage arbitrator evaluations
by parties and peer arbitrators by offering new tools to facilitate
submission of those evaluations.
Previous Employment Rule Changes:
In August 1997, the Boards of NASD Regulation and NASD ("NASD Boards")
submitted a proposal that removed from the NASD Code of Arbitration
Procedure provisions requiring registered persons to arbitrate claims
of statutory employment discrimination. That rule change was approved
by the SEC, and became effective for claims filed on or after January
1, 1999. The amended rule provided that associated persons no longer
would be required, solely by virtue of their association or their
registration with NASD, to arbitrate claims of statutory employment
discrimination. Associated persons were still required to arbitrate
other employment-related claims, as well as any business-related claims
involving investors or other persons.
In conjunction with this rule change, the NASD Boards recommended
certain enhancements to the voluntary arbitration process for
employment discrimination claims. To carry out the Boards' mandate,
NASD staff assembled a working group, including attorneys representing
employees, general counsels of member firms, and arbitrators with
expertise in employment matters, to advise on issues relating to the
arbitration of employment discrimination claims. In addition to several
issues presented to them by NASD staff, the working group considered
recommendations contained in a document known as "A Due Process
Protocol for Mediation and Arbitration of Statutory Disputes Arising
Out of the Employment Relationship" ("the Protocol"). The NASD Boards
recommended that the working group consider due process procedures
similar to those in the Protocol. As a result of these initiatives,
NASD, in 2000, further amended its Rules to enhance the dispute
resolution process for the handling of employment discrimination
disputes, and to expand disclosure to employees concerning the
arbitration of all disputes.
These rules, as approved by the SEC, deal with the qualifications of
arbitrators hearing claims of employment discrimination; the number of
arbitrators to hear such claims; special rules for discovery, awards,
and attorneys' fees; coordination of claims filed in court and
arbitration; and disclosure to associated persons of the effects of the
arbitration clause found in the Form U-4.[NOTE 1]
This series of rule changes has resulted in a reduction of employment
cases in NASD's forum, particularly matters involving employment
discrimination claims. Since 2000, the number of cases involving
employment discrimination claims has averaged fewer than 50 per year.
Although there are relatively few of these claims filed in the NASD
forum, we believe that arbitration and mediation are extremely
effective means to resolve employment disputes. Indeed, the majority of
all matters in NASD's forum are resolved between the parties through
direct negotiation or through mediation.[NOTE 2] In addition to the
decided matters in which employees
recovered damages, numerous other matters were settled between the
parties through direct negotiation or mediation.
The GAO Recommendations:
I. Verification of Arbitrator Qualifications:
Since at least 1990, Dispute Resolution has used the Central
Registration Depository (CRD)[NOTE 3] system to verify background
information
of all arbitrator candidates affiliated with the securities industry.
In addition, NASD has taken numerous measures to assure the
completeness and accuracy of arbitrator background information provided
to parties. The GAO noted many of these on page three of its November
9, 2000 GAO Report entitled: Procedures for Updating Arbitrator
Disclosure Information:
"NASD-DR "has taken actions to help ensure that arbitrators submit
updated background information. After arbitrators become enrolled in
the program, NASD-DR officials told us NASD-DR repeatedly reminds
arbitrators of the obligation to update background information. For
example, NASD-DR's arbitrator training materials note that each time
arbitrators are appointed to a case, they are to review their
disclosure reports for accuracy and update them as necessary. Other
NASD-DR materials provided to arbitrators-the Arbitrator's Reference
Guide, the Code of Arbitration Procedure, and the Arbitrator's Manual-
also contain discussions of required disclosures and the obligation to
update background information. In addition, NASD-DR officials stated
that in the NASD-DR newsletter-called The Neutral Corner, which it
sends to all arbitrators free of charge-NASD-DR regularly places
reminders about their duty to provide updated disclosure information.
NASD-DR has also used other measures to further ensure that arbitrator
background information is up to date. In 1992, and again at the end of
1998, NASD-DR surveyed its pool of arbitrators to review and verify the
accuracy of information on their backgrounds.":
In 1999, the staff updated the records of over 6,500 arbitrators based
on the arbitrators' responses to a November 1998 questionnaire.
Arbitrators who failed to respond to the questionnaire were
subsequently dropped from the roster. NASD Dispute Resolution also has
implemented regular audits to ensure that the staff inputs important
updates provided by arbitrators in a timely manner.
Additional NASD Initiatives:
As indicated above, NASD Dispute Resolution has long recognized the
importance of updating its arbitrator records in a timely and accurate
manner. We believe that when parties consider an arbitrator for
possible service, they have a fundamental right to arbitrator
information that is up-to-date, correct, and relevant. To address this
issue further, NASD Dispute Resolution took the following actions to
supplement its existing efforts:
1. Centralization of the Roster Maintenance Function. Beginning in Fall
2000, the Department of Neutral Management (DNM), located in New York
City, became
solely responsible for updating and revising arbitrator records. We
believe this change made the process easier to control and reduced the
possibility of errors.
2. On-line Update Form: Since November 1, 2000,
arbitrators have been able to update their records on-line via NASD
Dispute Resolution's Web Site. An easy, step-by-step form allows
arbitrators to update their information and to submit it
electronically[NOTE 4] to the DNM.
3. Arbitrator Disclosure Reports: Since November 1, 2000, NASD has been
giving arbitrators serving on three-person panels a copy of the
disclosure reports of their fellow arbitrators. This helps arbitrators
have a better understanding of the expertise and background of the
people with whom they are serving, and also encourages panel members to
consider the disclosures made by other arbitrators and to make similar
disclosures themselves.
NASD Dispute Resolution has undertaken an ambitious project to redesign
completely its legacy computer system. We will implement this new
system in phases over the next few years, and will create a web-based
gateway for parties, counsel, arbitrators, mediators, and staff. The
new system will provide for on-line filing of claims, pleadings, and
correspondence, as well as on-line scheduling of hearings and selection
of arbitrators and mediators. It will enable neutrals to access the
data we maintain for them on our system and to update their own
records.
Last year, even though there was no evidence that individuals were
falsifying information in order to become approved as arbitrators, NASD
felt that additional efforts to verify arbitrators' background
information would increase the confidence of parties and counsel in the
accuracy of arbitrator records. Accordingly, Dispute Resolution
resolved in the Fall of 2002 to implement by January 2, 2003 procedures
to verify the following information provided by new applicants to the
Dispute Resolution roster of arbitrators:
Federal and County criminal records, Employment information, and
Professional licenses.
Because of our intent to pass on the cost of verification to
applicants, the SEC advised us that we would need to make a rule filing
to seek approval of this new procedure. Therefore, Dispute Resolution
obtained the approval of the NASD National Arbitration and Mediation
Committee at its meeting on February 13, 2003, and the approval of the
Dispute Resolution Board of Directors at its meeting of April 23, 2003.
NASD filed with the SEC (NASD-SR-2003-122) the verification rule
proposal on August 5, 2003.
II. Initiatives Related to Arbitrator Evaluations:
NASD recognizes the critical importance of evaluating the performance
of arbitrators. We seek to maintain the quality of our roster by
continuously reviewing the performance of our neutrals. On a quarterly
basis, NASD staff members gather all evaluations from parties and from
peers and consider whether to remove certain arbitrators from the
roster. Staff observations of the arbitrator's performance and any
complaints received about a particular arbitrator are also
considered. NASD has removed arbitrators from the roster due to poor
evaluations, lack of training, failure to provide complete and accurate
disclosures, and other reasons.
In order to make appropriate determinations to maintain the quality of
the arbitrator roster, we need the input of our customers. NASD has
tried many methods to encourage parties and peers to complete
evaluations. For example, in 1997, NASD implemented new party
evaluation forms. The initial party and representative response to the
new forms was favorable in terms of both the number filed and the
valuable feedback received. This early success was due in large part to
the procedure of asking presiding chairpersons to distribute the new
questionnaires at the conclusion of the last evidentiary hearing and to
encourage the parties or their representatives to participate
voluntarily. At that time, NASD also revised the Hearing Procedure
Script to remind the chairperson to make this important request of the
parties.
These efforts resulted in a temporary increase in the number of
evaluations returned but parties and counsel are not always willing to
take the time to submit evaluations. NASD staff members take every
opportunity, during focus groups, in regular meetings of the Securities
Industry Conference on Arbitration, the Public Investors Arbitration
Bar Association, and the Securities Industry Association, and in
individual meetings with attorneys, to remind regular participants in
our forum to complete evaluation forms. In addition, NASD regularly
reminds arbitrators of the importance of completing the peer
evaluations through correspondence, in numerous articles in The Neutral
Corner, and in individual conversations.
As of July 28, 2003, the party and peer evaluation forms are available
to download from the NASD Web Site as part of the case-related
materials provided for parties and arbitrators. In addition, during the
first half of 2004, we are planning to implement evaluation forms that
parties and arbitrators can fill out on-line. This should provide
greater access to the forms, and facilitate collection and recording of
party and peer evaluations.
NASD also is committed to continue to improve record keeping of
evaluations and of follow up actions. NASD takes every complaint or
evaluation seriously and we promptly investigate any claim of improper
conduct. As suggested by the GAO, we will strive to provide better
documentation of the actions we take in response to complaints or
evaluations.
Conclusion:
NASD believes that arbitration and mediation are fair and effective
means of resolving employment disputes. We are keenly aware of the
importance of the parties' perception of fairness and of their
confidence in the process. Thus, we have taken significant steps to
ensure that arbitrator background information is complete and accurate
and have implemented measures to enhance the parties' confidence in our
forum through the verification of arbitrator background information.
NASD also understands the importance of evaluating arbitrator
performance. Staff provides part of this monitoring through
participating in initial prehearing conferences, attending hearings
when matters are brought to their attention, and conducting
conversations with arbitrators. However, we also rely heavily on
parties and peer arbitrators to provide signals about arbitrator
performance. In addition, we monitor complaint letters, conduct focus
groups, and elicit comments during informal meetings and at Dispute
Resolution public presentations. We have great confidence in the
qualifications and skills of our arbitrator roster. Nevertheless, when
there are problems, we want to identify them early and address them
through education, counseling of individual arbitrators, or, when
necessary, removal from the roster.
We are pleased that the many steps we have taken to improve our
procedures have been effective; we will continue our efforts to
maintain a fair and efficient process for resolving employment
disputes. Thank you for the opportunity to respond to the GAO Report
and to work with your staff to help fashion responsive initiatives. If
you have any questions or require further information, please contact
me at (202) 728-8407.
Very truly yours,
Linda D. Fienberg
President:
Signed by Linda D. Fienberg:
cc: Clarita Mrena - GAO Margaret A. Holmes - GAO Robert Love - SEC:
NOTES:
[1] Individuals must sign and submit Form U-4 to become registered
with a Self Regulatory Organization (SRO) such as NASD. The U-4 Form
contains a requirement that the applicant agree to arbitrate any
dispute, claim, or controversy that is required to be arbitrated under
the rules, constitution, or by-laws of the SRO.
[2] In 2002, parties settled 56 percent of all cases closed either
through direct negotiation or through mediation. Employment cases
follow a similar pattern.
[3] The CRD system, which is operated by NASD's Regulatory Services and
Operations Division, is the registration and licensing system for the
United States securities industry and its federal and state securities
regulators and SROs. NASD and the North American Securities
Administrators Association (NASAA) jointly administer the CRD system.
[4] Arbitrators may also print the form, complete it by hand, and fax
or mail it to the Department of Neutral Management.
[End of section]
Appendix IV: Comments from the New York Stock Exchange:
Robert S. Clemente Director:
Arbitration:
New York Stock Exchange, Inc. 20 Broad Street:
New York, NY 10005:
tel: 212.656.5608 fax: 212.656.2727/2558 Clemente@nyse.com:
NYSE:
August 11, 2003:
Robert E. Robertson Director:
Education, Workforce and Income Security Issues
U.S. General Accounting Office:
441 G Street, NW --Room 5928 Washington, DC 20548:
Re: Draft GAO Report 03-790 --Employment Disputes. Recommendations to
Further Ensure that Securities Arbitrators are Qualified:
Dear Mr. Robertson:
The New York Stock Exchange, Inc. ("NYSE") appreciates the opportunity
to provide comments on the above-referenced draft GAO report, a copy of
which you emailed to me on July 15, 2003 ("the draft report"). We also
discussed some of the general points in this letter with your
colleagues Margaret Holmes and Clarita Mrena during a conference call
last week, and we are mindful of the time and effort that GAO staff
have devoted to seeking information from NYSE relating to its
arbitration program. [NOTE 1]:
The draft report recommends that NYSE and NASD be directed by the SEC
to verify the qualifications of all applicants for arbitrator
positions. For the reasons detailed below, NYSE believes that, for
NYSE, the costs of additional verification of the arbitrator pool
significantly exceed the benefits that would be gained. Accordingly, we
respectfully request that GAO consider and implement the comments in
this letter and in the enclosed marked pages of the draft report (a
copy of the marked pages also was emailed to Ms. Holmes on August 5,
2003). Doing so, we believe, will enable GAO to provide a fuller and
more accurate account of the current requirements and procedures
relating to the qualification and evaluation of Exchange arbitrators.
Because the draft report's title and overall focus relates to
arbitrated employment disputes, NYSE initially notes the important fact
that employment disputes constitute a very small percentage of its
arbitrations, and discrimination arbitrations initiated by employees
are a particularly small subset of those filings. In 2000, only 18% of
the arbitration filings at NYSE were initiated by employees; in 2001,
that number dropped to 13%; and in 2002, the figure
dropped further to 8.7%. Discrimination claims are a tiny subset of
this subset: they constitute less than 1 % of all arbitration filings
since 2000, and during 2003 only one employment discrimination claim
has been filed. The draft report correctly notes the diminished filing
of employment discrimination claims at NYSE since it amended its Rule
600 (in late 1998) to provide for arbitration of statutory
discrimination claims only upon agreement of the parties after the
dispute arises. Since that amendment, the majority of employment
dispute NYSE arbitrations have been claims filed by NYSE member firms
against their employees or former employees. These claims are generally
contractual disputes based upon an employee's failure to repay a
promissory note or training costs. Accordingly, they generally do not
require arbitrators to have expertise in and apply state or federal
employment laws.
Regardless of the subject matter of the dispute, NYSE is committed to
providing a fair and efficient dispute resolution forum. However,
verifying the qualifications of all applicants for arbitrator positions
seems to be directed at solving a problem that does not exist. NYSE is
not aware of any complaints by parties or counsels that arbitrators
misrepresented their qualifications or that a particular proceeding or
award was compromised on that basis. Additionally, the Exchange itself
is aware of no instances where an applicant has submitted false
information.
The absence of such complaints may reflect the fact that considerable
background information must be disclosed before an individual is even
appointed to NYSE's list of eligible arbitrators, or selected for a
specific case. To become eligible to serve as an NYSE arbitrator, an
applicant must first submit a biographical and disclosure form, known
as an "NYSE Arbitrator/Mediator Profile."[NOTE 2] The profile requires
detailed information regarding the applicant's educational background,
employment history, disciplinary or regulatory background, and any
affiliations with the securities industry. The form also inquires as to
additional qualifications that make the person competent to serve as an
arbitrator, including experience in alternative dispute resolution or
the completion of an arbitrator training program. Applicants swear or
affirm that the information provided is "true and complete" to the best
of their knowledge.[NOTE 3]
The overwhelming majority of employee-parties in NYSE arbitrations are
represented by counsel, typically highly experienced practitioners, who
can and do "make further inquiry of the Director of Arbitration
concerning an arbitrator's background." (Exchange Rule 608.)[NOTE 4] In
addition, counsel often conduct their own independent due diligence and
verification of qualifications, although arbitrators generally are from
the same community as, and their qualifications already may be known
to, the parties and/or counsel. Thus, in addition to the current
mechanism for assuring the quality of the arbitrator pool itself, the
process embodies a "last chance" qualification check by those most
interested in quality assurance, the very parties to an arbitration.
Turning to the question of costs, note that verification of all
qualification-related information would entail a more detailed
background check, involving records possessed by employers,
educational institutions, and/or licensing authorities across the
country. Regardless of who bears those costs - the parties through
higher fees, NYSE's constituents by increasing NYSE's subsidy to its
arbitration program, or the arbitrator applicants - NYSE believes they
ought not to be borne in the absence of a more compelling case for
greater verification of pool quality.
With respect to evaluation of arbitrator performance, we are pleased
that the draft report acknowledges some of the steps NYSE has taken to
improve its policies, in part in response to prior SEC recommendations.
Specific recent enhancements to NYSE's evaluation of arbitrators
include its implementation in 2003 of new software which allows for a
centralized, easily accessible record of all feedback and comments from
arbitrator evaluations, listing the type of evaluation based on its
author (party, peer or staff). Prior enhancements enabled NYSE to note
the need (if any) for remedial action, as well as the steps taken to
improve the particular arbitrator's performance. In addition, NYSE
revised its arbitrator evaluation forms to include specific questions
regarding arbitrator performance. Also, NYSE has directed chairmen of
arbitration panels to specifically include in their opening and closing
statements comments encouraging the parties and counsel to submit
evaluations.
NYSE continuously monitors and upgrades arbitrator qualification,
evaluation and training. In addition to formal evaluations, NYSE
Arbitration staff receive informal feedback from arbitrators, parties
and counsel, and regularly attend or conduct dispute resolution and
arbitrator training seminars. Additionally, the Director of Arbitration
attends conferences of the Securities Industry Conference on
Arbitration, which is a cooperative effort on the part of the
securities industry, the SROs, and the public - working with the SEC -
to implement a uniform system of arbitration, to monitor that system,
and to change it as appropriate or required.
With respect to compliance with prior SEC recommendations and general
improvements to its arbitration program, NYSE is monitored not only by
periodic SEC and other government inspections and inquiries, but also
by NYSE's own Regulatory Quality Review Department ("RQR"), which is
part of NYSE's Division of Corporate Audit and Regulatory Quality
Review. RQR functions independently with its own audit staff and
regularly reports to NYSE's Board of Directors. RQR currently is
engaged in a review of arbitrator qualification, selection, evaluation
and training, in part to review compliance with a prior RQR examination
and prior SEC recommendations on these subjects. The conduct of follow-
up reviews on matters raised by GAO and the SEC are part of the NYSE
Board's charge to RQR, and RQR has indicated, for its current review
and for its ongoing arbitration review program, that it will focus on
these issues.
NYSE will continue to work with the SEC, arbitrators, parties, counsel,
and other industry participants to improve NYSE's arbitration program,
including implementing rational and cost-effective enhancements to
arbitrator qualification and evaluation.
Again, we appreciate your consideration of NYSE's comments. If you have
any questions, please do not hesitate to contact me.
Sincerely yours,
Robert S. Clemente:
Signed by Robert S. Clemente:
Enclosures:
NOTES:
[1] In response to specific requests from GAO staff, NYSE provided
information and/or documents - including the materials referenced in
this letter - on or about August 27, 2002; November 21, 2002; January
17, 2003; February 7, 2003; February 26, 2003; and March 7, 2003.
[2] This form is available at www.nyse.com/pdfs/profile2.pdf.
[3] Additionally, as the draft report notes, an applicant must submit
two letters of recommendation. The letters - from two members of the
applicant's community, field, or profession - must contain the length
of time the writer has known the applicant and under what
circumstances; a description of the experience the applicant possesses
that qualifies him or her to serve; and an attestation as to the
character and fitness of the applicant. In many instances,
recommendations come from current NYSE arbitrators or other persons
known to NYSE.
[4] Potential arbitrators who refuse to respond to further inquiries
are subject to disqualification for cause.
[End of section]
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Clarita A. Mrena (202) 512-3022
Margaret A. Holmes (202) 512-3283:
Staff Acknowledgments:
In addition to those named above, Susan S. Pachikara, Joan K. Vogel,
and Sidney H. Schwartz made significant contributions to this report.
FOOTNOTES
[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.
[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).
[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.
[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.
[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.
[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.
[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).
[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).
[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.
[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.
[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.
[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.
[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.
[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.
[36] Sex discrimination includes sexual harassment claims.
[37] We were unable to determine what factors caused this decrease.
[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.
[39] On average, the amount claimed in discrimination cases was also
higher.
[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.
[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. § 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.
[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.
[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.
[48] NASD was formerly known as the National Association of Securities
Dealers, but now goes solely by the acronym.
[49] 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.
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