Employment Disputes: Recommendations to Better Ensure That Securities Arbitrators Are Qualified

GAO-03-790 Published: Aug 29, 2003. Publicly Released: Sep 24, 2003.
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Highlights

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.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
United States Securities and Exchange Commission To help ensure that all NASD arbitrators possess the qualifications required by their SRO, the Chairman of SEC should direct NASD to verify basic background information of all new applicants for their arbitrator rosters.
Closed – Implemented
On September 25, 2003, the Securities and Exchange Commission approved an NASD rule change imposing a fee on all new arbitrator applicants to cover the cost of background verification (68 FR 56661, Oct. 1, 2003). With the SEC approval of this NASD rule, all new applicants for the NASD arbitrator roster will have their basic background information verified.
United States Securities and Exchange Commission To help ensure that all NYSE arbitrators possess the qualifications required by their SRO, the Chairman of SEC should direct NYSE to verify basic background information of all new applicants for their arbitrator rosters.
Closed – Implemented
SEC believes the NYSE arbitration department should explore steps to ensure parties have sufficient information to make informed decisions regarding arbitrator disclosure. In addition, SEC suggested that the NYSE might want to contact NASD to learn about how they are verifying the background of all new arbitrator applicants and determine if they should adopt a similar process. Since a number of NYSE arbitrators also serve as NASD arbitrators, SEC suggested the NYSE explore the feasibility of implementing a formal arrangement to exchange information involving judicial, regulatory or professional licensing actions, to the extent such information is publicly available, that have been initiated against persons who serve as arbitrators in both arbitration forums. In response to SEC's suggestion, NYSE is in the process of developing a rule that will verify background information submitted by its arbitrators.
United States Securities and Exchange Commission SEC should continue to review the adequacy of procedures for evaluating arbitrator performance in their next inspections at NASD and NYSE.
Closed – Implemented
The Securities and Exchange Commission reported that it will continue to review the adequacy of the procedures NASD (formerly National Association of Securities Dealers) and New York Stock Exchange use for evaluation arbitrator performance.

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