oversight

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

Published by the Government Accountability Office on 2003-08-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

              United States General Accounting Office

GAO           Report to Congressional Requesters




August 2003
              EMPLOYMENT
              DISPUTES
              Recommendations to
              Better Ensure That
              Securities Arbitrators
              Are Qualified




GAO-03-790
                                               August 2003


                                               EMPLOYMENT DISPUTES

                                               Recommendations to Better Ensure That
Highlights of GAO-03-790, a report to          Securities Arbitrators Are Qualified
congressional requesters




Employees in the securities                    Arbitration is generally required for most employment disputes, except those
industry must submit to binding                dealing with discrimination claims. NYSE will only arbitrate discrimination
arbitration in most employment                 cases when parties involved agree to arbitrate after the dispute occurs.
disputes. The Securities and                   NASD will arbitrate employment discrimination cases based on agreements
Exchange Commission (SEC) is                   entered into between employees and firms before or after a dispute occurs.
responsible for overseeing these
arbitration programs—the largest
                                               NASD has instituted additional requirements, however, for these cases, such
being run by NASD and the New                  as requiring that arbitrators not be affiliated with the securities industry. In
York Stock Exchange (NYSE). The                addition, those chairing hearings for employment discrimination cases must
Congress asked GAO to examine                  hold a law degree, have 10 years of legal experience, have substantial
(1) the circumstances under which              familiarity with employment laws, and must not have primarily represented
NASD and NYSE will arbitrate                   employers or employees in the last 5 years.
employment and employment
discrimination disputes, and their             To qualify to hear cases, NASD and NYSE require that arbitrators have at
procedures for selecting and                   least 5 years of work experience, supply two letters of recommendation, and
evaluating their arbitrators; (2) the          complete training in basic arbitration procedures. Arbitrators must also
characteristics and outcomes of                provide information on their complete employment history, including any
arbitrated employment and
employment discrimination
                                               affiliation with the securities industry, as well as information on whether
disputes at NASD and NYSE over                 they have any regulatory or criminal history. Neither organization
the last 10 years; and (3) how SEC             independently verifies the qualifications for applicants not associated with
oversees the arbitration programs              the securities industry. In addition NASD and NYSE have standard
at NASD and NYSE and the results               procedures for ensuring that arbitrators selected to hear cases do not have
of these oversight activities.                 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
To help ensure that only qualified
arbitrators hear employment and                the arbitrator’s performance was adequate.
employment discrimination cases
at NASD and NYSE, GAO                          Over the last 10 years, 261 (17 percent) of the 1,546 employment disputes
recommends that SEC direct NASD                arbitrated at NASD or NYSE included a discrimination claim. Discrimination
and NYSE to verify the background              cases differed from cases with disputes that did not involve discrimination in
information provided by all                    the following ways:
arbitrator applicants. In addition,
GAO recommends that SEC, during                •   Discrimination cases required more hearing sessions.
its next inspections, continue to
                                               •   Employees won discrimination cases less often than cases not involving
review the adequacy of NASD’s and
NYSE’s procedures for evaluating                   discrimination claims.
arbitrator performance. SEC,                   •   In cases that employees won, the monetary award in discrimination
NASD and NYSE all expressed                        cases was generally larger than in cases not involving discrimination.
support for the second
recommendation, but SEC and                    SEC periodically inspects NASD and NYSE arbitration programs. On the
NYSE raised concerns about                     basis of its inspections, SEC has recommended improvements. In its most
requiring verification at NYSE.                recent inspections of NASD and NYSE, SEC made various recommendations
                                               concerning procedures for ensuring that arbitrators are qualified. In
www.gao.gov/cgi-bin/getrpt?GAO-03-790.
                                               addition, SEC recommended that one or both improve procedures for
To view the full report, including the scope   recording information on arbitrator performance in a central database and
and methodology, click on the link above.      for disqualifying arbitrators who are poor performers.
For more information, contact Robert
Robertson at (202) 512-9889 or
robertsonr@gao.gov.
Contents


Letter                                                                                         1
               Results in Brief                                                                2
               Background                                                                      4
               Both NASD and NYSE Have Policies and Procedures Intended to
                 Promote Fair Arbitration for all Cases                                        7
               Over the Last 10 Years, Relatively Few Employment Disputes
                 Involved Discrimination, and Some Variations Existed between
                 These Cases and Other Employment Disputes                                   17
               SEC Oversight Found SROs Could Improve Procedures to Ensure
                 Arbitrators Are Qualified and Perform Well                                  28
               Conclusions                                                                   32
               Recommendations                                                               33
               Agency and SRO Comments                                                       33

Appendix I     Scope and Methodology                                                         36
               Determining the Characteristics and Outcomes of Arbitrated
                 Employment Disputes                                                         36
               Determining Arbitrator Performance                                            37
               Determining the Content of SEC Complaint Letters                              38

Appendix II    Comments from the Securities and Exchange
               Commission                                                                    39



Appendix III   Comments from NASD                                                            41



Appendix IV    Comments from the New York Stock Exchange                                     47



Appendix V     GAO Contacts and Staff Acknowledgments                                        51
               GAO Contacts                                                                  51
               Staff Acknowledgments                                                         51




               Page i                  GAO-03-790 Employment Disputes in the Securities Industry
Table
          Table 1: Types of Discrimination Claims in Employment Cases at
                   NASD and NYSE, 1993 through 2002                                    18


Figures
          Figure 1: Application Process                                                11
          Figure 2: Types of Evaluations Arbitrators Received at NASD                  15
          Figure 3: How NASD Arbitrators Were Rated                                    16
          Figure 4: Number of Cases Involving Discrimination at NASD and
                   NYSE, 1993 through 2002                                             19
          Figure 5: Median Number of Hearing Sessions for Discrimination
                   and Nondiscrimination Cases at NASD, 1993 through 2002              20
          Figure 6: Median Number of Hearing Sessions for Discrimination
                   and Nondiscrimination Cases at NYSE, 1993 through 2002              21
          Figure 7: Percentage of Discrimination and Nondiscrimination
                   Cases at NASD and NYSE from 1993 through 2002, by
                   Amount Claimed                                                      22
          Figure 8: Percentage of Cases at NASD and NYSE in Which
                   Employees Were Awarded Compensatory Damages, 1993
                   through 2002                                                        24
          Figure 9: Percentage of Discrimination and Nondiscrimination
                   Cases at NASD and NYSE in Which Employees Were
                   Awarded Compensatory Damages, 1993 through 2002                     25
          Figure 10: Percentage of Cases Won at NASD and NYSE from 1993
                   through 2002 by Amount Awarded                                      26
          Figure 11: Percentage of Discrimination and Nondiscrimination
                   Cases at NASD and NYSE from 1993 through 2002, by
                   Amount Awarded                                                      27
          Figure 12: Focus of SEC Inspections of NASD and NYSE, 1995-2002              29




          Page ii                GAO-03-790 Employment Disputes in the Securities Industry
Abbreviations

CRD               Central Registration Depository
EEOC              Equal Employment Opportunity Commission
NYSE              New York Stock Exchange
SAC               Securities Arbitration Commentator
SEC               Securities and Exchange Commission
SRO               self-regulatory organization




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Page iii                     GAO-03-790 Employment Disputes in the Securities Industry
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)1, which regulate the firms in the securities industry that are their
                                   members. Two SROs, NASD2 and the New York Stock Exchange (NYSE),
                                   run the largest arbitration programs. While NASD and NYSE are
                                   responsible for operating arbitration programs, the federal government,
                                   through the Securities and Exchange Commission (SEC), oversees NASD
                                   and NYSE to help ensure that arbitration procedures are fair and the rights
                                   of all parties to the arbitration process are protected.




                                   1
                                    SROs have an extensive role in regulating the U.S. securities markets, including ensuring
                                   that members comply with federal securities laws and SRO rules. SROs include all the
                                   registered U.S. securities exchanges and clearing organizations, NASD, and the Municipal
                                   Securities Rulemaking Board.
                                   2
                                    NASD was formerly known as the National Association of Securities Dealers, but now
                                   goes solely by the acronym.



                                   Page 1                        GAO-03-790 Employment Disputes in the Securities Industry
                   Recently you raised concerns about the fairness of the arbitration process
                   and the quality of arbitrators, especially in cases involving alleged
                   employment discrimination.

                   In response to your concerns about the arbitration of employment cases,
                   this report examines (1) the circumstances under which NYSE and NASD
                   will arbitrate employment and employment discrimination disputes and
                   each SRO’s procedures for selecting and evaluating their arbitrators;
                   (2) the characteristics and outcomes of arbitrated employment and
                   employment discrimination disputes at NYSE and NASD over the last
                   10 years; and (3) how SEC oversees the arbitration programs at NYSE and
                   NASD and the results of these oversight activities.

                   In response to your request, we conducted interviews with officials from
                   SEC, NYSE, NASD, and other established arbitration forums. In addition,
                   we analyzed existing rules and procedure manuals governing NASD and
                   NYSE. To determine how employees fared in securities arbitration, we
                   analyzed data on 10 years of arbitration cases filed by employees at NASD
                   or NYSE in which arbitrators had issued decisions (referred to as awards).
                   Specifically, we calculated the rates reflecting the extent to which
                   employees won awards, how much employees were compensated in
                   awards, and various factors that could influence arbitration outcomes.
                   Finally, to review SEC’s oversight activities, we reviewed a random sample
                   of complaint letters SEC received concerning arbitration and its inspection
                   reports for NYSE and NASD over the last 10 years, concentrating on issues
                   concerning arbitrator qualifications and arbitrator performance. Appendix
                   I contains a detailed description of our scope and methodology and
                   describes the reliability and limitations of our data. We performed our
                   work between August 2002 and June 2003 in accordance with generally
                   accepted government auditing standards.


                   Both NASD and NYSE have policies and standard procedures intended to
Results in Brief   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


                   Page 2                   GAO-03-790 Employment Disputes in the Securities Industry
familiarity with employment laws, and must not have primarily presented
employers or employees in the last 5 years. NYSE, on the other hand, will
only arbitrate if both parties agree after a discrimination claim has been
asserted. To qualify to hear cases, NASD and NYSE require that applicants
provide information on their employment history, including their
affiliation with the securities industry as well as information on whether
they have any regulatory or criminal disciplinary history, have at least
5 years of work experience, supply two letters of reference, and complete
training in basic arbitration procedures. Neither organization verifies the
qualifications submitted by applicants not associated with the securities
industry. In addition, NASD and NYSE have standard procedures for
ensuring that arbitrators selected to hear cases do not have conflicts, for
evaluating arbitrator performance, and for removing poorly performing
arbitrators from their rosters. As an indication of how well an arbitrator
conducts hearings and makes decisions, NASD and NYSE rely primarily on
the evaluations of arbitrators by staff, parties in disputes, and other
arbitrators on cases. However, since some of these evaluations are
voluntary, not all NASD or NYSE arbitrators are evaluated for every case
they hear. Officials at each SRO reported that if they receive no
information about an arbitrator’s performance on a case, they assume that
the arbitrator’s performance was adequate.

Over the last 10 years, 261 (17 percent) of the 1,546 employment disputes
arbitrated by NYSE and NASD involved one or more discrimination
claim(s), most often related to age or sex, and the characteristics and
outcomes of discrimination cases were somewhat different from those
cases not involving discrimination. Disputes involving discrimination
required more hearing sessions and took longer to complete than cases
with no discrimination claims. The compensatory damages claimed for the
majority of cases, whether or not it included a discrimination claim, was
over $100,000. Although the majority of employees were awarded some
compensatory damages, employees in discrimination cases were less
likely to be awarded any compensatory damages. Most employees in
discrimination cases who were awarded compensatory damages, however,
received more than their counterparts in cases not involving
discrimination.

Based on periodic inspections of NASD and NYSE and reviews of
complaint letters, SEC has found problems with procedures that one or
both SROs used to oversee arbitrator qualifications and track arbitrator
performance. SEC inspections generally include a review of arbitration
procedures, interviews with staff, and a review of arbitrator profiles and
closed cases, including both employment and employment discrimination


Page 3                  GAO-03-790 Employment Disputes in the Securities Industry
             cases. According to SEC officials, complaint letters can affect the focus
             of an inspection, but we found that SEC receives relatively few letters
             concerning employment arbitration. In its most recent inspections of
             NASD and NYSE, SEC made various recommendations concerning
             procedures for ensuring that arbitrators are qualified. In addition, SEC
             recommended improving procedures for recording information on
             arbitrator performance in a central database and for disqualifying
             arbitrators who are poor performers. For example, SEC recommended
             that arbitrators’ files be updated to reflect changes submitted by
             arbitrators that affect their qualifications. Both NYSE and NASD have
             taken steps to implement SEC’s recommendations.

             To help ensure that all NASD and NYSE arbitrators possess the
             qualifications required by their SRO, we recommend that SEC direct NASD
             and NYSE to verify the basic background information provided by all new
             applicants for their arbitrator rosters. We also recommend that SEC,
             during its next inspections, continue to review the adequacy of NASD and
             NYSE procedures for evaluating arbitrator performance. SEC, NASD, and
             NYSE all expressed support of the second recommendation, but SEC and
             NYSE raised concerns about requiring verification of information for
             arbitrator applicants at NYSE. We continue to believe the value of
             authenticating basic background information of arbitrator applicants
             outweighs these concerns because it will increase party confidence in
             arbitration, a process that is required for the majority of disputes. NASD
             indicated the steps they have taken to begin verifying the background
             information for all new arbitrator applicants.


             The arbitration of disputes first occurred at NYSE in the late nineteenth
Background   century but eventually became the practice within the securities industry
             in general. Arbitration was used to settle disputes over employee
             contracts, and in 1991 the U.S. Supreme Court ruled that an age
             discrimination claim brought forth by a securities industry employee could
             be subject to mandatory arbitration.3 Subsequent court decisions
             permitted the use of mandatory arbitration for resolving other
             employment discrimination disputes, including sexual harassment.4


             3
                 Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).
             4
              Alford v. Dean Witter Reynolds, Inc., 939 F. 2d 229 (5th Cir. 1991); Cremin v. Merrill
             Lynch, Pierce, Fenner & Smith, Inc., 957 F. Supp. 1460 (N.D. Ill. 1997); andCircuit City v.
             Adams, 532 U.S. 105 (2001).




             Page 4                          GAO-03-790 Employment Disputes in the Securities Industry
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.5

SROs include NYSE that operates and regulates its market, as well as
NASD, a private-sector provider of financial regulatory and dispute
resolution services.6 Their responsibilities include overseeing the
arbitration of claims brought in the securities industry by customers,
firms,7 and employees as required by the Securities and Exchange Act of
1934 (the Exchange Act).8 In 2000, NASD established a separate subsidiary
to administer its arbitration program. The subsidiary is headquartered in
Washington, D.C., and New York City, but also maintains staff in five
regional offices. NYSE administers fewer arbitration cases than NASD and
its arbitration program, which is administered by its Department of
Arbitration in New York, is much smaller. NASD’s subsidiary operates with
a staff of about 200 while NYSE maintains a staff of approximately 18. In
addition, NASD currently has approximately 7,000 arbitrators on its roster,
while NYSE has 1,905.

Arbitrators play a key role in resolving disputes brought forth in the
securities industry and their performance has a direct bearing on the
fairness of a hearing. Like judges, they oversee the administration of
proceedings, including determining the number of hearing sessions a case




5
 According to NYSE, the overwhelming majority of employees in arbitration are
represented by attorneys who specialize in employment law.
6
 Although NASD and Nasdaq are in the process of separating, as of this date NASD is the
SRO and Nasdaq is a subsidiary of NASD. Nasdaq’s application for Exchange Registration
status as a registered securities exchange under Section 6 of the Exchange Act is still
pending before SEC. NASD delegates to NASD Regulation, its wholly owned subsidiary,
SRO responsibilities as its regulatory arm.
7
 Firms must register with an SRO to operate within the securities industry and must abide
by its rules.
8
 Customers bring the majority of arbitration cases in the securities industry. For example,
in 2002, 78 percent of all decided cases at NASD were customer cases. Similarly, in 2002,
only approximately 9 percent of all cases filed with NYSE were filed by employees.




Page 5                        GAO-03-790 Employment Disputes in the Securities Industry
requires and what evidence can be admitted.9 Unlike judges, arbitrators
are not required to base their decisions on legal precedent or to provide
any reasoning for their decisions. In addition, their decisions—unlike
those rendered in court—can only be appealed on limited grounds.

SEC is responsible for regulating securities market participants, including
SROs such as NASD and NYSE. In addition to overseeing SROs through its
inspections, SEC approves the rules they use to administer their
arbitration programs to ensure they comply with the Exchange Act and
other securities laws and rules. When SROs propose new rules or change
existing rules, they are required to file them with SEC for approval.10 SEC
then provides interested parties an opportunity to comment on proposed
rules or rule changes. In general, SEC is to approve certain new or
amended rules within 90 days after they are published or institute
proceedings to determine whether they should be disapproved.




9
  At both NASD and NYSE, arbitrators are classified as either public or nonpublic (NYSE
uses the term industry). A nonpublic arbitrator is someone from the securities industry,
retired from or has spent a substantial part of their career in the securities industry, or is an
attorney, accountant, or professional who devoted more than 20 percent of his or her
professional work to securities industry clients in the last 2 years. Public arbitrators then
are those arbitrators who do not fall into the industry category and in addition do not have
a spouse or a household member (referred to as an immediate family member at NASD)
who is associated with someone in the securities industry. In June 2003, NASD filed
proposed amendments to rules contained in its Code of Arbitration Procedure regarding
the classification of public arbitrators. The purpose of proposed rule amendments was to
further ensure that individuals with significant ties to the securities industry may not serve
as public arbitrators.
10
  Certain rules proposed by SROs that deal with a narrow list of topics, such as rules that
establish or change dues, fees, or other charges that can become effective upon filing with
SEC without action by SEC. SEC is required to publish notice of the proposed rule changes
filed by the SRO and the rule change is subject to a 21-day comment period that begins
when the notice of the filing is published. Within 60 days of SRO’s filing of a rule that is
effective upon filing, SEC can annul the rule change and require that the rule be refiled
under the normal notice and comment period.




Page 6                         GAO-03-790 Employment Disputes in the Securities Industry
                              In most employment disputes, arbitration is mandatory, although for
Both NASD and NYSE            discrimination cases NYSE rules strictly limit its use and NASD has
Have Policies and             instituted additional requirements. For both customer and employment
                              disputes, both SROs require that all arbitrators have certain qualifications
Procedures Intended           in order to be on their rosters of available arbitrators. However, neither
to Promote Fair               SRO verifies the qualifications for all of the arbitrators on their rosters.
                              Both SROs have procedures designed to ensure that the arbitrators
Arbitration for all           selected to hear cases do not have conflicts and have procedures for
Cases                         evaluating arbitrator performance. Yet, arbitrators who hear cases at both
                              SROs may not be receiving evaluations on a routine basis.

Arbitration Is Required for   Prior to 1999, both NASD and NYSE rules required the mandatory
Most Employment               arbitration of all employment-related disputes, including discrimination
Disputes, Although for        claims.11 In the 1990s, as discrimination claims filed at NASD rose,12 some
                              Members of Congress challenged the use of mandatory arbitration for
Discrimination Cases          discrimination disputes. In 1997, the Equal Employment Opportunity
NYSE Has Strictly Limited     Commission (EEOC), which is responsible for enforcing the nation’s
Its Use and NASD Has          employment discrimination laws, published a policy statement opposing
Instituted Additional         the use of mandatory arbitration agreements for these disputes.
Requirements                  Opposition to mandatory arbitration for these claims stemmed from
                              concerns that arbitration eliminated the role the courts played in deterring
                              discrimination and protecting employees. In addition, others believed that
                              many arbitrators were unfamiliar with antidiscrimination laws and,
                              therefore, could not provide a fair hearing on these claims.

                              NASD and NYSE took different approaches in changing their rules to
                              address these concerns. NYSE followed EEOC’s recommendation and only
                              arbitrates discrimination claims when all parties agree to arbitration after
                              the dispute occurs. NASD, on the other hand, no longer requires that
                              employees arbitrate employment discrimination disputes, but will arbitrate
                              these disputes, based on agreements employees have made before or after
                              the dispute occurs.13 The net result is that NASD will administer arbitration


                              11
                               Associated persons of broker-dealers accept the rules of SROs by signing the U-4, the
                              application they must complete to become registered with a SRO. Within the U-4,
                              applicants agree to arbitrate any dispute claim or controversy that is required to be
                              arbitrated under the rules, constitutions, or by-laws of the SRO.
                              12
                                 Discrimination claims filed rose from 4 in 1991 to 109 in 1996 (see Federal Register, 62,
                              242).
                              13
                                As approved by SEC, effective January 1, 1999, NASD’s Code of Arbitration Procedures
                              were amended so that registered persons were no longer required to arbitrate claims of
                              statutory employment.




                              Page 7                         GAO-03-790 Employment Disputes in the Securities Industry
cases that include discrimination claims if the parties have entered into an
agreement to do so. This includes policies employees sign as a condition
of employment.

According to NASD, in conjunction with this rule change, they assembled
a working group14 to consider recommendations contained in a document
known as “A Due Process Protocol for Mediation and Arbitration of
Statutory Disputes Arising out of the Employment Relationship.” This Due
Process Protocol was developed in 1995 by a committee of representatives
from a range of organizations,15 to provide arbitration procedures for
statutory employment claims. Following NASD’s review of this protocol
NASD introduced additional requirements for these types of claims.16
Changes ranged from setting qualifications for arbitrators who chair
arbitrator panels17 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 primarily18 represented employers or
employees in the last 5 years.19 In addition to special chair qualifications,
all the arbitrators who hear cases with discrimination claims must also be
classified as “public”—that is, individuals who are not affiliated with the
securities industry either professionally or through their family
relationships. For employment discrimination claims of $100,000 or less, a



14
 The working group included attorneys representing employees, general counsels of
member firms, and arbitrators with expertise in employment matters.
15
 Organizations represented were involved in labor, employment law, and alternative
dispute resolutions.
16
 NASD has also adopted rules to allow claims to be consolidated in one case, meaning if
someone chooses to take a discrimination claim to court they will also be allowed to
combine nondiscrimination claims in that case.
17
  Arbitration cases are heard by one or three arbitrators, depending on the size of the claim.
In discrimination cases where there is only one arbitrator, that arbitrator must also meet
these requirements.
18
 Primarily is defined as 50 percent or more of the arbitrator’s business or professional
activities.
19
  Arbitrators who qualify to serve as chairs on discrimination disputes are asked to provide
a summary description of their qualifications for discrimination disputes, which is
presented to the parties in the case. This summary is in addition to the narrative summary
that all arbitrators must provide regarding their general arbitrator qualifications.




Page 8                        GAO-03-790 Employment Disputes in the Securities Industry
single public arbitrator is appointed, and for claims greater than this
amount a panel of three public arbitrators is selected.20

In disputes subject to arbitration that arise out of the employment or
termination of employment of an associated person, and that relate
exclusively to disputes involving employment contracts, promissory notes
or receipt of commissions, a single “nonpublic” arbitrator—that is
someone who is affiliated with the securities industry—can only hear
nondiscrimination claims of $50,000 or less. In similar cases with claims of
$50,000 or more, a panel composed of three nonpublic arbitrators is
appointed. Currently, arbitrator chairs in cases without discrimination
claims need the same qualifications as any arbitrator.21 At NYSE, all
employment disputes, at the option of the employee, are entitled to a panel
of three arbitrators, and a majority of the arbitrators cannot be from the
industry unless the employee requests it.

NASD rules, adopted in 2000, also made two changes to procedures
concerning arbitrator decisions in cases with employment discrimination
claims. First, the rules specifically state that arbitrators can award
“reasonable” attorney’s fees for discrimination claims.22 This change also
creates an incentive for attorneys to take discrimination cases because it
provides greater assurance that they will be compensated for their work if
they are successful. Second, NASD’s rule change requires arbitrators to
document the disposition of discrimination claims, something not required
for the other claims. While this rule still does not require arbitrators to
explain their decisions, it requires arbitrators to specify for the parties
how they ruled on any statutory discrimination claim.




20
     Parties may agree to have the case determined by a single arbitrator.
21
   NASD is now considering expanding the qualifications for arbitrator chairs by requiring
them to take the chair-training course and to have participated in a certain number of
arbitration cases. According to NASD officials, having chairs be more familiar with the
legal process would help the arbitration process.
22
  SEC stated in its order approving NASD’s rule that it approved “the specific provision
governing attorneys fees in cognizance of the special attention to them under the civil
rights laws” and that “awards of attorney’s fees by arbitrators remain available to all parties
in other cases administered under the Code of Arbitration Procedure, if applicable law
permits such an award.” Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by the National Association of Securities Dealers, Inc., Relating to the Arbitration
Process for Claims of Employment Discrimination, Release No. 34-42061 (Oct. 27, 1999).




Page 9                           GAO-03-790 Employment Disputes in the Securities Industry
Both SROs Have Similar         Both SROs require that all applicants for the arbitrator roster provide
Qualifications for             information on their affiliation with the securities industry, have 5 years of
                               work experience, supply two letters of recommendation, and complete
Arbitrators and Neither
                               training in basic arbitration procedures.23 Recommendation letters must
Verify the Qualifications of   include particular information about the person writing the letter, the
All Applicants                 prospective arbitrator, and an attestation as to the character and fitness of
                               the nominee. NASD also requires that applicants take a multiple choice
                               examination and receive a passing score of at least 80 percent. (See fig.1.)
                               After receiving arbitrator applications from applicants who work or
                               worked in the securities industry, the SROs check the Central Registration
                               Depository (CRD), a computerized database that contains the educational,
                               work, and disciplinary history for current and former securities registered
                               persons.24 Therefore, the CRD only covers arbitrators classified as
                               nonpublic. Currently, information from arbitrator applicants not employed
                               in the securities industry is not checked by the SROs, but NASD is
                               proposing a rule change that would require the verification of background
                               information on all new arbitrators.25




                               23
                                 On the application form arbitrators are also asked to answer a series of questions on
                               whether they have engaged in criminal activities and provide information on their
                               affiliation to the securities industry—something arbitrators are required to update on an
                               ongoing basis. For more information on arbitrator disclosure requirements, see U.S.
                               General Accounting Office, Follow-up Report on Matters Relating to Securities
                               Arbitration, GAO-03-162R (Washington, D.C.: Apr. 11, 2003) and Michael A. Perino, Report
                               to the Securities and Exchange Commission Regarding Arbitrator Conflict Disclosure
                               Requirements in NASD and NYSE Securities Arbitrations (Nov. 4, 2002).
                               24
                                 NASD and the North American Securities Administrators Association established the CRD
                               in 1981 and its use allows individual brokers and firms to meet both state and federal
                               reporting requirements. NASD has instituted a statistical quality control process to
                               measure the accuracy of disclosures and has periodic examinations done of the data by
                               data quality professionals.
                               25
                                In August 2003, NASD filed a rule proposal with SEC, which would require that new
                               arbitrator applicants have background information verified for federal and county criminal
                               records, employment information, and professional licenses (SR-NASD-2003-122).




                               Page 10                      GAO-03-790 Employment Disputes in the Securities Industry
Figure 1: Application Process


  Basic information applicant                      Verification of background                          Arbitrator training requirements
  must provide                                     information

  NYSE & NASD:                                     NYSE & NASD:                                        NASD:
   Work experience and                             Check CRDa for those                               Applicants attend training and
    education.                                       applicants who worked in the                        pass a written test before being
   Information on all affiliations with             securities industry.                                placed on the roster.
    the securities industry.                        Neither checks background                         NYSE:
   Information on all regulatory and                information of applicants who did                  Arbitrators attend training within
    criminal activities.                             not work in the securities                          1st year on the roster and before
                                                     industry.
   Two letters of reference.                                                                            arbitrating a case.

Source: NASD and NYSE.
                                           a
                                            A computerized database that holds the educational, work, and disciplinary history for current and
                                           former securities registered persons.


                                           NASD reported that verifying the background information on all new
                                           arbitrators would enhance the reputation of its arbitration program. If SEC
                                           approves its rule change, NASD will use an independent firm to conduct
                                           the background checks and will pass the cost of this process—expected to
                                           be between $60 and $85—onto the applicant. NYSE did not report any
                                           plans to change its procedures at this time.

                                           At NASD, once arbitrators’ applications are approved, they must take a
                                           half-day introductory training course, be evaluated by the trainer, and pass
                                           a 25-question multiple choice examination on arbitration procedures. Once
                                           they pass the examination and evaluation by the trainer, they are included
                                           on the NASD arbitrator roster. At NYSE, on the other hand, once an
                                           application is reviewed and approved by staff, the applicant is considered
                                           able to arbitrate any case once he or she participates in one training
                                           course on arbitration procedures and conduct issues.26

                                           Ongoing training at both SROs is limited. NYSE requires that arbitrators
                                           continue to attend at least one training course every 4 years.27 NASD does
                                           not have such a requirement but does offer chairperson training for those


                                           26
                                             Arbitrators can fulfill their training requirement by reviewing the arbitrator conduct and
                                           procedures with NYSE staff prior to a hearing. In addition, NYSE reported that many of
                                           their new applicants have experience and training from other arbitration forums.
                                           27
                                                NYSE can waive this requirement.




                                           Page 11                          GAO-03-790 Employment Disputes in the Securities Industry
                           arbitrators wanting to chair cases.28 One SEC official raised concerns
                           about mandating ongoing training for arbitrators, arguing that it may
                           discourage the most experienced arbitrators from serving.


Both SROs Have             Both SROs, recognizing that arbitrators are one of the key factors to
Procedures for Selecting   ensuring a fair and efficient process, have developed procedures to help
Arbitrators for Cases      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
Intended to Ensure That    the expertise the arbitrators held. In 1996, a NASD task force, organized to
They Are Unbiased          review the securities arbitration process, reported that claimants and their
                           representatives were concerned that staff could be biased in selecting
                           arbitrators. To address this concern, NASD changed how arbitrators were
                           selected. Since 1998, NASD has allowed both parties involved in a dispute
                           to choose the arbitrators, which limited NASD staff involvement in the
                           selection process.29 NASD provides parties with a computer-generated list
                           of up to 15 arbitrators with profiles for each arbitrator.30 An arbitrator’s
                           profile includes a paragraph on the arbitrator’s background, a summary of
                           the arbitrator’s education and work history, the arbitrator’s experience,
                           the arbitrator’s disclosure and conflict information, and a list of all the
                           publicly available award decisions that the arbitrator has rendered. Each
                           party may peremptorily strike any arbitrator from the list, then ranks the
                           arbitrators who remain by order of preference. If the parties do not
                           mutually agree on an acceptable number of arbitrators after striking and
                           ranking, the list is extended by the computer and the parties are assigned
                           the next available arbitrator(s) on the computerized roster. While this
                           process reduces the potential for staff bias, some arbitrators have raised
                           concerns that a computer-generated list may not contain arbitrators with
                           substantial experience.

                           In 2000, NYSE also began giving parties three options for selecting
                           arbitrators: (1) choosing randomly from a list drawn from all available


                           28
                                In mid-2003, NASD Chairperson training was converted to an online interactive program.
                           29
                            At that time, NASD reviewed all arbitrators on its roster and sent out letters to all
                           arbitrators requesting that they update their profiles; in the process, NASD removed 800 to
                           1,000 arbitrators on its roster.
                           30
                             The composition of the lists depends on the size of the claim and the nature of the
                           dispute. For example, in employment discrimination cases being heard by three arbitrators
                           (claims of more than $100,000), the list will contain the names of 10 public arbitrators, plus
                           the names of 5 public arbitrators who meet the special additional requirements to chair
                           discrimination cases.




                           Page 12                         GAO-03-790 Employment Disputes in the Securities Industry
                            arbitrators; (2) choosing from a list the staff compiles; or (3) having NYSE
                            staff attorneys select, the only procedure used prior to 2000. If all parties
                            cannot agree on one of these options, staff attorneys determine who will
                            arbitrate. According to NYSE, staff selection has remained the most
                            common method for selecting arbitrators, with parties using it for about
                            85 percent of the cases. Since this method is the default if parties cannot
                            agree, it is not possible to determine how often this method was actually
                            chosen by parties, or used as the default.

                            At both NASD and NYSE, arbitrators selected to serve on cases are asked
                            to review the case and determine if they have any possible conflicts of
                            interest. In addition, arbitrators must update their profile, which includes
                            information on their employment history and affiliation with the securities
                            industry. Both NYSE and NASD will remove arbitrators from their roster if
                            they misstate or fail to disclose information concerning conflicts of
                            interest.


Both SROs Have              Each SRO has developed three types of evaluations for arbitrators:
Procedures to Track         (1) party evaluations, completed by either party or their attorneys;
Arbitrator Performance,     (2) peer evaluations, completed by other arbitrators who hear the case;
                            and (3) staff evaluations. Both SROs summarize evaluation results and
Although Many Arbitrators   input them into a centralized arbitrator database. According to NASD
May Not Be Evaluated        officials, staff are required to summarize and input only negative
                            comments on an arbitrator, although SEC staff noted that in practice it
                            also often sees positive comments from NASD staff recorded in the files.
                            NYSE officials, on the other hand, reported recording a complete summary
                            of the evaluations. NASD conducts quarterly audits in which they check to
                            see if staff members are consistently entering information in the
                            centralized database and documenting actions taken concerning any
                            evaluations. In addition, the audits review how complaint letters have
                            been recorded, reviewed, and resolved.

                            Both SROs reported that it has been difficult for them to get parties to
                            return evaluations.31 Yet, NYSE reported that response rates have
                            increased since it began requiring that arbitrator chairs encourage parties
                            to complete the evaluations and reiterate that the evaluations are



                            31
                             NASD reported that it is currently working to allow parties and arbitrators to complete
                            and return evaluations online and that this feature would increase the number of
                            evaluations completed.




                            Page 13                      GAO-03-790 Employment Disputes in the Securities Industry
confidential and will not affect the case outcome. NYSE said that peers are
very responsive with evaluations. NYSE said it requires that staff observe
new arbitrators for their first hearing at NYSE and said it sought to
evaluate all arbitrators, who serve on a case that goes to a hearing, at least
once a year. Although NYSE said that it had fulfilled this requirement in
2002, NYSE could not provide data on evaluations showing that arbitrators
had been observed. NASD could not report how often staff evaluate
arbitrators. Officials from both SROs said that if no information is received
about an arbitrator on a case, they assume the arbitrator performed
adequately.

To gain a better understanding of how often arbitrators were evaluated,
we reviewed the records of 124 out of the 494 arbitrators at NASD who
had heard discrimination claims and/or other employment claims between
January 2001 and June of 2002.32 On the basis of this sample, we estimate
that about 45 percent of arbitrators who heard cases during this time had
received some type of evaluation and of those only about 2 percent
received all three types of evaluations—peer, party, and staff. (See
fig. 2 for a breakdown of the types of evaluations arbitrators received.)




32
 We did not review arbitrator records at NYSE because its current computer system did
not allow NYSE to provide us with the data we sought, within the time frame for this
report.




Page 14                     GAO-03-790 Employment Disputes in the Securities Industry
Figure 2: Types of Evaluations Arbitrators Received at NASD

Percentage of arbitrators
45
        40
40

35

30

25

20

15                14         14       14
                                              11
10

 5                                                     4
                                                               2

 0
      Peer      Party       Staff    Peer    Peer    Party    All
      only      only        only      and    and      and    three
                                     party   staff   staff
     Type of evaluations
Source: NASD.



Although NASD supplements its evaluations by rating arbitrators on a
quarterly basis,33 our review showed that ratings are often based on little
or no information. Every quarter NASD rates those arbitrators who have
been active during that time, using a 3-point scale, with 1 being the lowest
and 3 being the highest. Staff bases the rating on evaluations and
complaints received that quarter and any notes recorded during that time
frame in the arbitrator database. In general, NASD reported that any
arbitrator who did not have any evaluations during the quarter is likely to
be rated adequate (“2”). We estimate that the majority of the arbitrators
that were rated received an adequate rating of 2, whether or not they
received any evaluations during this time, and 57 percent of arbitrators
with a 2 rating had not received any evaluations during this time frame.
(See fig. 3.) Some arbitrators without evaluations during this time frame
were also rated excellent, which could be a result of the rating from the
prior quarter.



33
 NYSE reported that it does not have a numerical rating system and did not think it would
add anything to the evaluation process it has in place.




Page 15                             GAO-03-790 Employment Disputes in the Securities Industry
Figure 3: How NASD Arbitrators Were Rated
Percentage of NASD arbitrators
100

 90
                                         79
 80                             75

 70

 60

 50

 40

 30
                                                          21
 20                                               17

 10      8
                  0
  0
         Arbitrators            Arbitrators       Arbitrators
           rated 1                rated 2           rated 3

                Arbitrators with evaluations

                Arbitrators without evaluations

Source: NASD.



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



Page 16                                GAO-03-790 Employment Disputes in the Securities Industry
                        permanently dropped from NASD’s arbitrator list and 1 was temporarily
                        made unavailable pending further review. One arbitrator, who had been
                        permanently dropped in 2001, appeared to have complaints going back to
                        1993, yet the notes showed that no changes had been made to the adequate
                        rating of 2. For another permanently dropped arbitrator, staff noted they
                        were concerned that no negative comments were recorded on the
                        computer file since other staff and arbitrators had complained about this
                        arbitrator’s conduct. Of the 9 remaining arbitrators, information provided
                        by NASD indicated that staff had followed-up on the complaints raised for
                        5 arbitrators.


                        Of the 1,546 employment cases34 decided by arbitrators at NASD and NYSE
Over the Last 10        over the last 10 years,35 261 (17 percent) included at least 1 discrimination
Years, Relatively Few   claim. Cases with discrimination claims required more hearing sessions
                        and took longer to complete than those with no discrimination claims. At
Employment Disputes     the same time, the compensatory damages claimed in all cases was
Involved                generally over $100,000, with claimed amounts generally higher at NYSE
                        than at NASD. In over half of all employment cases, employees won some
Discrimination, and     level of monetary compensation, although in cases with discrimination
Some Variations         claims employees were generally less likely to win. In most cases, when
Existed between         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
These Cases and         being $50,000 or less. When compensatory damages were awarded in cases
Other Employment        involving discrimination, it tended to be higher than compensatory
                        damages awarded in other employment cases, with just over 60 percent of
Disputes                discrimination cases receiving more than $50,000. Appendix 1 describes
                        the reliability and limitations of these data.




                        34
                          Our analysis was conducted on cases decided by arbitrators and does not include cases
                        that were settled or withdrawn. According to NASD, in recent years, parties agreed on a
                        resolution in nearly 60 percent of all cases.
                        35
                         The data analyzed spanned from January 1993 through June 2002—the most current data
                        available.




                        Page 17                      GAO-03-790 Employment Disputes in the Securities Industry
Age and Sex                                                  Employment cases arbitrated at NASD and NYSE can contain 1 or more
Discrimination Were Most                                     claims, some of which might involve discrimination. Of all 1,546
Prevalent in the Relatively                                  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
Few Employment Cases                                         discrimination claim. NASD arbitrated 202 of the cases that involved
That Included                                                discrimination allegations. NYSE arbitrated the remaining 59. Given that
Discrimination Claims                                        some cases involved more than 1 type of discrimination claim, in 261 cases
                                                             a total of 324 discrimination claims were made. As shown in table 1, the
                                                             majority of these 324 discrimination claims was either age (33 percent) or
                                                             sex-based (32 percent).36

Table 1: Types of Discrimination Claims in Employment Cases at NASD and NYSE, 1993 through 2002



                                                    Sex
                                              discrimination/        Race/national
                       Age                     harassment               origin             Disability          Religion         Unspecified     Total
  Year         NASD          NYSE             NASD     NYSE         NASD      NYSE      NASD     NYSE      NASD       NYSE     NASD    NYSE
  1993             1             7              2        6             2         1        0         1         0           0      0       0        20
  1994             6             8             11        6             3         2        1         0         2           1      1       0        41
  1995            15             4              9        2             4         0        2         0         1           0      0       2        39
  1996             9             2             10        2             2         1        3         2         0           0      0       1        32
  1997             8             2             15        5             6         0        6         2         3           1      3       1        52
  1998            18             2             13        2             5         0        7         3         1           2      2       0        55
  1999             3             2              9        0             5         0        2         1         2           0      0       1        25
  2000             8             0              5        0             5         0        4         0         2           0      5       0        29
  2001             7             1              6        0             2         0        1         1         1           0      3       0        22
  2002             4             1              1        0             1         0        0         0         0           0      2       0         9
  Total           79            29             81       23            35         4       26        10        12           4     16       5       324
Source: Securities Arbitration Commentator.
                                                             Note: Year 2002 includes cases decided in January through June.


                                                             Over the last 10 years, the number of cases with discrimination claims has
                                                             generally decreased at NYSE. In more recent years, this has also occurred
                                                             at NASD, although prior to 2000 the number of cases at NASD involving
                                                             discrimination fluctuated. (See fig. 4.) NASD and NYSE officials reported
                                                             that the rule changes in 1999, which altered if and how discrimination




                                                             36
                                                                  Sex discrimination includes sexual harassment claims.




                                                             Page 18                          GAO-03-790 Employment Disputes in the Securities Industry
                           cases are arbitrated, might have reduced the arbitration of these types of
                           cases.37

                           Figure 4: Number of Cases Involving Discrimination at NASD and NYSE, 1993
                           through 2002

                           Total number of cases (n = 261)
                           40




                           30




                           20




                           10




                               0
                                1993       1994          1995            1996     1997     1998     1999     2000     2001    2002a

                                           NASD
                                           NYSE
                           Source: Securities Arbitration Commentator.
                           a
                           Includes only those cases decided in January through June 2002.




Cases That Included        Over the last 10 years, the median number of hearing sessions in
Discrimination Claims      discrimination cases ranged from 5 to 10 at NASD (see fig. 5) and from 8 to
Required More Hearing      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
Sessions and Took Longer   11 at NYSE.
to Complete




                           37
                                We were unable to determine what factors caused this decrease.




                           Page 19                                       GAO-03-790 Employment Disputes in the Securities Industry
 Figure 5: Median Number of Hearing Sessions for Discrimination and Nondiscrimination Cases at NASD, 1993 through 2002


                               Median number of hearing sessions
                               12



                               10



                                8



                                6



                                4



                                2



                                0
                                       1993      1994         1995           1996           1997            1998    1999       2000       2001      2002a

                                                                     With at least 1 discrimination claim

                                                                     With no discrimination claim


    Total number of cases (n = 1,236)
    With at least 1
                                          4       19           26              19             28             35       16        26         18         8
    discrimination claim
    With no discrimination
                                         31       68           92             138           153             145      110       105        133        62
    claim


Source: Securities Arbitration Commentator.
                                                          a
                                                           Median number of hearing sessions based only on cases decided in January through June.




                                                          Page 20                                   GAO-03-790 Employment Disputes in the Securities Industry
Figure 6: Median Number of Hearing Sessions for Discrimination and Nondiscrimination Cases at NYSE, 1993 through 2002


                               Median number of hearing sessions
                               20




                               15




                               10




                                5




                                0
                                       1993      1994        1995              1996           1997            1998    1999       2000      2001a     2002b

                                                                       With at least 1 discrimination claim

                                                                       With no discrimination claim


    Total number of cases (n = 252)
    With at least 1
                                        12        11               7              7              8              7       4         0           1         1
    discrimination claim
    With no discrimination
                                        29        26           24               34             14              24      14         8          12         9
    claim


Source: Securities Arbitration Commentator.
                                                         a
                                                          Too few cases with at least 1 discrimination claim were decided in 2001 to calculate the median
                                                         number of sessions per case for that year.
                                                         b
                                                          For 2002, only cases decided in January through June were included in this analysis; however, not
                                                         enough cases with at least 1 discrimination claim were decided during that time to calculate the
                                                         median number of sessions per case for cases with at least 1 discrimination claim.


                                                         Not surprisingly, cases requiring more hearing sessions also took longer to
                                                         complete. For example, cases requiring 1 to 2 hearing sessions took
                                                         438 days on average to complete, while those requiring 5 to 8 hearing
                                                         sessions took 490 days on average. According to NASD, discrimination
                                                         cases could require more hearing sessions and take longer to complete
                                                         because they are more complex.




                                                         Page 21                                     GAO-03-790 Employment Disputes in the Securities Industry
Amounts Claimed in the                                In most cases arbitrated at NASD and NYSE over the last 10 years,
Majority of Employment                                employees sought more than $100,000 in compensatory damages, whether
Cases Were over $100,000                              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


                                Percentage of cases
                                 40


                                 35


                                 30


                                 25


                                 20


                                 15


                                 10


                                  5


                                  0
                                          $1-$9,999     $10,000-                 $50,001-               $100,001-      $500,001-         >$1 million
                                                        $50,000                  $100,000               $500,000       $1 million
                                      Award amounts

                                                                 With at least 1 discrimination claim

                                                                 With no discrimination claim


    Total number of cases (n = 1,295)
    With at least 1                             3            9                        17                    64             39                 80
    discrimination claim
    With no discrimination                    111          169                      124                   317             122               240
    claim


Source: Securities Arbitration Commentator.

                                                      Note: For 2002, analysis based only on cases decided in January through June.


                                                      Overall, employees in NYSE cases sought higher compensatory damages
                                                      than employees in NASD cases with the average compensatory damage
                                                      claimed at NYSE over $2 million and the average compensatory damage
                                                      claimed at NASD was under $1 million. These differences might reflect
                                                      differences in the membership of the two SROs. For example, members of



                                                      Page 22                                GAO-03-790 Employment Disputes in the Securities Industry
                           NYSE tend to include mostly the larger, more established broker-dealers,
                           whose employees may seek higher compensatory damages in arbitration
                           cases.


Cases Involving            In general, in more than 50 percent of cases at NASD and NYSE,
Discrimination Were Less   employees were awarded some level of compensatory damages. (See fig.
Likely to Win Some Level   8.)
of Compensatory Damages
Than Cases with No
Discrimination Claims




                           Page 23                 GAO-03-790 Employment Disputes in the Securities Industry
Figure 8: Percentage of Cases at NASD and NYSE in Which Employees Were Awarded Compensatory Damages, 1993 through
2002



                             Percentage of cases
                             100




                               80




                               60




                               40




                               20




                                0
                                       1993        1994        1995          1996    1997        1998        1999        2000       2001   2002a

                                                                      NASD

                                                                      NYSE


    Total number of cases (n = 1,546)
    NASD                                36         97          124           159     188          189        138         135        153      70

    NYSE                                42         38           31            42      22           32         19           8         13      10



Source: Securities Arbitration Commentator.
                                                          a
                                                          For 2002, analysis based only on cases decided in January through June.


                                                          Employees in cases involving discrimination, however, were less likely to
                                                          win some compensatory damages than employees in cases with no
                                                          discrimination claims. (See fig. 9.) Forty-eight percent of all NASD and
                                                          NYSE cases over the last 10 years that included a discrimination claim
                                                          won some level of compensatory damages compared with 61 percent of
                                                          cases with no discrimination claims.38



                                                          38
                                                           Because of data limitations, in cases with both discrimination and other employment
                                                          claims, we could not determine what proportion of the award, if any, was awarded for a
                                                          discrimination claim.



                                                          Page 24                          GAO-03-790 Employment Disputes in the Securities Industry
Figure 9: Percentage of Discrimination and Nondiscrimination Cases at NASD and NYSE in Which Employees Were Awarded
Compensatory Damages, 1993 through 2002



                             Percentage of cases
                             100




                               80




                               60




                               40




                               20




                                0
                                       1993        1994       1995           1996           1997            1998    1999       2000      2001      2002a

                                                                     With at least 1 discrimination claim

                                                                     With no discrimination claim


    Total number of cases (n = 1,546)
    With at least 1
                                        17          30         33              26             38             42      21         26         19         9
    discrimination claim
    With no discrimination
                                        61         105        122             175           172             179     136        117        147        71
    claim


Source: Securities Arbitration Commentator.
                                                          a
                                                          For 2002, analysis based only on cases decided in January through June.




                                                          Page 25                                  GAO-03-790 Employment Disputes in the Securities Industry
While Most Employees                                   In cases where employees received a monetary award, over 60 percent of
Received Less Than Half of                             employees received less than half of the compensatory damages they
the Compensatory                                       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
Damages They Claimed,                                  over half of the cases won had awards of $50,000 or less, while at NYSE
Cases That Included                                    70 percent of awards were over $50,000.
Discrimination Claims
Received Higher Awards

Figure 10: Percentage of Cases Won at NASD and NYSE from 1993 through 2002 by Amount Awarded


                                 Percentage of cases
                                 35


                                 30


                                 25


                                 20


                                 15


                                 10


                                  5


                                  0
                                          $1-$9,999        $10,000-          $50,001-            $100,001-           $500,001-         >$1 million
                                                           $50,000           $100,000            $500,000            $1 million
                                      Award amounts

                                                                   NASD

                                                                   NYSE


    Total number of cases with monetary awards (n = 784)

    NASD                                      147            199                89                  158                 29                 18

    NYSE                                        7             36                29                   49                 10                 13



Source: Securities Arbitration Commentator.

                                                       Note: For 2002, analysis based only on cases decided in January through June.




                                                       Page 26                          GAO-03-790 Employment Disputes in the Securities Industry
                                                      Compared with cases with no discrimination claims, employees in cases
                                                      involving discrimination were more likely to receive larger awards.39 (See
                                                      fig. 11.) Sixty-two percent of cases with discrimination claims that
                                                      received monetary awards had an award amount over $50,000, compared
                                                      with 48 percent of cases without discrimination claims.

Figure 11: Percentage of Discrimination and Nondiscrimination Cases at NASD and NYSE from 1993 through 2002, by
Amount Awarded


                                Percentage of cases
                                 35


                                 30


                                 25


                                 20


                                 15


                                 10


                                  5


                                  0
                                          $1-$9,999         $10,000-                $50,001-               $100,001-      $500,001-         >$1 million
                                                            $50,000                 $100,000               $500,000       $1 million
                                      Award amounts

                                                                    With at least 1 discrimination claim

                                                                    With no discrimination claim


    Total number of cases with monetary awards (n = 784)
    With at least 1
                                              11               34                       23                    38               5                 6
    discrimination claim
    With no discrimination
                                              143             201                       95                   169             34                 25
    claim


Source: Securities Arbitration Commentator.

                                                      Note: For 2002, analysis based only on cases decided in January through June.




                                                      39
                                                           On average, the amount claimed in discrimination cases was also higher.




                                                      Page 27                                   GAO-03-790 Employment Disputes in the Securities Industry
                          In addition to receiving monetary compensation, employees sometimes
                          seek and receive nonmonetary awards. For example, an employee may
                          want defamatory language removed from his or her record. In the
                          employment cases that we analyzed, approximately 13 percent of
                          employees won some type of nonmonetary award without any monetary
                          award.


                          To assess arbitration programs at NASD and NYSE, SEC conducts periodic
SEC Oversight Found       inspections and reviews complaint letters it receives. It has cited problems
SROs Could Improve        at one or both SROs in the procedures used to (1) ensure arbitrators are
                          qualified and (2) track arbitrator performance. SEC generally reviews
Procedures to Ensure      arbitration procedures, arbitrator profiles, disclosure reports, and closed
Arbitrators Are           cases and interviews staff during its inspections. Although SEC officials
                          indicated that complaint letters could affect the focus of an inspection, we
Qualified and Perform     found that few of the letters SEC receives focus on employment
Well                      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   Since 1995, SEC has examined NASD’s and NYSE’s arbitration programs
Inspections and Reviews   three times each and has routinely responded to complaint letters about
Complaint Letters to      the process. Most inspections have focused on either case processing or
                          recruiting and maintaining arbitrators. In general, inspections also
Assess SRO-Administered   included reviewing problems raised in previous inspections to determine
Arbitration Programs      whether they had been resolved. (See fig. 12.)




                          Page 28                 GAO-03-790 Employment Disputes in the Securities Industry
Figure 12: Focus of SEC Inspections of NASD and NYSE, 1995-2002


     Year                   SRO                  Focus of inspection

                                                  Enrollment, training, selection, and
      2001                   NYSE                 evaluation of the performance of
                                                  arbitrators in NYSE’s arbitrator pool.


                                                  Processing customer and industry claimsa
      2000                   NASD                 and maintaining arbitrator pool by the
                                                  Midwest Regional Office.



      1998                   NASD                 Recruitment, enrollment, training, and
                                                  evaluation of arbitrator performance.



                                                  Administration and procesing customer
      1998                   NYSE                 and industry claims.




      1995                   NYSE                 Administration and procesing customer
                                                  claims.



                                                  Processing of customer claims and
      1995                   NASD
                                                  selection and retention of arbitrators.

Source: SEC inspection reports.
a
 Customers’ claims are claims made by investors while industry claims are made by members of the
securities industry.


In conducting inspections, SEC reviews a variety of documents,
summarizes findings, develops recommendations, and provides SRO with
the opportunity to comment on both its findings and recommendations.
The documents SEC reviews generally include case files40 and arbitrator


40
  Prior to 1998, SEC limited its review to customer cases. In its 1998 inspections, SEC
began to also review employment cases. An SEC official reported that because relatively
few employment discrimination cases are arbitrated, typically all cases alleging
employment discrimination closed during the inspection review period are selected for
review.




Page 29                             GAO-03-790 Employment Disputes in the Securities Industry
profiles and disclosure reports. Some of the case files are chosen
randomly while others are selected based on risk factors that suggest
problems may exist, such as the length of time it took to complete a case.
In addition to reviewing documents, SEC interviews SRO staff to better
understand its operations. In its 2000 inspection of NASD, SEC reviewed
110 arbitrator profiles and disclosure reports and 89 arbitration case files.
In its 2001 inspection of NYSE, SEC reviewed 200 arbitrator profiles and
disclosure reports and 40 customer and employment cases in addition to
other documents.41 An SEC official noted that under the Exchange Act,42
SEC has a broad range of authority to address deficiencies found in an
inspection. As a practical matter, SEC staff and SROs discuss deficiencies
and document that necessary steps have been taken.43

In addition to carrying out inspections to oversee SRO arbitration
programs, SEC reviews complaint letters from individuals employed in the
securities industry and other interested parties regarding 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.44 Of the
16, 6 raised concerns about the use of mandatory arbitration to address
employment or employment discrimination claims. The other 10 letters
dealt with a variety of issues, including the amount of time allocated to
address a claim, the scheduling of hearings, and a proposal to limit
damages that can be claimed.




41
  SEC was unable to provide the total number of closed cases their sample was drawn
from.
42
     Securities Exchange Act of 1934 Section 19(h), 15 U.S.C. § 78s(h).
43
  In the event deficiencies were not adequately addressed, SEC has authority under Section
19(h) of the Exchange Act to institute administrative proceedings to remove SRO officials,
limit or suspend SRO activities, or revoke SRO registration.
44
 Twenty-five of the 100 letters in our sample were missing from SEC files. The issues
raised in the remaining 59 letters were either unclear or dealt with issues unrelated to
employment cases.




Page 30                          GAO-03-790 Employment Disputes in the Securities Industry
                            An SEC official with the division that approves SRO rules said the division
                            responds to all complaint letters it receives, which are tracked using the
                            database letter log.45 The official indicated that when letters register
                            general discontent with the arbitration process but do not contain a
                            specific allegation, parties are provided general information about
                            arbitration, including information on the narrow procedural mechanism
                            for challenging awards. When letters contain specific allegations, SEC
                            attorneys contact the SRO or use other means to investigate the allegation
                            before providing a response. SEC attorneys may also forward a copy of the
                            letter to the office that oversees periodic inspections, so it can assess the
                            allegation in its inspection activities. For example, an SEC official
                            reported that SEC had placed special emphasis in a recent inspection on
                            reviewing updates SRO staff made to arbitrator profiles and disclosure
                            reports in response to concerns raised in a complaint letter.


SEC Has Made a Variety of   In recent inspections, SEC staff identified a number of ways NASD and
Recommendations to          NYSE could improve their procedures for ensuring that arbitrators are
Improve SRO Procedures      qualified and for tracking arbitrator performance. For example, to ensure
                            that arbitrators are qualified, SEC staff recommended that one or both
                            SROs

                            •    ensure that they consistently conduct CRD checks of all industry
                                 arbitrators and document those reviews in arbitrator profiles;

                            •    ensure that all arbitrator profiles are complete and reflect new or
                                 updated information arbitrators submit about themselves;

                            •    lengthen training courses for new arbitrators;

                            •    include in arbitrator training manuals guidance on certain arbitration
                                 procedures and certain problems arbitrators are likely to encounter;
                                 and

                            •    develop policy on how often arbitrators must attend ongoing training,
                                 the circumstances under which it can be waived, and documentation of
                                 reasons waivers are granted.




                            45
                             The official reported that although other SEC divisions receive complaint letters, the
                            division that approves SRO rules receives the most letters dealing with employment issues.




                            Page 31                      GAO-03-790 Employment Disputes in the Securities Industry
              On the basis of our review of SRO documents containing policies and
              standard procedures and interviews with SRO officials, we found that each
              SRO had taken steps to address SEC’s recommendations. One or both
              SROs now require that CRD checks be recorded in arbitrator profiles; have
              an online reporting form arbitrators can use to submit updated
              information about themselves;46 and have a basic training course for new
              arbitrators, more comprehensive training manuals, and a written policy
              regarding ongoing arbitrator training.

              In addition, in recent inspections, SEC staff found that the procedures in
              place to track arbitrator performance could be improved. For example,
              SEC staff recommended that one or both SROs

              •      ensure that all pertinent information on arbitrator performance,
                     whether negative or positive, is recorded in a central database and

              •      do more to address complaints of poor arbitrator performance,
                     including, if appropriate, removing arbitrators from the active pool and
                     better documenting actions taken in response to complaints of poor
                     performance.

              SEC staff reported that it appears from recent ongoing and completed
              inspections that the SROs have taken steps to address these
              recommendations.47

              In general, to determine if any issues raised in past inspections remain
              unresolved, SEC, at the beginning of each new inspection, reviews
              recommendations from prior inspections. SEC is currently inspecting
              NASD and will report on the results, including unresolved issues, if any,
              within the next year. NYSE will be reexamined beginning in 2003, at which
              time SEC will assess what additional steps, if any, NYSE has taken to
              address the issues reported here.


              SEC oversees NYSE and NASD, which regulate their member firms in the
Conclusions   securities industry. All three are responsible for ensuring that the
              procedures for arbitrating discrimination and other employment disputes


              46
                   GAO-03-162R (Washington, D.C.: Apr. 11, 2003).
              47
               In GAO-03-162R, we report that one SRO has implemented procedures making it easier to
              remove arbitrators from ongoing cases.




              Page 32                         GAO-03-790 Employment Disputes in the Securities Industry
                  are fair and the requirements of the Exchange Act are met. Although SEC’s
                  approval of rules governing arbitration programs and its periodic
                  inspections of these programs has resulted in improvements, there are
                  aspects of these programs that deserve closer scrutiny.

                  Currently, NASD and NYSE verify the qualifications for those arbitrators
                  who have worked in the securities industry and neither SRO verifies the
                  information provided by nonindustry arbitrators. While we did not find
                  instances where arbitrators provided false statements of qualifications,
                  verifying the qualifications of all arbitrator applicants is an important step
                  in ensuring that employees and employers receive accurate information on
                  the arbitrators they select to hear their cases. Additionally, while SEC has
                  reviewed both SROs procedures for evaluating arbitrator performance, we
                  found evidence that arbitrators are not evaluated on a routine basis.
                  Although NASD has procedures for peer, party, and staff to evaluate
                  arbitrators and identify poor performers, these evaluations are not always
                  completed. While NYSE officials indicated that NYSE has similar
                  procedures and reported staff generally evaluate active arbitrators at least
                  once a year, we were unable to confirm this information. Securities
                  industry employees must use NASD and NYSE arbitration programs to
                  resolve most employment disputes. Therefore, more effort should be made
                  to verify that arbitrators meet the qualifications SROs require and to
                  encourage parties, other arbitrators, and staff to submit evaluations more
                  regularly, so that only arbitrators who perform adequately are maintained
                  on SRO rosters.


                  To help ensure that all NASD and NYSE arbitrators possess the
Recommendations   qualifications required by their SRO, we recommend that the Chairman of
                  SEC direct NASD and NYSE to verify basic background information of all
                  new applicants for their arbitrator rosters. We also recommend that SEC
                  continue to review the adequacy of procedures for evaluating arbitrator
                  performance in their next inspections at NASD and NYSE.


                  We provided a draft of this report to SEC, NASD, and NYSE for their
Agency and SRO    review. A copy of their written comments is in appendixes II, III, and IV,
Comments          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,


                  Page 33                  GAO-03-790 Employment Disputes in the Securities Industry
it might not be necessary for NYSE, as a smaller arbitration forum than
NASD, to add this cost to the arbitration process. As a result, SEC
indicated that it should be up to NYSE to decide whether the independent
verification of basic background information of arbitrator applicants is
needed. NASD noted that although it has had no evidence that arbitrators
ever falsified information, it is planning to verify the background
information on all new applicants to increase party confidence in the
accuracy of arbitrator records. NASD reported that a one-time fee for
arbitrator applicants would cover the cost of this procedure. NYSE
reported that since it has found no proof of anyone providing false
information, there is insufficient justification for independently verifying
application information and adding costs to the process. In addition, NYSE
believes that it has already taken steps to ensure that its application
procedures are adequate, such as having applicants affirm that the
information they provide is correct and requiring two recommendation
letters. NYSE also indicated that counsel for employees can and do take
further actions to review the background of arbitrators.

Despite concerns raised by SEC and NYSE, we continue to believe that
verifying background information for all new arbitrators is an important
part of ensuring the integrity of arbitration, a process required for most
disputes. While adding costs to the process is a legitimate concern,
NASD’s approach of instituting a one-time application fee of $80 would not
increase the expense of arbitration for the parties involved. Additionally,
the fact that lawyers representing parties are already sometimes verifying
information suggests that verification is valued and further supports the
need for it to be done independently and systematically for all new
arbitrators. Moreover, although our report has focused on the arbitration
of employment cases, a small percentage of all the cases arbitrated in the
securities industry, our recommendation will benefit all parties, since
NASD and NYSE arbitrators are available for both employment and
customer cases.

Concerning our recommendation that SEC continue to review evaluation
procedures at SROs, SEC, NASD, and NYSE, all indicated that they
understand the importance of evaluating arbitrators. Specifically, SEC
agreed that evaluating arbitrator performance is a fundamental element of
the arbitration process and reported that it will continue to review the
adequacy of procedures for evaluating arbitrator performance during its
inspections of SRO arbitration programs. NASD noted that it would strive
to provide better documentation of the actions it takes in response to
complaints or evaluations. NYSE reported it has a new computer system
that creates a centralized, easily accessible record of all feedback and


Page 34                 GAO-03-790 Employment Disputes in the Securities Industry
comments from arbitrator evaluations, which will allow staff to have a
more comprehensive view of an arbitrator’s performance.


As arranged with your offices, unless you announce its contents earlier,
we plan no further distribution of this report until 30 days after the date of
this report. At that time, we will provide copies of this report to the
Chairman of SEC, the President of NASD, and the Director of Arbitration
for NYSE, appropriate congressional committees, and other interested
parties. We will also make copies available to other interested parties,
upon request. This report will be available at no charge on GAO’s Web site
at http://www.gao.gov.

If you have any questions about this report, please contact me on
(202) 512-9889. Other contacts and staff acknowledgments are listed in
appendix V.




Robert E. Robertson
Director, Education, Workforce, and
 Income Security Issues




Page 35                  GAO-03-790 Employment Disputes in the Securities Industry
                      Appendix I: Scope and Methodology
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.


                      To determine the nature and outcomes of employment and employment
Determining the       discrimination disputes in the securities industry, we analyzed a database
Characteristics and   containing employment disputes in which arbitration decisions had been
                      made by NASD1 or the New York Stock Exchange (NYSE) from January
Outcomes of           1993 through June 2002. We obtained this database from Securities
Arbitrated            Arbitration Commentator, Inc. (SAC), Maplewood, New Jersey. SAC is a
                      commercial research firm that maintains a database of information from
Employment Disputes   publicly available records on decided cases from all self-regulatory
                      organizations (SRO) arbitration forums, as well as the American
                      Arbitration Association.

                      The SAC database contained information on arbitration awards that
                      resulted from employee claims for damages against SRO member firms. By
                      definition, this database did not include cases that were settled or
                      withdrawn before an arbitration decision was reached. The 1,564 cases in
                      the database included fields describing a range of variables, such as the
                      name of the forum, the parties involved in the case, types of claims in the
                      case, amounts of compensatory damages claimed, and amounts of
                      compensatory damages awarded. Data on every variable we analyzed were
                      not available for all 1,546 employment cases arbitrated at NASD and NYSE
                      over the last 10 years. Our analyses of the median number of hearing
                      sessions were based on 96 percent of the total 1,546 cases. The amounts
                      claimed in discrimination and nondiscrimination cases, overall, were
                      based on 84 percent of the 1,546 cases. All other analyses presented in this
                      report were based on the total 1,546 employment cases arbitrated over the
                      last 10 years, unless otherwise noted.

                      To assess the reliability of the data we received from SAC, we reviewed
                      100 randomly sampled cases in the database, 50 with discrimination claims



                      1
                       NASD was formerly known as the National Association of Securities Dealers, but now
                      goes solely by the acronym.




                      Page 36                     GAO-03-790 Employment Disputes in the Securities Industry
              Appendix I: Scope and Methodology




              and 50 without discrimination claims. To verify the accuracy of the
              information for cases in the database, we compared this information with
              information in copies of the original awards for the same cases as issued
              by the forums or as reprinted by Lexis/Nexis. For most variables, data
              reliability was adequate for the analysis we conducted. We did not use any
              variables in the SAC database with high error rates. However, we were
              unable to verify that the SAC database included all cases decided by NASD
              or NYSE from January 1993 through June 2002.


              To determine who evaluates arbitrators and what performance ratings
Determining   they receive, we first generated a list from the SAC data file of all NASD
Arbitrator    arbitrators who had decided at least 1 employment case that did not
              include a discrimination claim. We stratified this list of 494 arbitrators into
Performance   two groups—those that had also decided at least 1 case involving
              discrimination during this time and those that had not decided any cases
              involving discrimination. We selected all 60 arbitrators from the group that
              had heard at least 1 discrimination case and selected a random sample of
              64 of those that had not heard any and obtained NASD’s files containing
              evaluation and rating information for each of these 124 arbitrators.2 From
              the files associated with the sampled arbitrators, we extracted data on the
              number of evaluations, if any, these arbitrators received from the parties
              and/or other arbitrators in the cases they had decided and on performance
              ratings these arbitrators received.

              Each arbitrator in our study population of 494 had a nonzero probability of
              being selected for our sample. In analyzing data about the arbitrators in
              our sample, we weighted each sampled arbitrator to account statistically
              for all arbitrators in the study population, including those who were not
              selected.

              Because we followed a probability procedure based on random selections,
              our sample is only one of a large number of samples that we might have
              drawn. Since each sample could have provided different estimates, we
              express our confidence in the precision of our particular sample’s results
              as 95 percent confidence intervals. These are intervals that would contain
              the actual population value for 95 percent of the samples we could have


              2
               Our initial list contained 496 arbitrators, but we later learned that 2 of the 62 arbitrators
              we believed had decided a discrimination case had not, in fact, decided any cases during
              this time. We removed the arbitrators from the population and from the sample. Therefore,
              the actual study population was 494 arbitrators, from which 124 arbitrators were sampled.




              Page 37                        GAO-03-790 Employment Disputes in the Securities Industry
                    Appendix I: Scope and Methodology




                    drawn. As a result, we are 95 percent confident that each of the confidence
                    intervals in this report will include the true value in the study population.
                    The width of a confidence interval is also referred to as the sampling error
                    associated with the estimate. Sampling errors associated with estimates
                    from our file review do not exceed plus or minus 15 percentage points.

                    SEC tracks complaint letters in a computerized database and has logged
Determining the     over 12,000 from 1992 through October 2002. To determine how SEC
Content of SEC      responds to complaint letters it receives concerning arbitration of
                    employment and employment discrimination cases, first we asked SEC
Complaint Letters   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.




                    Page 38                     GAO-03-790 Employment Disputes in the Securities Industry
              Appendix II: Comments from the Securities and Exchange Commission
Appendix II: Comments from the Securities
and Exchange Commission




              Page 39                     GAO-03-790 Employment Disputes in the Securities Industry
Appendix II: Comments from the Securities and Exchange Commission




Page 40                     GAO-03-790 Employment Disputes in the Securities Industry
             Appendix III: Comments from NASD
Appendix III: Comments from NASD




             Page 41                   GAO-03-790 Employment Disputes in the Securities Industry
Appendix III: Comments from NASD




Page 42                   GAO-03-790 Employment Disputes in the Securities Industry
Appendix III: Comments from NASD




Page 43                   GAO-03-790 Employment Disputes in the Securities Industry
Appendix III: Comments from NASD




Page 44                   GAO-03-790 Employment Disputes in the Securities Industry
Appendix III: Comments from NASD




Page 45                   GAO-03-790 Employment Disputes in the Securities Industry
Appendix III: Comments from NASD




Page 46                   GAO-03-790 Employment Disputes in the Securities Industry
             Appendix IV: Comments from the New York Stock Exchange
Appendix IV: Comments from the New York
Stock Exchange




             Page 47                    GAO-03-790 Employment Disputes in the Securities Industry
Appendix IV: Comments from the New York Stock Exchange




Page 48                    GAO-03-790 Employment Disputes in the Securities Industry
Appendix IV: Comments from the New York Stock Exchange




Page 49                    GAO-03-790 Employment Disputes in the Securities Industry
Appendix IV: Comments from the New York Stock Exchange




Page 50                    GAO-03-790 Employment Disputes in the Securities Industry
                  Appendix V: GAO Contacts and Staff
Appendix V: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  Clarita A. Mrena (202) 512-3022
GAO Contacts      Margaret A. Holmes (202) 512-3283


                  In addition to those named above, Susan S. Pachikara, Joan K. Vogel, and
Staff             Sidney H. Schwartz made significant contributions to this report.
Acknowledgments




(130174)
                  Page 51                   GAO-03-790 Employment Disputes in the Securities Industry
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