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Securities Arbitrators Are Qualified' which was released on September 
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Report to Congressional Requesters:

United States General Accounting Office:

GAO:

August 2003:

Employment Disputes:

Recommendations to Better Ensure That Securities Arbitrators Are 
Qualified:

Employment Disputes in the Securities Industry:

GAO-03-790:

GAO Highlights:

Highlights of GAO-03-790, a report to congressional requesters 

Why GAO Did This Study:

Employees in the securities industry must submit to binding 
arbitration in most employment disputes. The Securities and Exchange 
Commission (SEC) is responsible for overseeing these arbitration 
programs—the largest being run by NASD and the New York Stock Exchange 
(NYSE). The Congress asked GAO to examine (1) the circumstances under 
which NASD and NYSE will arbitrate employment and employment 
discrimination disputes, and their procedures for selecting and 
evaluating their arbitrators; (2) the characteristics and outcomes of 
arbitrated employment and employment discrimination disputes at NASD 
and NYSE over the last 10 years; and (3) how SEC oversees the 
arbitration programs at NASD and NYSE and the results of these 
oversight activities.

What GAO Found:

Arbitration is generally required for most employment disputes, except 
those dealing with discrimination claims. NYSE will only arbitrate 
discrimination cases when parties involved agree to arbitrate after 
the dispute occurs. NASD will arbitrate employment discrimination 
cases based on agreements entered into between employees and firms 
before or after a dispute occurs. NASD has instituted additional 
requirements, however, for these cases, such as requiring that 
arbitrators not be affiliated with the securities industry. In 
addition, those chairing hearings for employment discrimination cases 
must hold a law degree, have 10 years of legal experience, have 
substantial familiarity with employment laws, and must not have 
primarily represented employers or employees in the last 5 years. 

To qualify to hear cases, NASD and NYSE require that arbitrators have 
at least 5 years of work experience, supply two letters of 
recommendation, and complete training in basic arbitration procedures. 
Arbitrators must also provide information on their complete employment
history, including any affiliation with the securities industry, as 
well as information on whether they have any regulatory or criminal 
history. Neither organization independently verifies the 
qualifications for applicants not associated with the securities 
industry. In addition NASD and NYSE have standard procedures for 
ensuring that arbitrators selected to hear cases do not have conflicts 
and for evaluating arbitrator performance. However, evaluations of 
arbitrators by staff, parties in disputes and other arbitrators on 
cases are not always completed. Officials at NASD and NYSE noted that 
if they receive no information about an arbitrator’s performance on a 
case, they assume that the arbitrator’s performance was adequate.

Over the last 10 years, 261 (17 percent) of the 1,546 employment 
disputes arbitrated at NASD or NYSE included a discrimination claim. 
Discrimination cases differed from cases with disputes that did not 
involve discrimination in the following ways:

* Discrimination cases required more hearing sessions.

* Employees won discrimination cases less often than cases not 
involving discrimination claims.

* In cases that employees won, the monetary award in discrimination 
cases was generally larger than in cases not involving discrimination. 

SEC periodically inspects NASD and NYSE arbitration programs. On the 
basis of its inspections, SEC has recommended improvements. In its 
most recent inspections of NASD and NYSE, SEC made various 
recommendations concerning procedures for ensuring that arbitrators 
are qualified. In addition, SEC recommended that one or both improve 
procedures for recording information on arbitrator performance in a 
central database and for disqualifying arbitrators who are poor 
performers.

What GAO Recommends:

To help ensure that only qualified arbitrators hear employment and 
employment discrimination cases at NASD and NYSE, GAO recommends that 
SEC direct NASD and NYSE to verify the background information provided 
by all arbitrator applicants. In addition, GAO recommends that SEC, 
during its next inspections, continue to review the adequacy of NASD’s 
and NYSE’s procedures for evaluating arbitrator performance. SEC, NASD 
and NYSE all expressed support for the second recommendation, but SEC 
and NYSE raised concerns about requiring verification at NYSE.

www.gao.gov/cgi-bin/getrpt?GAO-03-790.

To view the full report, including the scope and methodology, click on 
the link above. For more information, contact Robert Robertson at 
(202) 512-9889 or robertsonr@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Both NASD and NYSE Have Policies and Procedures Intended to Promote 
Fair Arbitration for all Cases:

Over the Last 10 Years, Relatively Few Employment Disputes Involved 
Discrimination, and Some Variations Existed between These Cases and 
Other Employment Disputes:

SEC Oversight Found SROs Could Improve Procedures to Ensure Arbitrators 
Are Qualified and Perform Well:

Conclusions:

Recommendations:

Agency and SRO Comments:

Appendix I: Scope and Methodology:

Determining the Characteristics and Outcomes of Arbitrated Employment 
Disputes:

Determining Arbitrator Performance:

Determining the Content of SEC Complaint Letters:

Appendix II: Comments from the Securities and Exchange Commission:

Appendix III: Comments from NASD:

Appendix IV: Comments from the New York Stock Exchange:

Appendix V: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Staff Acknowledgments:

Table:

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

Figures:

Figure 1: Application Process:

Figure 2: Types of Evaluations Arbitrators Received at NASD:

Figure 3: How NASD Arbitrators Were Rated:

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

Figure 5: Median Number of Hearing Sessions for Discrimination and 
Nondiscrimination Cases at NASD, 1993 through 2002:

Figure 6: Median Number of Hearing Sessions for Discrimination and 
Nondiscrimination Cases at NYSE, 1993 through 2002:

Figure 7: Percentage of Discrimination and Nondiscrimination Cases at 
NASD and NYSE from 1993 through 2002, by Amount Claimed:

Figure 8: Percentage of Cases at NASD and NYSE in Which Employees Were 
Awarded Compensatory Damages, 1993 through 2002:

Figure 9: Percentage of Discrimination and Nondiscrimination Cases at 
NASD and NYSE in Which Employees Were Awarded Compensatory Damages, 
1993 through 2002:

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

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

Figure 12: Focus of SEC Inspections of NASD and NYSE, 1995-2002:

Abbreviations:

CRD: Central Registration Depository:

EEOC: Equal Employment Opportunity Commission:

NYSE: New York Stock Exchange:

SAC: Securities Arbitration Commentator:

SEC: Securities and Exchange Commission:

SRO: self-regulatory organization:

United States General Accounting Office:

Washington, DC 20548:

August 29, 2003:

The Honorable John D. Dingell 
Ranking Minority Member 
Committee on Energy and Commerce 
House of Representatives:

The Honorable Edward J. Markey 
Ranking Minority Member 
Subcommittee on Telecommunications and the Internet 
Committee on Energy and Commerce 
House of Representatives:

Most employment disputes in the securities industry must be arbitrated-
-resolved by a neutral third party--because mandatory arbitration of 
such disputes is often a condition for employment in the securities 
industry. Arbitrators have the authority to make legally binding 
decisions that can only be appealed on limited grounds. Their decisions 
can have serious consequences for an employee's career or livelihood 
since employee cases can involve such issues as salary, performance 
evaluations, and alleged discrimination. To resolve disputes filed by 
employees, the securities firms rely on the arbitration programs run by 
self-regulatory organizations (SRO)[Footnote 1], which regulate the 
firms in the securities industry that are their members. Two SROs, 
NASD[Footnote 2] and the New York Stock Exchange (NYSE), run the 
largest arbitration programs. While NASD and NYSE are responsible for 
operating arbitration programs, the federal government, through the 
Securities and Exchange Commission (SEC), oversees NASD and NYSE to 
help ensure that arbitration procedures are fair and the rights of all 
parties to the arbitration process are protected.

Recently you raised concerns about the fairness of the arbitration 
process and the quality of arbitrators, especially in cases involving 
alleged employment discrimination.

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

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

Results in Brief:

Both NASD and NYSE have policies and standard procedures intended to 
ensure fair arbitration in all disputes, but the circumstances under 
which they will arbitrate employment and employment discrimination 
cases differ. Arbitration is required for most employment disputes in 
the securities industry, except for discrimination cases. NASD will 
arbitrate employment discrimination cases based on agreements entered 
into between employees and firms before or after a dispute occurs. NASD 
has instituted additional requirements, however, for these cases, such 
as requiring that arbitrators not be affiliated with the securities 
industry. In addition, those chairing hearings for employment 
discrimination cases must hold a law degree, have 10 years of legal 
experience, have substantial familiarity with employment laws, and must 
not have primarily presented employers or employees in the last 5 
years. NYSE, on the other hand, will only arbitrate if both parties 
agree after a discrimination claim has been asserted. To qualify to 
hear cases, NASD and NYSE require that applicants provide information 
on their employment history, including their affiliation with the 
securities industry as well as information on whether they have any 
regulatory or criminal disciplinary history, have at least 5 years of 
work experience, supply two letters of reference, and complete training 
in basic arbitration procedures. Neither organization verifies the 
qualifications submitted by applicants not associated with the 
securities industry. In addition, NASD and NYSE have standard 
procedures for ensuring that arbitrators selected to hear cases do not 
have conflicts, for evaluating arbitrator performance, and for removing 
poorly performing arbitrators from their rosters. As an indication of 
how well an arbitrator conducts hearings and makes decisions, NASD and 
NYSE rely primarily on the evaluations of arbitrators by staff, parties 
in disputes, and other arbitrators on cases. However, since some of 
these evaluations are voluntary, not all NASD or NYSE arbitrators are 
evaluated for every case they hear. Officials at each SRO reported that 
if they receive no information about an arbitrator's performance on a 
case, they assume that the arbitrator's performance was adequate.

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

Based on periodic inspections of NASD and NYSE and reviews of complaint 
letters, SEC has found problems with procedures that one or both SROs 
used to oversee arbitrator qualifications and track arbitrator 
performance. SEC inspections generally include a review of arbitration 
procedures, interviews with staff, and a review of arbitrator profiles 
and closed cases, including both employment and employment 
discrimination cases. According to SEC officials, complaint letters can 
affect the focus of an inspection, but we found that SEC receives 
relatively few letters concerning employment arbitration. In its most 
recent inspections of NASD and NYSE, SEC made various recommendations 
concerning procedures for ensuring that arbitrators are qualified. In 
addition, SEC recommended improving procedures for recording 
information on arbitrator performance in a central database and for 
disqualifying arbitrators who are poor performers. For example, SEC 
recommended that arbitrators' files be updated to reflect changes 
submitted by arbitrators that affect their qualifications. Both NYSE 
and NASD have taken steps to implement SEC's recommendations.

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

Background:

The arbitration of disputes first occurred at NYSE in the late 
nineteenth century but eventually became the practice within the 
securities industry in general. Arbitration was used to settle disputes 
over employee contracts, and in 1991 the U.S. Supreme Court ruled that 
an age discrimination claim brought forth by a securities industry 
employee could be subject to mandatory arbitration.[Footnote 3] 
Subsequent court decisions permitted the use of mandatory arbitration 
for resolving other employment discrimination disputes, including 
sexual harassment.[Footnote 4] Proponents of mandatory arbitration 
believe it is an efficient, cost-effective way to resolve conflicts 
between employers and their employees. Opponents of mandatory 
arbitration believe that it puts employees at a disadvantage. They 
argue that discovery, the process by which parties exchange documents 
and other information relevant to their case, is limited, hearings take 
place outside of public scrutiny, and arbitrators favor employers, who 
are more likely to be "repeat users" than employees.[Footnote 5]

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

Arbitrators play a key role in resolving disputes brought forth in the 
securities industry and their performance has a direct bearing on the 
fairness of a hearing. Like judges, they oversee the administration of 
proceedings, including determining the number of hearing sessions a 
case requires and what evidence can be admitted.[Footnote 9] Unlike 
judges, arbitrators are not required to base their decisions on legal 
precedent or to provide any reasoning for their decisions. In addition, 
their decisions--unlike those rendered in court--can only be appealed 
on limited grounds.

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

Both NASD and NYSE Have Policies and Procedures Intended to Promote 
Fair Arbitration for all Cases:

In most employment disputes, arbitration is mandatory, although for 
discrimination cases NYSE rules strictly limit its use and NASD has 
instituted additional requirements. For both customer and employment 
disputes, both SROs require that all arbitrators have certain 
qualifications in order to be on their rosters of available 
arbitrators. However, neither SRO verifies the qualifications for all 
of the arbitrators on their rosters. Both SROs have procedures designed 
to ensure that the arbitrators selected to hear cases do not have 
conflicts and have procedures for evaluating arbitrator performance. 
Yet, arbitrators who hear cases at both SROs may not be receiving 
evaluations on a routine basis.

Arbitration Is Required for Most Employment Disputes, Although for 
Discrimination Cases NYSE Has Strictly Limited Its Use and NASD Has 
Instituted Additional Requirements:

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

NASD and NYSE took different approaches in changing their rules to 
address these concerns. NYSE followed EEOC's recommendation and only 
arbitrates discrimination claims when all parties agree to arbitration 
after the dispute occurs. NASD, on the other hand, no longer requires 
that employees arbitrate employment discrimination disputes, but will 
arbitrate these disputes, based on agreements employees have made 
before or after the dispute occurs.[Footnote 13] The net result is that 
NASD will administer arbitration cases that include discrimination 
claims if the parties have entered into an agreement to do so. This 
includes policies employees sign as a condition of employment.

According to NASD, in conjunction with this rule change, they assembled 
a working group[Footnote 14] to consider recommendations contained in a 
document known as "A Due Process Protocol for Mediation and Arbitration 
of Statutory Disputes Arising out of the Employment Relationship." This 
Due Process Protocol was developed in 1995 by a committee of 
representatives from a range of organizations,[Footnote 15] to provide 
arbitration procedures for statutory employment claims. Following 
NASD's review of this protocol NASD introduced additional requirements 
for these types of claims.[Footnote 16] Changes ranged from setting 
qualifications for arbitrators who chair arbitrator panels[Footnote 17] 
to specifying how arbitrators documented their decisions.

The arbitrator chairing a discrimination case at NASD must hold a law 
degree, have 10 years of legal experience, have substantial familiarity 
with employment law, and must not have primarily[Footnote 18] 
represented employers or employees in the last 5 years.[Footnote 19] In 
addition to special chair qualifications, all the arbitrators who hear 
cases with discrimination claims must also be classified as "public"--
that is, individuals who are not affiliated with the securities 
industry either professionally or through their family relationships. 
For employment discrimination claims of $100,000 or less, a single 
public arbitrator is appointed, and for claims greater than this amount 
a panel of three public arbitrators is selected.[Footnote 20]

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

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

Both SROs Have Similar Qualifications for Arbitrators and Neither 
Verify the Qualifications of All Applicants:

Both SROs require that all applicants for the arbitrator roster provide 
information on their affiliation with the securities industry, have 5 
years of work experience, supply two letters of recommendation, and 
complete training in basic arbitration procedures.[Footnote 23] 
Recommendation letters must include particular information about the 
person writing the letter, the prospective arbitrator, and an 
attestation as to the character and fitness of the nominee. NASD also 
requires that applicants take a multiple choice examination and receive 
a passing score of at least 80 percent. (See fig.1.) After receiving 
arbitrator applications from applicants who work or worked in the 
securities industry, the SROs check the Central Registration Depository 
(CRD), a computerized database that contains the educational, work, and 
disciplinary history for current and former securities registered 
persons.[Footnote 24] Therefore, the CRD only covers arbitrators 
classified as nonpublic. Currently, information from arbitrator 
applicants not employed in the securities industry is not checked by 
the SROs, but NASD is proposing a rule change that would require the 
verification of background information on all new arbitrators.[Footnote 
25]

Figure 1: Application Process:

[See PDF for image]

[A] A computerized database that holds the educational, work, and 
disciplinary history for current and former securities registered 
persons.

[End of figure]

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

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

Ongoing training at both SROs is limited. NYSE requires that 
arbitrators continue to attend at least one training course every 4 
years.[Footnote 27] NASD does not have such a requirement but does 
offer chairperson training for those arbitrators wanting to chair 
cases.[Footnote 28] One SEC official raised concerns about mandating 
ongoing training for arbitrators, arguing that it may discourage the 
most experienced arbitrators from serving.

Both SROs Have Procedures for Selecting Arbitrators for Cases Intended 
to Ensure That They Are Unbiased:

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

In 2000, NYSE also began giving parties three options for selecting 
arbitrators: (1) choosing randomly from a list drawn from all available 
arbitrators; (2) choosing from a list the staff compiles; or (3) having 
NYSE staff attorneys select, the only procedure used prior to 2000. If 
all parties cannot agree on one of these options, staff attorneys 
determine who will arbitrate. According to NYSE, staff selection has 
remained the most common method for selecting arbitrators, with parties 
using it for about 85 percent of the cases. Since this method is the 
default if parties cannot agree, it is not possible to determine how 
often this method was actually chosen by parties, or used as the 
default.

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

Both SROs Have Procedures to Track Arbitrator Performance, Although 
Many Arbitrators May Not Be Evaluated:

Each SRO has developed three types of evaluations for arbitrators: (1) 
party evaluations, completed by either party or their attorneys; (2) 
peer evaluations, completed by other arbitrators who hear the case; and 
(3) staff evaluations. Both SROs summarize evaluation results and input 
them into a centralized arbitrator database. According to NASD 
officials, staff are required to summarize and input only negative 
comments on an arbitrator, although SEC staff noted that in practice it 
also often sees positive comments from NASD staff recorded in the 
files. NYSE officials, on the other hand, reported recording a complete 
summary of the evaluations. NASD conducts quarterly audits in which 
they check to see if staff members are consistently entering 
information in the centralized database and documenting actions taken 
concerning any evaluations. In addition, the audits review how 
complaint letters have been recorded, reviewed, and resolved.

Both SROs reported that it has been difficult for them to get parties 
to return evaluations.[Footnote 31] Yet, NYSE reported that response 
rates have increased since it began requiring that arbitrator chairs 
encourage parties to complete the evaluations and reiterate that the 
evaluations are confidential and will not affect the case outcome. NYSE 
said that peers are very responsive with evaluations. NYSE said it 
requires that staff observe new arbitrators for their first hearing at 
NYSE and said it sought to evaluate all arbitrators, who serve on a 
case that goes to a hearing, at least once a year. Although NYSE said 
that it had fulfilled this requirement in 2002, NYSE could not provide 
data on evaluations showing that arbitrators had been observed. NASD 
could not report how often staff evaluate arbitrators. Officials from 
both SROs said that if no information is received about an arbitrator 
on a case, they assume the arbitrator performed adequately.

To gain a better understanding of how often arbitrators were evaluated, 
we reviewed the records of 124 out of the 494 arbitrators at NASD who 
had heard discrimination claims and/or other employment claims between 
January 2001 and June of 2002.[Footnote 32] On the basis of this 
sample, we estimate that about 45 percent of arbitrators who heard 
cases during this time had received some type of evaluation and of 
those only about 2 percent received all three types of evaluations--
peer, party, and staff. (See fig. 2 for a breakdown of the types of 
evaluations arbitrators received.):

Figure 2: Types of Evaluations Arbitrators Received at NASD:

[See PDF for image]

[End of figure]

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

Figure 3: How NASD Arbitrators Were Rated:

[See PDF for image]

[End of figure]

Both NASD and NYSE have mechanisms in place to address poor performance 
by arbitrators. If NYSE or NASD receives either a poor arbitrator 
evaluation or complaints about an arbitrator on a case, staff will take 
steps to respond. For example, the staff member assigned to the case 
may be asked to corroborate the complaint or be asked to consult other 
arbitrators assigned to the case to see if they support the allegation. 
A staff member who confirms the complaint may then speak to the 
arbitrator and suggest how he or she could improve his or her behavior. 
If the complaint suggests no corrective action is possible, both SROs 
reported that the arbitrator would be removed from the active roster 
immediately. All complaints are recorded in the arbitrator database, 
and both SROs reported that staff input how the complaint will be 
resolved.

In reviewing the records of NASD arbitrators, we found that staff did 
not always document how they responded to poor evaluations and 
complaints. We estimate that 10 percent of all 494 NASD arbitrators 
that heard cases between January 2001 and June of 2002, received some 
kind of complaint, either from a staff member, a party member, or 
another arbitrator. In our sample, 6 of the 16 arbitrators that 
received negative complaints were permanently dropped from NASD's 
arbitrator list and 1 was temporarily made unavailable pending further 
review. One arbitrator, who had been permanently dropped in 2001, 
appeared to have complaints going back to 1993, yet the notes showed 
that no changes had been made to the adequate rating of 2. For another 
permanently dropped arbitrator, staff noted they were concerned that no 
negative comments were recorded on the computer file since other staff 
and arbitrators had complained about this arbitrator's conduct. Of the 
9 remaining arbitrators, information provided by NASD indicated that 
staff had followed-up on the complaints raised for 5 arbitrators.

Over the Last 10 Years, Relatively Few Employment Disputes Involved 
Discrimination, and Some Variations Existed between These Cases and 
Other Employment Disputes:

Of the 1,546 employment cases[Footnote 34] decided by arbitrators at 
NASD and NYSE over the last 10 years,[Footnote 35] 261 (17 percent) 
included at least 1 discrimination claim. Cases with discrimination 
claims required more hearing sessions and took longer to complete than 
those with no discrimination claims. At the same time, the compensatory 
damages claimed in all cases was generally over $100,000, with claimed 
amounts generally higher at NYSE than at NASD. In over half of all 
employment cases, employees won some level of monetary compensation, 
although in cases with discrimination claims employees were generally 
less likely to win. In most cases, when employees won they received 
less than half of the compensatory damages they claimed, with over 50 
percent of the awards over the last 10 years being $50,000 or less. 
When compensatory damages were awarded in cases involving 
discrimination, it tended to be higher than compensatory damages 
awarded in other employment cases, with just over 60 percent of 
discrimination cases receiving more than $50,000. Appendix 1 describes 
the reliability and limitations of these data.

Age and Sex Discrimination Were Most Prevalent in the Relatively Few 
Employment Cases That Included Discrimination Claims:

Employment cases arbitrated at NASD and NYSE can contain 1 or more 
claims, some of which might involve discrimination. Of all 1,546 
employment cases heard (1,289 at NASD and 257 at NYSE) at NASD and NYSE 
over the last 10 years, 261 (17 percent) included at least 1 type of 
discrimination claim. NASD arbitrated 202 of the cases that involved 
discrimination allegations. NYSE arbitrated the remaining 59. Given 
that some cases involved more than 1 type of discrimination claim, in 
261 cases a total of 324 discrimination claims were made. As shown in 
table 1, the majority of these 324 discrimination claims was either age 
(33 percent) or sex-based (32 percent).[Footnote 36]

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

[See PDF for image]

Note: Year 2002 includes cases decided in January through June.

[End of figure]

Over the last 10 years, the number of cases with discrimination claims 
has generally decreased at NYSE. In more recent years, this has also 
occurred at NASD, although prior to 2000 the number of cases at NASD 
involving discrimination fluctuated. (See fig. 4.) NASD and NYSE 
officials reported that the rule changes in 1999, which altered if and 
how discrimination cases are arbitrated, might have reduced the 
arbitration of these types of cases.[Footnote 37]

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

[See PDF for image]

[A] Includes only those cases decided in January through June 2002.

[End of figure]

Cases That Included Discrimination Claims Required More Hearing 
Sessions and Took Longer to Complete:

Over the last 10 years, the median number of hearing sessions in 
discrimination cases ranged from 5 to 10 at NASD (see fig. 5) and from 
8 to 15 at NYSE (see fig. 6). The median number of hearing sessions in 
cases that did not involve discrimination ranged from 4 to 5 at NASD 
and 5 to 11 at NYSE.

Figure 5: Median Number of Hearing Sessions for Discrimination and 
Nondiscrimination Cases at NASD, 1993 through 2002:

[See PDF for image]

[A] Median number of hearing sessions based only on cases decided in 
January through June.

[End of figure]

Figure 6: Median Number of Hearing Sessions for Discrimination and 
Nondiscrimination Cases at NYSE, 1993 through 2002:

[See PDF for image]

[A] Too few cases with at least 1 discrimination claim were decided in 
2001 to calculate the median number of sessions per case for that year.

[B] For 2002, only cases decided in January through June were included 
in this analysis; however, not enough cases with at least 1 
discrimination claim were decided during that time to calculate the 
median number of sessions per case for cases with at least 1 
discrimination claim.

[End of figure]

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

Amounts Claimed in the Majority of Employment Cases Were over $100,000:

In most cases arbitrated at NASD and NYSE over the last 10 years, 
employees sought more than $100,000 in compensatory damages, whether or 
not the case included a discrimination claim. (See fig. 7.):

Figure 7: Percentage of Discrimination and Nondiscrimination Cases at 
NASD and NYSE from 1993 through 2002, by Amount Claimed:

[See PDF for image]

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

[End of figure]

Overall, employees in NYSE cases sought higher compensatory damages 
than employees in NASD cases with the average compensatory damage 
claimed at NYSE over $2 million and the average compensatory damage 
claimed at NASD was under $1 million. These differences might reflect 
differences in the membership of the two SROs. For example, members of 
NYSE tend to include mostly the larger, more established broker-
dealers, whose employees may seek higher compensatory damages in 
arbitration cases.

Cases Involving Discrimination Were Less Likely to Win Some Level of 
Compensatory Damages Than Cases with No Discrimination Claims:

In general, in more than 50 percent of cases at NASD and NYSE, 
employees were awarded some level of compensatory damages. (See fig. 
8.):

Figure 8: Percentage of Cases at NASD and NYSE in Which Employees Were 
Awarded Compensatory Damages, 1993 through 2002:

[See PDF for image]

[A] For 2002, analysis based only on cases decided in January through 
June.

[End of figure]

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

Figure 9: Percentage of Discrimination and Nondiscrimination Cases at 
NASD and NYSE in Which Employees Were Awarded Compensatory Damages, 
1993 through 2002:

[See PDF for image]

[A] For 2002, analysis based only on cases decided in January through 
June.

[End of figure]

While Most Employees Received Less Than Half of the Compensatory 
Damages They Claimed, Cases That Included Discrimination Claims 
Received Higher Awards:

In cases where employees received a monetary award, over 60 percent of 
employees received less than half of the compensatory damages they 
claimed. In terms of the amount of compensatory damages awarded, awards 
in cases at NYSE tended to be higher. (See fig. 10.) At NASD, just over 
half of the cases won had awards of $50,000 or less, while at NYSE 70 
percent of awards were over $50,000.

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

[See PDF for image]

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

[End of figure]

Compared with cases with no discrimination claims, employees in cases 
involving discrimination were more likely to receive larger 
awards.[Footnote 39] (See fig. 11.) Sixty-two percent of cases with 
discrimination claims that received monetary awards had an award amount 
over $50,000, compared with 48 percent of cases without discrimination 
claims.

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

[See PDF for image]

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

[End of figure]

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

SEC Oversight Found SROs Could Improve Procedures to Ensure Arbitrators 
Are Qualified and Perform Well:

To assess arbitration programs at NASD and NYSE, SEC conducts periodic 
inspections and reviews complaint letters it receives. It has cited 
problems at one or both SROs in the procedures used to (1) ensure 
arbitrators are qualified and (2) track arbitrator performance. SEC 
generally reviews arbitration procedures, arbitrator profiles, 
disclosure reports, and closed cases and interviews staff during its 
inspections. Although SEC officials indicated that complaint letters 
could affect the focus of an inspection, we found that few of the 
letters SEC receives focus on employment arbitration. In its most 
recent inspections, in addition to problems with procedures both SROs 
used to ensure arbitrators are qualified, SEC found that one or both 
SROs did not record information on arbitrator performance in a central 
database or disqualify all arbitrators who were poor performers from 
hearing cases. Both SROs have taken some steps to address the problems.

SEC Conducts Systematic Inspections and Reviews Complaint Letters to 
Assess SRO-Administered Arbitration Programs:

Since 1995, SEC has examined NASD's and NYSE's arbitration programs 
three times each and has routinely responded to complaint letters about 
the process. Most inspections have focused on either case processing or 
recruiting and maintaining arbitrators. In general, inspections also 
included reviewing problems raised in previous inspections to determine 
whether they had been resolved. (See fig. 12.):

Figure 12: Focus of SEC Inspections of NASD and NYSE, 1995-2002:

[See PDF for image]

[A] Customers' claims are claims made by investors while industry 
claims are made by members of the securities industry.

[End of figure]

In conducting inspections, SEC reviews a variety of documents, 
summarizes findings, develops recommendations, and provides SRO with 
the opportunity to comment on both its findings and recommendations. 
The documents SEC reviews generally include case files[Footnote 40] and 
arbitrator profiles and disclosure reports. Some of the case files are 
chosen randomly while others are selected based on risk factors that 
suggest problems may exist, such as the length of time it took to 
complete a case. In addition to reviewing documents, SEC interviews SRO 
staff to better understand its operations. In its 2000 inspection of 
NASD, SEC reviewed 110 arbitrator profiles and disclosure reports and 
89 arbitration case files. In its 2001 inspection of NYSE, SEC reviewed 
200 arbitrator profiles and disclosure reports and 40 customer and 
employment cases in addition to other documents.[Footnote 41] An SEC 
official noted that under the Exchange Act,[Footnote 42] SEC has a 
broad range of authority to address deficiencies found in an 
inspection. As a practical matter, SEC staff and SROs discuss 
deficiencies and document that necessary steps have been 
taken.[Footnote 43]

In addition to carrying out inspections to oversee SRO arbitration 
programs, SEC reviews complaint letters from individuals employed in 
the securities industry and other interested parties regarding SRO-
administered arbitration programs. Of all the complaint letters SEC 
receives, however, only a small percentage raise concerns about the 
arbitration and an even smaller percentage deal with employment cases. 
According to SEC's complaint letter log, of the over 12,000 complaint 
letters SEC received from January 1992 through October 2002, 
approximately 500 contained a specific reference to arbitration. We 
reviewed a random sample of 100 of the letters that referred to 
arbitration and found 16 that discussed the arbitration of employment 
clams.[Footnote 44] Of the 16, 6 raised concerns about the use of 
mandatory arbitration to address employment or employment 
discrimination claims. The other 10 letters dealt with a variety of 
issues, including the amount of time allocated to address a claim, the 
scheduling of hearings, and a proposal to limit damages that can be 
claimed.

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

SEC Has Made a Variety of Recommendations to Improve SRO Procedures:

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

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

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

* lengthen training courses for new arbitrators;

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

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

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

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

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

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

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

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

Conclusions:

SEC oversees NYSE and NASD, which regulate their member firms in the 
securities industry. All three are responsible for ensuring that the 
procedures for arbitrating discrimination and other employment disputes 
are fair and the requirements of the Exchange Act are met. Although 
SEC's approval of rules governing arbitration programs and its periodic 
inspections of these programs has resulted in improvements, there are 
aspects of these programs that deserve closer scrutiny.

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

Recommendations:

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

Agency and SRO Comments:

We provided a draft of this report to SEC, NASD, and NYSE for their 
review. A copy of their written comments is in appendixes II, III, and 
IV, respectively. SEC, NASD, and NYSE also provided technical comments 
on the draft report, which were incorporated as appropriate.

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

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

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

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

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

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

Signed by Robert E. Robertson:

[End of section]

Appendix I: Scope and Methodology:

This appendix provides a detailed description of the scope and 
methodology we used to determine (1) the characteristics and outcomes 
of arbitrated employment and employment discrimination disputes in the 
securities industry; (2) who evaluates arbitrators and what performance 
ratings they receive; and (3) how the Securities and Exchange 
Commission (SEC) responds to complaint letters it receives concerning 
arbitration of employment and employment discrimination cases.

Determining the Characteristics and Outcomes of Arbitrated Employment 
Disputes:

To determine the nature and outcomes of employment and employment 
discrimination disputes in the securities industry, we analyzed a 
database containing employment disputes in which arbitration decisions 
had been made by NASD[Footnote 48] or the New York Stock Exchange 
(NYSE) from January 1993 through June 2002. We obtained this database 
from Securities Arbitration Commentator, Inc. (SAC), Maplewood, New 
Jersey. SAC is a commercial research firm that maintains a database of 
information from publicly available records on decided cases from all 
self-regulatory organizations (SRO) arbitration forums, as well as the 
American Arbitration Association.

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

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

Determining Arbitrator Performance:

To determine who evaluates arbitrators and what performance ratings 
they receive, we first generated a list from the SAC data file of all 
NASD arbitrators who had decided at least 1 employment case that did 
not include a discrimination claim. We stratified this list of 494 
arbitrators into two groups--those that had also decided at least 1 
case involving discrimination during this time and those that had not 
decided any cases involving discrimination. We selected all 60 
arbitrators from the group that had heard at least 1 discrimination 
case and selected a random sample of 64 of those that had not heard any 
and obtained NASD's files containing evaluation and rating information 
for each of these 124 arbitrators.[Footnote 49] From the files 
associated with the sampled arbitrators, we extracted data on the 
number of evaluations, if any, these arbitrators received from the 
parties and/or other arbitrators in the cases they had decided and on 
performance ratings these arbitrators received.

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

Because we followed a probability procedure based on random selections, 
our sample is only one of a large number of samples that we might have 
drawn. Since each sample could have provided different estimates, we 
express our confidence in the precision of our particular sample's 
results as 95 percent confidence intervals. These are intervals that 
would contain the actual population value for 95 percent of the samples 
we could have drawn. As a result, we are 95 percent confident that each 
of the confidence intervals in this report will include the true value 
in the study population. The width of a confidence interval is also 
referred to as the sampling error associated with the estimate. 
Sampling errors associated with estimates from our file review do not 
exceed plus or minus 15 percentage points.

Determining the Content of SEC Complaint Letters:

SEC tracks complaint letters in a computerized database and has logged 
over 12,000 from 1992 through October 2002. To determine how SEC 
responds to complaint letters it receives concerning arbitration of 
employment and employment discrimination cases, first we asked SEC 
staff to search its database and identify those letters that mention 
arbitration. SEC found that approximately 500 of the logged letters 
mentioned arbitration. We reviewed the content of a random sample of 
100 of these letters to determine how many dealt specifically with 
arbitration of employment or employment discrimination claims. Out of 
the 100 letters, we found 16 that dealt with the arbitration of 
employment or employment discrimination claims. Twenty-five of the 100 
letters in our sample were missing from SEC files, and the issues 
raised in the remaining 59 letters were either unclear or unrelated to 
employment cases.

[End of section]

Appendix II: Comments from the Securities and Exchange Commission:

UNITED STATES:

SECURITIES AND EXCHANGE COMMISSION WASHINGTON. D.C. 20549:

DIVISION OF MARKET REGULATION:

August 5, 2003:

Mr. Robert E. Robertson Director:

General Accounting Office Education, Workforce, and Income Security 
Issues 441 G Street, N.W. - 5T57 Washington DC 20548:

Re: Draft Report GAO-03-790:

Dear Mr. Robertson:

Thank you for the opportunity to comment on the General Accounting 
Office's draft report GAO-03-790, which addresses the arbitration of 
employment disputes at NASD and New York Stock Exchange arbitration 
forums. The draft report provides helpful discussion of issues 
surrounding the administration of employment disputes.

In the draft report, GAO addresses the varieties of employment disputes 
that parties bring to NASD and NYSE arbitration forums, actions the two 
self-regulatory organizations have taken to provide fair procedures for 
the parties, as well as the Commission's oversight of the process.

GAO has concluded correctly, we believe, that ultimately the success 
and fairness of the arbitration process comes from the strength of the 
arbitrator pool. Accordingly, we agree with the focus in the draft 
recommendations on arbitrator qualifications and evaluation. The draft 
calls for the SROs to take additional steps to verify basic background 
information provided by applicants for their arbitration rosters, and 
for the Commission to continue to include in its oversight work 
attention to arbitrator evaluation.

We note that NASD - which administers the largest securities 
arbitration forum - has filed with the Commission the proposed rule 
change, which it discussed with GAO, to address verification of 
arbitrator qualifications. NASD's proposal reflects a judgment made by 
its Board that routine verification of basic arbitrator application 
data would improve its parties' confidence in their arbitrators. The 
proposal, if approved by the Commission, would impose the cost of 
verification on arbitrator applicants. At the same time, in the absence 
of examples of false statements of qualification, it is reasonable to 
permit smaller arbitration forums to assess independently benefits and 
costs of verifying the application data. We have found that it is 
beneficial to the parties to have a choice among a variety of 
arbitration forums. Given competing demands on their budgets, it may 
not be necessary for all of the smaller forums to 
formalize verification. Nevertheless, we intend to share your 
recommendation with all of the smaller arbitration forums, and to ask 
NASD to advise them of its experience under the new procedure.

As GAO recognizes in its draft report, Commission staff inspections of 
SRO arbitration programs already focus on SRO procedures for evaluating 
arbitrator performance. The staff closely reviews party, peer and staff 
evaluations, along with the SROs' procedures for tracking and 
following-up on evaluations of arbitrator performance. We agree with 
GAO that evaluating arbitrator performance is a fundamental element of 
the arbitration process, and will continue to review the adequacy of 
procedures for evaluating arbitrator performance during future 
inspections of SRO arbitration programs.

Thank you again for the opportunity to comment on the draft report. We 
request that GAO include a copy of this letter in the final report.

Sincerely,

Annette L. Nazareth 
Director:

Signed by Annette L. Nazareth: 

[End of section]

Appendix III: Comments from NASD:

Linda D. Fienberg 
President, 
Dispute Resolution 
Executive Vice President and Chief Hearing Officer, 
Regulatory Policy and Oversight:

August 6, 2003:

Mr. Robert E. Robertson:

Director, Education, Workforce, and Income Security Issues U.S. General 
Accounting Office:

441 G Street, N.W. Washington, D.C. 20548:

NASD:

Re: EMPLOYMENT DISPUTES Recommendations to Further Ensure that 
Securities Arbitrators are Qualified:

Dear Mr. Robertson:

Thank you for the opportunity to comment on the GAO Report (GAO Report 
or Report) to Representatives Dingell and Markey regarding the review 
of securities industry employment disputes. NASD considers the 
resolution of employment disputes to be an important part of the 
services we provide, and we appreciate the acknowledgement in the 
Report of NASD's policies and procedures intended to ensure fair 
arbitration for all cases.

The GAO Report covered two primary areas:

1. Expanded steps to verify arbitrator qualifications; and:

2. Measures to enhance procedures to evaluate arbitrator performance.

We respond below to the GAO's findings in each area and describe 
numerous initiatives NASD has implemented to improve our arbitration 
forum. We highlight the actions already taken to implement the GAO 
recommendation regarding background verification and discuss NASD 
actions to improve collection of arbitrator evaluations from parties, 
peer arbitrators, and staff.

Executive Summary:

NASD is committed to providing a fair and efficient forum for the 
resolution of discrimination claims and other employment disputes. 
Although the GAO Report covered a period of 10 years, the most 
significant changes in the arbitration of securities industry 
employment disputes have occurred more recently. NASD requires 
arbitration of regular employment disputes such as compensation claims 
and will arbitrate statutory employment discrimination claims when 
employees and firms agree to arbitrate such disputes before or after a 
dispute occurs. We have implemented numerous measures in the past 
several years to improve our process for resolving employment disputes 
and to enhance due process procedures for employment discrimination 
matters. In addition, we have adopted special qualification 
requirements for arbitrators serving on discrimination cases and 
adopted other enhancements.

We have already filed with the Securities and Exchange Commission (SEC) 
a rule proposal (NASD-SR-2003-122 on August 5, 2003) to begin 
background verification for arbitrator candidates. We also have plans 
to supplement our current efforts to encourage arbitrator evaluations 
by parties and peer arbitrators by offering new tools to facilitate 
submission of those evaluations.

Previous Employment Rule Changes:

In August 1997, the Boards of NASD Regulation and NASD ("NASD Boards") 
submitted a proposal that removed from the NASD Code of Arbitration 
Procedure provisions requiring registered persons to arbitrate claims 
of statutory employment discrimination. That rule change was approved 
by the SEC, and became effective for claims filed on or after January 
1, 1999. The amended rule provided that associated persons no longer 
would be required, solely by virtue of their association or their 
registration with NASD, to arbitrate claims of statutory employment 
discrimination. Associated persons were still required to arbitrate 
other employment-related claims, as well as any business-related claims 
involving investors or other persons.

In conjunction with this rule change, the NASD Boards recommended 
certain enhancements to the voluntary arbitration process for 
employment discrimination claims. To carry out the Boards' mandate, 
NASD staff assembled a working group, including attorneys representing 
employees, general counsels of member firms, and arbitrators with 
expertise in employment matters, to advise on issues relating to the 
arbitration of employment discrimination claims. In addition to several 
issues presented to them by NASD staff, the working group considered 
recommendations contained in a document known as "A Due Process 
Protocol for Mediation and Arbitration of Statutory Disputes Arising 
Out of the Employment Relationship" ("the Protocol"). The NASD Boards 
recommended that the working group consider due process procedures 
similar to those in the Protocol. As a result of these initiatives, 
NASD, in 2000, further amended its Rules to enhance the dispute 
resolution process for the handling of employment discrimination 
disputes, and to expand disclosure to employees concerning the 
arbitration of all disputes.

These rules, as approved by the SEC, deal with the qualifications of 
arbitrators hearing claims of employment discrimination; the number of 
arbitrators to hear such claims; special rules for discovery, awards, 
and attorneys' fees; coordination of claims filed in court and 
arbitration; and disclosure to associated persons of the effects of the 
arbitration clause found in the Form U-4.[NOTE 1]

This series of rule changes has resulted in a reduction of employment 
cases in NASD's forum, particularly matters involving employment 
discrimination claims. Since 2000, the number of cases involving 
employment discrimination claims has averaged fewer than 50 per year. 
Although there are relatively few of these claims filed in the NASD 
forum, we believe that arbitration and mediation are extremely 
effective means to resolve employment disputes. Indeed, the majority of 
all matters in NASD's forum are resolved between the parties through 
direct negotiation or through mediation.[NOTE 2] In addition to the 
decided matters in which employees 
recovered damages, numerous other matters were settled between the 
parties through direct negotiation or mediation.

The GAO Recommendations:

I. Verification of Arbitrator Qualifications:

Since at least 1990, Dispute Resolution has used the Central 
Registration Depository (CRD)[NOTE 3] system to verify background 
information 
of all arbitrator candidates affiliated with the securities industry. 
In addition, NASD has taken numerous measures to assure the 
completeness and accuracy of arbitrator background information provided 
to parties. The GAO noted many of these on page three of its November 
9, 2000 GAO Report entitled: Procedures for Updating Arbitrator 
Disclosure Information:

"NASD-DR "has taken actions to help ensure that arbitrators submit 
updated background information. After arbitrators become enrolled in 
the program, NASD-DR officials told us NASD-DR repeatedly reminds 
arbitrators of the obligation to update background information. For 
example, NASD-DR's arbitrator training materials note that each time 
arbitrators are appointed to a case, they are to review their 
disclosure reports for accuracy and update them as necessary. Other 
NASD-DR materials provided to arbitrators-the Arbitrator's Reference 
Guide, the Code of Arbitration Procedure, and the Arbitrator's Manual-
also contain discussions of required disclosures and the obligation to 
update background information. In addition, NASD-DR officials stated 
that in the NASD-DR newsletter-called The Neutral Corner, which it 
sends to all arbitrators free of charge-NASD-DR regularly places 
reminders about their duty to provide updated disclosure information.

NASD-DR has also used other measures to further ensure that arbitrator 
background information is up to date. In 1992, and again at the end of 
1998, NASD-DR surveyed its pool of arbitrators to review and verify the 
accuracy of information on their backgrounds.":

In 1999, the staff updated the records of over 6,500 arbitrators based 
on the arbitrators' responses to a November 1998 questionnaire. 
Arbitrators who failed to respond to the questionnaire were 
subsequently dropped from the roster. NASD Dispute Resolution also has 
implemented regular audits to ensure that the staff inputs important 
updates provided by arbitrators in a timely manner.

Additional NASD Initiatives:

As indicated above, NASD Dispute Resolution has long recognized the 
importance of updating its arbitrator records in a timely and accurate 
manner. We believe that when parties consider an arbitrator for 
possible service, they have a fundamental right to arbitrator 
information that is up-to-date, correct, and relevant. To address this 
issue further, NASD Dispute Resolution took the following actions to 
supplement its existing efforts:

1. Centralization of the Roster Maintenance Function. Beginning in Fall 
2000, the Department of Neutral Management (DNM), located in New York 
City, became 
solely responsible for updating and revising arbitrator records. We 
believe this change made the process easier to control and reduced the 
possibility of errors. 

2. On-line Update Form: Since November 1, 2000, 
arbitrators have been able to update their records on-line via NASD 
Dispute Resolution's Web Site. An easy, step-by-step form allows 
arbitrators to update their information and to submit it 
electronically[NOTE 4] to the DNM.

3. Arbitrator Disclosure Reports: Since November 1, 2000, NASD has been 
giving arbitrators serving on three-person panels a copy of the 
disclosure reports of their fellow arbitrators. This helps arbitrators 
have a better understanding of the expertise and background of the 
people with whom they are serving, and also encourages panel members to 
consider the disclosures made by other arbitrators and to make similar 
disclosures themselves.

NASD Dispute Resolution has undertaken an ambitious project to redesign 
completely its legacy computer system. We will implement this new 
system in phases over the next few years, and will create a web-based 
gateway for parties, counsel, arbitrators, mediators, and staff. The 
new system will provide for on-line filing of claims, pleadings, and 
correspondence, as well as on-line scheduling of hearings and selection 
of arbitrators and mediators. It will enable neutrals to access the 
data we maintain for them on our system and to update their own 
records.

Last year, even though there was no evidence that individuals were 
falsifying information in order to become approved as arbitrators, NASD 
felt that additional efforts to verify arbitrators' background 
information would increase the confidence of parties and counsel in the 
accuracy of arbitrator records. Accordingly, Dispute Resolution 
resolved in the Fall of 2002 to implement by January 2, 2003 procedures 
to verify the following information provided by new applicants to the 
Dispute Resolution roster of arbitrators:

Federal and County criminal records, Employment information, and 
Professional licenses.

Because of our intent to pass on the cost of verification to 
applicants, the SEC advised us that we would need to make a rule filing 
to seek approval of this new procedure. Therefore, Dispute Resolution 
obtained the approval of the NASD National Arbitration and Mediation 
Committee at its meeting on February 13, 2003, and the approval of the 
Dispute Resolution Board of Directors at its meeting of April 23, 2003. 
NASD filed with the SEC (NASD-SR-2003-122) the verification rule 
proposal on August 5, 2003.

II. Initiatives Related to Arbitrator Evaluations:

NASD recognizes the critical importance of evaluating the performance 
of arbitrators. We seek to maintain the quality of our roster by 
continuously reviewing the performance of our neutrals. On a quarterly 
basis, NASD staff members gather all evaluations from parties and from 
peers and consider whether to remove certain arbitrators from the 
roster. Staff observations of the arbitrator's performance and any 
complaints received about a particular arbitrator are also 
considered. NASD has removed arbitrators from the roster due to poor 
evaluations, lack of training, failure to provide complete and accurate 
disclosures, and other reasons.

In order to make appropriate determinations to maintain the quality of 
the arbitrator roster, we need the input of our customers. NASD has 
tried many methods to encourage parties and peers to complete 
evaluations. For example, in 1997, NASD implemented new party 
evaluation forms. The initial party and representative response to the 
new forms was favorable in terms of both the number filed and the 
valuable feedback received. This early success was due in large part to 
the procedure of asking presiding chairpersons to distribute the new 
questionnaires at the conclusion of the last evidentiary hearing and to 
encourage the parties or their representatives to participate 
voluntarily. At that time, NASD also revised the Hearing Procedure 
Script to remind the chairperson to make this important request of the 
parties.

These efforts resulted in a temporary increase in the number of 
evaluations returned but parties and counsel are not always willing to 
take the time to submit evaluations. NASD staff members take every 
opportunity, during focus groups, in regular meetings of the Securities 
Industry Conference on Arbitration, the Public Investors Arbitration 
Bar Association, and the Securities Industry Association, and in 
individual meetings with attorneys, to remind regular participants in 
our forum to complete evaluation forms. In addition, NASD regularly 
reminds arbitrators of the importance of completing the peer 
evaluations through correspondence, in numerous articles in The Neutral 
Corner, and in individual conversations.

As of July 28, 2003, the party and peer evaluation forms are available 
to download from the NASD Web Site as part of the case-related 
materials provided for parties and arbitrators. In addition, during the 
first half of 2004, we are planning to implement evaluation forms that 
parties and arbitrators can fill out on-line. This should provide 
greater access to the forms, and facilitate collection and recording of 
party and peer evaluations.

NASD also is committed to continue to improve record keeping of 
evaluations and of follow up actions. NASD takes every complaint or 
evaluation seriously and we promptly investigate any claim of improper 
conduct. As suggested by the GAO, we will strive to provide better 
documentation of the actions we take in response to complaints or 
evaluations.

Conclusion:

NASD believes that arbitration and mediation are fair and effective 
means of resolving employment disputes. We are keenly aware of the 
importance of the parties' perception of fairness and of their 
confidence in the process. Thus, we have taken significant steps to 
ensure that arbitrator background information is complete and accurate 
and have implemented measures to enhance the parties' confidence in our 
forum through the verification of arbitrator background information.

NASD also understands the importance of evaluating arbitrator 
performance. Staff provides part of this monitoring through 
participating in initial prehearing conferences, attending hearings 
when matters are brought to their attention, and conducting 
conversations with arbitrators. However, we also rely heavily on 
parties and peer arbitrators to provide signals about arbitrator 
performance. In addition, we monitor complaint letters, conduct focus 
groups, and elicit comments during informal meetings and at Dispute 
Resolution public presentations. We have great confidence in the 
qualifications and skills of our arbitrator roster. Nevertheless, when 
there are problems, we want to identify them early and address them 
through education, counseling of individual arbitrators, or, when 
necessary, removal from the roster.

We are pleased that the many steps we have taken to improve our 
procedures have been effective; we will continue our efforts to 
maintain a fair and efficient process for resolving employment 
disputes. Thank you for the opportunity to respond to the GAO Report 
and to work with your staff to help fashion responsive initiatives. If 
you have any questions or require further information, please contact 
me at (202) 728-8407.

Very truly yours,

Linda D. Fienberg 
President:

Signed by Linda D. Fienberg: 

cc: Clarita Mrena - GAO Margaret A. Holmes - GAO Robert Love - SEC:

NOTES: 

[1] Individuals must sign and submit Form U-4 to become registered 
with a Self Regulatory Organization (SRO) such as NASD. The U-4 Form 
contains a requirement that the applicant agree to arbitrate any 
dispute, claim, or controversy that is required to be arbitrated under 
the rules, constitution, or by-laws of the SRO.

[2] In 2002, parties settled 56 percent of all cases closed either 
through direct negotiation or through mediation. Employment cases 
follow a similar pattern.

[3] The CRD system, which is operated by NASD's Regulatory Services and 
Operations Division, is the registration and licensing system for the 
United States securities industry and its federal and state securities 
regulators and SROs. NASD and the North American Securities 
Administrators Association (NASAA) jointly administer the CRD system.

[4] Arbitrators may also print the form, complete it by hand, and fax 
or mail it to the Department of Neutral Management.

[End of section]

Appendix IV: Comments from the New York Stock Exchange:

Robert S. Clemente Director:

Arbitration:

New York Stock Exchange, Inc. 20 Broad Street:

New York, NY 10005:

tel: 212.656.5608 fax: 212.656.2727/2558 Clemente@nyse.com:

NYSE:

August 11, 2003:

Robert E. Robertson Director:

Education, Workforce and Income Security Issues 
U.S. General Accounting Office:

441 G Street, NW --Room 5928 Washington, DC 20548:

Re: Draft GAO Report 03-790 --Employment Disputes. Recommendations to 
Further Ensure that Securities Arbitrators are Qualified:

Dear Mr. Robertson:

The New York Stock Exchange, Inc. ("NYSE") appreciates the opportunity 
to provide comments on the above-referenced draft GAO report, a copy of 
which you emailed to me on July 15, 2003 ("the draft report"). We also 
discussed some of the general points in this letter with your 
colleagues Margaret Holmes and Clarita Mrena during a conference call 
last week, and we are mindful of the time and effort that GAO staff 
have devoted to seeking information from NYSE relating to its 
arbitration program. [NOTE 1]:

The draft report recommends that NYSE and NASD be directed by the SEC 
to verify the qualifications of all applicants for arbitrator 
positions. For the reasons detailed below, NYSE believes that, for 
NYSE, the costs of additional verification of the arbitrator pool 
significantly exceed the benefits that would be gained. Accordingly, we 
respectfully request that GAO consider and implement the comments in 
this letter and in the enclosed marked pages of the draft report (a 
copy of the marked pages also was emailed to Ms. Holmes on August 5, 
2003). Doing so, we believe, will enable GAO to provide a fuller and 
more accurate account of the current requirements and procedures 
relating to the qualification and evaluation of Exchange arbitrators.

Because the draft report's title and overall focus relates to 
arbitrated employment disputes, NYSE initially notes the important fact 
that employment disputes constitute a very small percentage of its 
arbitrations, and discrimination arbitrations initiated by employees 
are a particularly small subset of those filings. In 2000, only 18% of 
the arbitration filings at NYSE were initiated by employees; in 2001, 
that number dropped to 13%; and in 2002, the figure 
dropped further to 8.7%. Discrimination claims are a tiny subset of 
this subset: they constitute less than 1 % of all arbitration filings 
since 2000, and during 2003 only one employment discrimination claim 
has been filed. The draft report correctly notes the diminished filing 
of employment discrimination claims at NYSE since it amended its Rule 
600 (in late 1998) to provide for arbitration of statutory 
discrimination claims only upon agreement of the parties after the 
dispute arises. Since that amendment, the majority of employment 
dispute NYSE arbitrations have been claims filed by NYSE member firms 
against their employees or former employees. These claims are generally 
contractual disputes based upon an employee's failure to repay a 
promissory note or training costs. Accordingly, they generally do not 
require arbitrators to have expertise in and apply state or federal 
employment laws.

Regardless of the subject matter of the dispute, NYSE is committed to 
providing a fair and efficient dispute resolution forum. However, 
verifying the qualifications of all applicants for arbitrator positions 
seems to be directed at solving a problem that does not exist. NYSE is 
not aware of any complaints by parties or counsels that arbitrators 
misrepresented their qualifications or that a particular proceeding or 
award was compromised on that basis. Additionally, the Exchange itself 
is aware of no instances where an applicant has submitted false 
information.

The absence of such complaints may reflect the fact that considerable 
background information must be disclosed before an individual is even 
appointed to NYSE's list of eligible arbitrators, or selected for a 
specific case. To become eligible to serve as an NYSE arbitrator, an 
applicant must first submit a biographical and disclosure form, known 
as an "NYSE Arbitrator/Mediator Profile."[NOTE 2] The profile requires 
detailed information regarding the applicant's educational background, 
employment history, disciplinary or regulatory background, and any 
affiliations with the securities industry. The form also inquires as to 
additional qualifications that make the person competent to serve as an 
arbitrator, including experience in alternative dispute resolution or 
the completion of an arbitrator training program. Applicants swear or 
affirm that the information provided is "true and complete" to the best 
of their knowledge.[NOTE 3]

The overwhelming majority of employee-parties in NYSE arbitrations are 
represented by counsel, typically highly experienced practitioners, who 
can and do "make further inquiry of the Director of Arbitration 
concerning an arbitrator's background." (Exchange Rule 608.)[NOTE 4] In 
addition, counsel often conduct their own independent due diligence and 
verification of qualifications, although arbitrators generally are from 
the same community as, and their qualifications already may be known 
to, the parties and/or counsel. Thus, in addition to the current 
mechanism for assuring the quality of the arbitrator pool itself, the 
process embodies a "last chance" qualification check by those most 
interested in quality assurance, the very parties to an arbitration.

Turning to the question of costs, note that verification of all 
qualification-related information would entail a more detailed 
background check, involving records possessed by employers, 
educational institutions, and/or licensing authorities across the 
country. Regardless of who bears those costs - the parties through 
higher fees, NYSE's constituents by increasing NYSE's subsidy to its 
arbitration program, or the arbitrator applicants - NYSE believes they 
ought not to be borne in the absence of a more compelling case for 
greater verification of pool quality.

With respect to evaluation of arbitrator performance, we are pleased 
that the draft report acknowledges some of the steps NYSE has taken to 
improve its policies, in part in response to prior SEC recommendations. 
Specific recent enhancements to NYSE's evaluation of arbitrators 
include its implementation in 2003 of new software which allows for a 
centralized, easily accessible record of all feedback and comments from 
arbitrator evaluations, listing the type of evaluation based on its 
author (party, peer or staff). Prior enhancements enabled NYSE to note 
the need (if any) for remedial action, as well as the steps taken to 
improve the particular arbitrator's performance. In addition, NYSE 
revised its arbitrator evaluation forms to include specific questions 
regarding arbitrator performance. Also, NYSE has directed chairmen of 
arbitration panels to specifically include in their opening and closing 
statements comments encouraging the parties and counsel to submit 
evaluations.

NYSE continuously monitors and upgrades arbitrator qualification, 
evaluation and training. In addition to formal evaluations, NYSE 
Arbitration staff receive informal feedback from arbitrators, parties 
and counsel, and regularly attend or conduct dispute resolution and 
arbitrator training seminars. Additionally, the Director of Arbitration 
attends conferences of the Securities Industry Conference on 
Arbitration, which is a cooperative effort on the part of the 
securities industry, the SROs, and the public - working with the SEC - 
to implement a uniform system of arbitration, to monitor that system, 
and to change it as appropriate or required.

With respect to compliance with prior SEC recommendations and general 
improvements to its arbitration program, NYSE is monitored not only by 
periodic SEC and other government inspections and inquiries, but also 
by NYSE's own Regulatory Quality Review Department ("RQR"), which is 
part of NYSE's Division of Corporate Audit and Regulatory Quality 
Review. RQR functions independently with its own audit staff and 
regularly reports to NYSE's Board of Directors. RQR currently is 
engaged in a review of arbitrator qualification, selection, evaluation 
and training, in part to review compliance with a prior RQR examination 
and prior SEC recommendations on these subjects. The conduct of follow-
up reviews on matters raised by GAO and the SEC are part of the NYSE 
Board's charge to RQR, and RQR has indicated, for its current review 
and for its ongoing arbitration review program, that it will focus on 
these issues.

NYSE will continue to work with the SEC, arbitrators, parties, counsel, 
and other industry participants to improve NYSE's arbitration program, 
including implementing rational and cost-effective enhancements to 
arbitrator qualification and evaluation.

Again, we appreciate your consideration of NYSE's comments. If you have 
any questions, please do not hesitate to contact me.

Sincerely yours,

Robert S. Clemente: 

Signed by Robert S. Clemente: 

Enclosures:

NOTES: 

[1] In response to specific requests from GAO staff, NYSE provided 
information and/or documents - including the materials referenced in 
this letter - on or about August 27, 2002; November 21, 2002; January 
17, 2003; February 7, 2003; February 26, 2003; and March 7, 2003.

[2] This form is available at www.nyse.com/pdfs/profile2.pdf.

[3] Additionally, as the draft report notes, an applicant must submit 
two letters of recommendation. The letters - from two members of the 
applicant's community, field, or profession - must contain the length 
of time the writer has known the applicant and under what 
circumstances; a description of the experience the applicant possesses 
that qualifies him or her to serve; and an attestation as to the 
character and fitness of the applicant. In many instances, 
recommendations come from current NYSE arbitrators or other persons 
known to NYSE.

[4] Potential arbitrators who refuse to respond to further inquiries 
are subject to disqualification for cause.

[End of section]

Appendix V: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

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

Staff Acknowledgments:

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

FOOTNOTES

[1] SROs have an extensive role in regulating the U.S. securities 
markets, including ensuring that members comply with federal securities 
laws and SRO rules. SROs include all the registered U.S. securities 
exchanges and clearing organizations, NASD, and the Municipal 
Securities Rulemaking Board.

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

[3] Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). 

[4] Alford v. Dean Witter Reynolds, Inc., 939 F. 2d 229 (5th Cir. 
1991); Cremin v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 957 F. 
Supp. 1460 (N.D. Ill. 1997); andCircuit City v. Adams, 532 U.S. 105 
(2001).

[5] According to NYSE, the overwhelming majority of employees in 
arbitration are represented by attorneys who specialize in employment 
law.

[6] Although NASD and Nasdaq are in the process of separating, as of 
this date NASD is the SRO and Nasdaq is a subsidiary of NASD. Nasdaq's 
application for Exchange Registration status as a registered securities 
exchange under Section 6 of the Exchange Act is still pending before 
SEC. NASD delegates to NASD Regulation, its wholly owned subsidiary, 
SRO responsibilities as its regulatory arm. 

[7] Firms must register with an SRO to operate within the securities 
industry and must abide by its rules. 

[8] Customers bring the majority of arbitration cases in the securities 
industry. For example, in 2002, 78 percent of all decided cases at NASD 
were customer cases. Similarly, in 2002, only approximately 9 percent 
of all cases filed with NYSE were filed by employees.

[9] At both NASD and NYSE, arbitrators are classified as either public 
or nonpublic (NYSE uses the term industry). A nonpublic arbitrator is 
someone from the securities industry, retired from or has spent a 
substantial part of their career in the securities industry, or is an 
attorney, accountant, or professional who devoted more than 20 percent 
of his or her professional work to securities industry clients in the 
last 2 years. Public arbitrators then are those arbitrators who do not 
fall into the industry category and in addition do not have a spouse or 
a household member (referred to as an immediate family member at NASD) 
who is associated with someone in the securities industry. In June 
2003, NASD filed proposed amendments to rules contained in its Code of 
Arbitration Procedure regarding the classification of public 
arbitrators. The purpose of proposed rule amendments was to further 
ensure that individuals with significant ties to the securities 
industry may not serve as public arbitrators. 

[10] Certain rules proposed by SROs that deal with a narrow list of 
topics, such as rules that establish or change dues, fees, or other 
charges that can become effective upon filing with SEC without action 
by SEC. SEC is required to publish notice of the proposed rule changes 
filed by the SRO and the rule change is subject to a 21-day comment 
period that begins when the notice of the filing is published. Within 
60 days of SRO's filing of a rule that is effective upon filing, SEC 
can annul the rule change and require that the rule be refiled under 
the normal notice and comment period. 

[11] Associated persons of broker-dealers accept the rules of SROs by 
signing the U-4, the application they must complete to become 
registered with a SRO. Within the U-4, applicants agree to arbitrate 
any dispute claim or controversy that is required to be arbitrated 
under the rules, constitutions, or by-laws of the SRO. 

[12] Discrimination claims filed rose from 4 in 1991 to 109 in 1996 
(see Federal Register, 62, 242).

[13] As approved by SEC, effective January 1, 1999, NASD's Code of 
Arbitration Procedures were amended so that registered persons were no 
longer required to arbitrate claims of statutory employment.

[14] The working group included attorneys representing employees, 
general counsels of member firms, and arbitrators with expertise in 
employment matters.

[15] Organizations represented were involved in labor, employment law, 
and alternative dispute resolutions. 

[16] NASD has also adopted rules to allow claims to be consolidated in 
one case, meaning if someone chooses to take a discrimination claim to 
court they will also be allowed to combine nondiscrimination claims in 
that case.

[17] Arbitration cases are heard by one or three arbitrators, depending 
on the size of the claim. In discrimination cases where there is only 
one arbitrator, that arbitrator must also meet these requirements.

[18] Primarily is defined as 50 percent or more of the arbitrator's 
business or professional activities.

[19] Arbitrators who qualify to serve as chairs on discrimination 
disputes are asked to provide a summary description of their 
qualifications for discrimination disputes, which is presented to the 
parties in the case. This summary is in addition to the narrative 
summary that all arbitrators must provide regarding their general 
arbitrator qualifications.

[20] Parties may agree to have the case determined by a single 
arbitrator.

[21] NASD is now considering expanding the qualifications for 
arbitrator chairs by requiring them to take the chair-training course 
and to have participated in a certain number of arbitration cases. 
According to NASD officials, having chairs be more familiar with the 
legal process would help the arbitration process. 

[22] SEC stated in its order approving NASD's rule that it approved 
"the specific provision governing attorneys fees in cognizance of the 
special attention to them under the civil rights laws" and that "awards 
of attorney's fees by arbitrators remain available to all parties in 
other cases administered under the Code of Arbitration Procedure, if 
applicable law permits such an award." Self-Regulatory Organizations; 
Order Approving a Proposed Rule Change by the National Association of 
Securities Dealers, Inc., Relating to the Arbitration Process for 
Claims of Employment Discrimination, Release No. 34-42061 (Oct. 27, 
1999).

[23] On the application form arbitrators are also asked to answer a 
series of questions on whether they have engaged in criminal activities 
and provide information on their affiliation to the securities 
industry--something arbitrators are required to update on an ongoing 
basis. For more information on arbitrator disclosure requirements, see 
U.S. General Accounting Office, Follow-up Report on Matters Relating to 
Securities Arbitration, GAO-03-162R (Washington, D.C.: Apr. 11, 2003) 
and Michael A. Perino, Report to the Securities and Exchange Commission 
Regarding Arbitrator Conflict Disclosure Requirements in NASD and NYSE 
Securities Arbitrations (Nov. 4, 2002).

[24] NASD and the North American Securities Administrators Association 
established the CRD in 1981 and its use allows individual brokers and 
firms to meet both state and federal reporting requirements. NASD has 
instituted a statistical quality control process to measure the 
accuracy of disclosures and has periodic examinations done of the data 
by data quality professionals. 

[25] In August 2003, NASD filed a rule proposal with SEC, which would 
require that new arbitrator applicants have background information 
verified for federal and county criminal records, employment 
information, and professional licenses (SR-NASD-2003-122).

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

[27] NYSE can waive this requirement.

[28] In mid-2003, NASD Chairperson training was converted to an online 
interactive program. 

[29] At that time, NASD reviewed all arbitrators on its roster and sent 
out letters to all arbitrators requesting that they update their 
profiles; in the process, NASD removed 800 to 1,000 arbitrators on its 
roster.

[30] The composition of the lists depends on the size of the claim and 
the nature of the dispute. For example, in employment discrimination 
cases being heard by three arbitrators (claims of more than $100,000), 
the list will contain the names of 10 public arbitrators, plus the 
names of 5 public arbitrators who meet the special additional 
requirements to chair discrimination cases. 

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

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

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

[34] Our analysis was conducted on cases decided by arbitrators and 
does not include cases that were settled or withdrawn. According to 
NASD, in recent years, parties agreed on a resolution in nearly 60 
percent of all cases.

[35] The data analyzed spanned from January 1993 through June 2002--the 
most current data available.

[36] Sex discrimination includes sexual harassment claims.

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

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

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

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

[41] SEC was unable to provide the total number of closed cases their 
sample was drawn from. 

[42] Securities Exchange Act of 1934 Section 19(h), 15 U.S.C. § 78s(h).

[43] In the event deficiencies were not adequately addressed, SEC has 
authority under Section 19(h) of the Exchange Act to institute 
administrative proceedings to remove SRO officials, limit or suspend 
SRO activities, or revoke SRO registration.

[44] Twenty-five of the 100 letters in our sample were missing from SEC 
files. The issues raised in the remaining 59 letters were either 
unclear or dealt with issues unrelated to employment cases. 

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

[46] GAO-03-162R (Washington, D.C.: Apr. 11, 2003). 

[47] In GAO-03-162R, we report that one SRO has implemented procedures 
making it easier to remove arbitrators from ongoing cases.

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

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

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