SEC is responsible for regulating securities market participants, including  SROs such as NASD and NYSE. 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. 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. 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. 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 represented employers or  employees in the last 5 years. 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. In addition, arbitrators must update their profile, which includes  information on their employment history and affiliation with the securities  industry. Officials from both SROs said that if no information is received  about an arbitrator on a case, they assume the arbitrator performed  adequately. 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 decided by arbitrators at NASD and NYSE  over the last 10 years, 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. NASD arbitrated 202 of the cases that involved  discrimination allegations. 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. 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. 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. Conclusions

SEC oversees NYSE and NASD, which regulate their member firms in the  securities industry. Securities  industry employees must use NASD and NYSE arbitration programs to  resolve most employment disputes. Other contacts and staff acknowledgments are listed in  appendix V.

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.
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: (1) discrimination cases required more hearing sessions; (2) employees won discrimination cases less often than cases not involving discrimination claims; and (3) 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.