GAO Report on Employment Arbitration in Securities Arbitration Forums

GAO Report on Employment Arbitration Released


Improvements found, recommendations made

Congress’ watchdog, the U.S. General Accounting Office, recently issued a report on employment disputes in securities arbitration, which provides important statistics on arbitration outcomes and valuable information about the SEC oversight process and arbitrator qualifications and training.

The Report, entitled “EMPLOYMENT DISPUTES: Recommendations to Better Ensure that Securities Arbitrators are Qualified,” was sent to Congressmen John D. Dingell (D-MI) and Edward J. Markey (D-MA) on August 29, 2003 and released by them to the public on September 23, 2003.

This pair has periodically commissioned the GAO to inspect the SRO arbitration process and, in this request, they asked that GAO examine: (1) what employment and employment disputes must be arbitrated before the two major SROs, NASD and NYSE; (2) what statistical information is available about such arbitrated disputes over the past ten years; and (3) what SEC is doing to oversee the SRO programs. The Report, which runs almost 60 pages, produces some excellent, and sometimes surprising, statistics about the characteristics and outcomes of relevant employment Awards.

The Report’s main focus, though, is upon the Arbitrators who are qualified for and selected to serve on employment-related cases. Here, the GAO serves a singular role, because: (1) as an arm of the Government, it can review case files, SRO records and policies, and interview staff members to get information about forum practices and procedures that no reporter, committee member, or practitioner could elicit; and (2) unlike the SEC, whose oversight activities are conducted in secret, the GAO makes their findings public, in the form of reports that are professional, easy-to-read, and prepared in accordance with “generally accepted government auditing standards.”

Regarding the training, qualification, vetting and appointment of arbitrators, the GAO finds that the SROs have improved their activities greatly, that the SEC has made various recommendations to ensure that arbitrators are qualified, but GAO also finds that “there are aspects of these programs that deserve closer scrutiny.”

In that regard, GAO makes two recommendations, one which SEC and NYSE oppose and the other which garners general agreement: (1) “we recommend that the Chairman of SEC direct NASD and NYSE to verify basic background information of all new applicants for their arbitrator rosters;” and, (2) “[w]e also recommend that SEC continue to review the adequacy of procedures for evaluating arbitrator performance in their next inspections at NASD and NYSE.”

NASD has already initiated steps to verify background information with a new rule proposal (see SAA 03-32) that will cost new arbitrator applicants $80 to defray the investigative expenses. NYSE, though, argues that falsification of information has not been proven to be a problem and that parties do their own due diligence. SEC agrees that NYSE, as a far smaller program, should not have to add this cost to the arbitration process. GAO responds, though, that NASD’s approach does not add costs for the parties and the fact that parties have undertaken investigations of arbitrator background information indicates the importance of accuracy. In addition, “our recommendation will benefit all parties, since NASD and NYSE arbitrators are available for both employment and customer cases.”

Regarding the second recommendation, though, “NASD noted that it would strive to provide better documentation of the actions it takes in response to complaints or evaluations” and NYSE has already constructed “a new computer system that creates a centralized, easily accessible record of all feedback and comments from arbitrator evaluations….” (SAC Ed: We will report in more detail upon the GAO’s latest report on securities arbitration in an upcoming SAC print newsletter. Readers can obtain a copy of the Report by visiting the GAO WebSite, The Report is designated GAO-03-790. The GAO’s statistical analyses of Award data, which covers employment Awards from January 1992 to June 2002, were performed with SAC’s Award Database.) (SAC Ref. No. 03-38-01)



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