GAO Report Assesses NASD and NYSE Arbitration of Employment Discrimination Cases

eps with employment discrimination claims should read the report issued by the General Accounting Office (GAO) entitled, "Employment Disputes: Recommendations to Better Ensure That Securities Arbitrators Are Qualified." The report (available at www.gao.gov) critiques the NASD and NYSE arbitration forums in resolving employment discrimination claims.

Let's first address when NASD or NYSE arbitration is required. Arbitration is required for regular employment disputes, such as those relating to employment termination, employment contracts, promissory notes and receipt of commissions. By comparison, reps are not required to arbitrate employment discrimination claims unless they have agreed to do so. At the NASD, that arbitration agreement may be reached prior to or after the employment discrimination dispute arose (for example, through policies that firms require reps to sign as a condition of employment). The NYSE is stricter than the NASD, requiring that the parties agree to arbitration only after the dispute arose. The Form U-4 no longer is a basis to force reps to arbitrate employment discrimination disputes due to 1999 amendments to the codes of arbitration procedure.

Reps should understand that there are important differences between NASD and NYSE employment discrimination arbitration. For example, reps should find some comfort in knowing that the NASD requires, among other things, that its arbitrators be classified as "public" (that is, not affiliated with the securities industry either professionally or through their family relationships). On the other hand, in cases seeking $100,000 or less in damages, NASD will provide only a one-person arbitration panel to hear employment discrimination claims, not a three-person panel as the NYSE provides in all cases. Additionally, NASD made two procedural changes in 2000 which assist reps. First, NASD rules specifically allow arbitrators to award reasonable attorneys' fees. Second, NASD rules require arbitrators to specify how they ruled (but not necessarily explain their decision) on the employment discrimination claims. A final difference concerns the GAO's recommendation that the NASD and NYSE verify the background information provided by the arbitrator applicants. Whereas the NASD agrees that it should verify and has filed for permission to begin doing so, the NYSE has raised concerns that verification is not cost justified, explaining that it hears fewer cases than the NASD and that it knows of no examples of arbitrators making false statements about their qualifications.

Next, let's examine some interesting statistics. The GAO found that over the last 10 years, 17% of the employment disputes arbitrated at the NASD or the NYSE included a discrimination claim. The majority of the discrimination claims were based either on age or on sex. Overall, employment discrimination claims took longer to resolve as they required more arbitration hearing sessions. Additionally, while reps won employment cases not involving discrimination 61% of the time, reps won their discrimination claims less often, 48% of the time. However, when reps did win their discrimination claims, the monetary awards were greater. Specifically, reps won awards greater than $50,000 62% of the time when they alleged discrimination, versus 48% of the time when they did not. In all employment cases, reps who did not receive a monetary award nonetheless received non-monetary relief of some kind (for example, removing defamatory language from a Form U-5 termination notice) in 13% of the cases.

The question of whether arbitration is better than litigation is not an easy question to answer. For example, lower cost and faster resolution favor arbitration. On the other hand, reps, who survive the treacherous waters of litigation motion practice to have a jury hear their case, should do better before that jury.

The GAO report makes several recommendations to improve the arbitration process and ensure that arbitrators are qualified. But the numbers speak loudly. In 2000, reps filed a total of 29 employment discrimination claims. In 2001, they filed 22. In 2003, they filed only 9. These statistics suggest that either reps are not pursuing discrimination claims (a doubtful proposition) or reps are choosing (when they can) to file their claims in court. The GAO provided no statistics in that regard. Notably, though, the GAO reports that the NYSE had represented that attorneys who specialize in employment law represent the "overwhelming majority of employees" in arbitration. That's probably a mistake by reps, because knowledge of securities laws, rules and regulations is equally if not more important than knowledge of employment law. So, it may be that the reps' choice of counsel explains, at least in part, why the NASD and the NYSE are hearing only a handful of employment discrimination claims.

Accordingly, reps carefully should review their options with legal counsel before selecting the forum to resolve their employment discrimination claim.