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. Subsequent court decisions permitted the use of mandatory arbitration for resolving other employment discrimination disputes, including sexual harassment. 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. SROs include NYSE that operates and regulates its market, as well as NASD, a private-sector provider of financial regulatory and dispute resolution services. Their responsibilities include overseeing the arbitration of claims brought in the securities industry by customers, firms, and employees as required by the Securities and Exchange Act of 1934 (the Exchange Act). 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. 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. 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. 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. Prior to 1999, both NASD and NYSE rules required the mandatory arbitration of all employment-related disputes, including discrimination claims. In the 1990s, as discrimination claims filed at NASD rose, 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. 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 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, to provide arbitration procedures for statutory employment claims. Following NASD’s review of this protocol NASD introduced additional requirements for these types of claims. Changes ranged from setting qualifications for arbitrators who chair arbitrator panels 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 represented employers or employees in the last 5 years. 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. 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. 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. 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 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. 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. 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. 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. Ongoing training at both SROs is limited. NYSE requires that arbitrators continue to attend at least one training course every 4 years. NASD does not have such a requirement but does offer chairperson training for those arbitrators wanting to chair cases. One SEC official raised concerns about mandating ongoing training for arbitrators, arguing that it may discourage the most experienced arbitrators from serving.