Senate Banking, Housing and Urban Affairs Committee

Oversight Hearing on Mandatory Arbitration Agreements
in Employee Contracts in the Securities Industry

I. -- INTRODUCTION AND BACKGROUND

The Securities Industry Association ("SIA")⁽¹⁾ appreciates the opportunity to testify on the role of arbitration in resolving civil rights disputes in the securities industry. We commend Chairman D'Amato and all the Members of the Committee for holding this hearing on this important issue.

In a debate marked by stark differences of opinion, there is one fact about which there can be no dispute ­ all forms of discrimination should be eradicated, not only in the securities industry, but in society as a whole. This is the very premise of our civil rights laws. SIA and its members wholeheartedly embrace this goal. However, we reject the unfounded leap taken by some that Congress should now force all disputes involving allegations of discrimination into court. As our testimony will establish, the court system is neither the best, nor the only proper, means by which workplace discrimination may be effectively redressed. The erroneously drawn conclusion that arbitrating employment discrimination disputes in the securities industry will somehow erode Congressional efforts to eliminate discrimination is not supported by the data or by common sense.

The issue being examined at this hearing is identical to that which was broached by one court, when it stated:

[T]here is no disagreement among the members of this Court about the general proposition that racial, gender, and all other forms of invidious discrimination, are ugly realities that cannot be countenanced and that should be redressable through the widest possible range of remedies (citation omitted). However, the issue before us is not whether discrimination is a social evil that should be eradicated with whatever tools we have. Rather, the issue is whether, under existing precedent, the important public policies underlying [the Civil Rights Laws] of the Federal Civil Rights Act may be deemed to override the "emphatic national policy favoring arbitration" [citations omitted], as reflected in the [Federal Arbitration Act].⁽²⁾

II. -- STATEMENT OF POSITION

The employees of SIA member firms frequently arbitrate all claims arising out of their employment or termination of employment, including claims arising under the federal anti-discrimination laws. Until recently, securities industry employees agreed to arbitrate their claims by virtue of registering with a self-regulatory organization ("SRO") whose rules require arbitration through the execution of a Uniform Application for Securities Industry Registration (or Form U-4), or in some instances, by executing a private agreement to arbitrate with his or her firm. In June of this year, however, the SEC approved a rule change proposed by the National Association of Securities Dealers, Regulation ("NASD"), which removed from the NASD's Code of Arbitration the requirement that employees must arbitrate statutory claims of employment discrimination. That rule becomes effective on January 1, 1999 such that, on and after that date, claims may be filed in court for past conduct if they are within the applicable statutes of limitations and meet other statutory requirements and no other predispute arbitration agreements apply. SEC Release No. 34-40109; File No. SR-NASD-97-77.

In proposing the rule change, the NASD reiterated its belief that its arbitration system is fair and provides many benefits to employees as well as to securities firms, and that the rule change should not in any way indicate a lack of confidence in the SRO arbitration system. SEC Release No. 34-40109; File No. SR-NASD- 97-77, pp. 7, 12. Moreover, although many urged the SEC and the NASD to invalidate even private agreements to arbitrate statutory discrimination claims, the SEC declined to do so. Indeed, the NASD has expressly stated that "such [private] agreements would not be affected by this rule change." NASD Notice to Members 98-56, July 1998, p. 2.

Although a staunch supporter of arbitration, the SIA supported the change proposed by the SEC insofar as it purported only to remove the mandatory requirement from the NASD's rules. In its January 18, 1998 comment letter to the SEC, SIA stated that it supports "the rule in its current form and commends the [SEC] staff on its efforts to balance the competing concerns of arbitration's critics with those who believe in its efficiency, fairness and propriety for resolving all manner of employment claims." SIA Comment Letter to Jonathan Katz, Secretary of the SEC, dated January 18, 1998, p. 1.

This hearing thus arises at a somewhat unique time. The SEC's adoption of the rule proposed by the NASD, which will become effective in a few short months, evinces a sharp departure from the system by which virtually all claims in the securities industry have been arbitrated. In addition, and as will be discussed more fully below, the SROs have been working hard, with both the industry and with those that represent employees, to assure that fairness in this system is maximized. To that end, changes have been made and further changes are being studied and, where appropriate, will be made to improve the arbitration system even further.

In light of the fluidity of change in this area, it is premature to make any wholesale changes. It has been less than two months since the SEC approved the NASD's proposed rule change, and by its terms, the rule will not become effective for another six (6) months (January 1, 1999). Although one of our industry's largest members has announced publicly that it does not intend to require its employees to arbitrate their employment discrimination claims by private agreement, the majority of firms have apparently not yet decided whether or not they will do so. Accordingly, many new opportunities will arise for firms and employees to address this issue. Until the industry and its employees have had sufficient opportunity to respond to this new and significant change, it would be premature for Congress to take further action at this juncture.⁽³⁾

These developments are occurring at a time when the current court system for resolution of employment claims is long, burdensome and expensive -- an unfortunate reality that benefits neither employee nor employer. Courts simply cannot manage their current caseload, save any influx of cases that further change would engender. Moreover, and as discussed below, even without an increase in volume in caseload, however, the court system has not been shown to be a particularly hospitable environment for discrimination claims.

Arbitration's vocal detractors have unabashedly assumed ­ without meaningful supportive data -- that the judicial system is the best forum for resolving these disputes, and therefore, they argue, is the most effective way to further the goals of our civil rights laws. This argument is based in neither fact nor reality insofar as statistics and the reality of an overburdened and problematic court system demonstrate quite the contrary.

In this statement, SIA intends to:

(i) review the statutory and judicial bases for arbitration of employment discrimination disputes;

(ii) explore the safeguards and improvements instituted and being contemplated by the various fora that hear securities arbitration cases involving civil rights claims;

(iii) address why maintenance of the current system of arbitration is vital to further important policies established by Congress and implemented by the United States Supreme Court; and

(iv) demonstrate that the arbitration process is superior and more equitable to employees than litigating such claims in court.

III. -- LONG ENDORSED BY CONGRESS AND THE COURTS, ARBITRATION IS
A FAIR AND EFFICIENT MEANS OF RESOLVING CIVIL RIGHTS CLAIMS

A. Congress Has Expressly Endorsed Arbitration of Employment Discrimination Claims

Those who oppose arbitration as a forum for resolving civil rights or employment discrimination claims assert that arbitration of employment discrimination disputes runs contrary to Congressional intent and deprives individuals of substantive statutory rights. To the contrary, Congress long ago endorsed the resolution of statutory claims by arbitration, including employment discrimination claims. Congress enacted the Federal Arbitration Act ("FAA")⁽⁴⁾ in 1925 specifically to encourage the enforcement of arbitration agreements and to make agreements to arbitrate enforceable to the same extent as other contracts. As the U.S. Supreme Court and countless courts have noted, the FAA thus constitutes a "congressional declaration of a liberal federal policy favoring arbitration agreements."⁽⁵⁾

Arbitration's critics not only ignore Congress's longstanding endorsement of arbitration but foster a view that is inconsistent with the national trend to resolve disputes through alternative means of dispute resolution.

More specifically, in 1991, Congress enacted the Civil Rights Act of 1991 (the "Act"),⁽⁶⁾ which amended various civil rights laws, by adding a provision endorsing arbitration as a fair and effective means of resolving employment discrimination disputes. Section 118 of the Act provides as follows:

Where appropriate and to the extent authorized by law, the use of alternative means of dispute resolution, including settlement negotiations, conciliation, facilitation, mediation, fact-finding, mini trials and arbitration, is encouraged to resolve disputes arising under the Acts or provisions of Federal law amended by this title.⁽⁷⁾

Since the passage of the 1991 Civil Rights Act, many courts have recognized that Section 118 constitutes a clear Congressional endorsement of arbitration, including arbitration of employment discrimination claims pursuant to predispute arbitration agreements.⁽⁸⁾ More fundamentally, the Supreme Court noted in 1995 that Congress's purpose in enacting the FAA was "to overcome courts' refusal to enforce agreements to arbitrate."⁽⁹⁾ As a federal appellate court recently held, "the FAA not only reversed the judicial hostility to the enforcement of arbitration contracts, but also created a rule of contract construction favoring arbitration." ⁽¹⁰⁾

B. -- THE COURTS HAVE APPROVED OF ARBITRATION AS AN EFFECTIVE
AND FAIR MEANS OF RESOLVING EMPLOYMENT DISCRIMINATION CLAIMS

Critics also argue that an employee who agrees to arbitrate discrimination claims gives up important statutory rights. As the Supreme Court has expressly disavowed such rhetoric, so too should this Committee. The Supreme Court held, "[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial forum."⁽¹¹⁾

In Gilmer,⁽¹²⁾ the Court upheld the arbitration of an age discrimination claim pursuant to a Form U-4 agreement. After reiterating Congress's strong endorsement of arbitration agreements, and rejecting criticisms of the arbitration process, the Court stated that "[s]uch generalized attacks on arbitration 'res[t] on suspicion of arbitration as a method of weakening the protections afforded in the substantive law to would-be complaints,' and as such, they are 'far out of step with our current strong endorsement of the federal statutes favoring this method of resolving disputes.⁽¹³⁾ Notably, the Court considered the arbitration procedures used by the self-regulatory organizations in detail and rejected criticisms of them.⁽¹⁴⁾

On cue from Gilmer and its endorsement of mandatory arbitration of discrimination claims,⁽¹⁵⁾ federal courts have widely upheld the use of mandatory arbitration for a wide range of federal civil rights claims.⁽¹⁶⁾ Thus, it bears repeating that substantive rights are not waived by virtue of mandatory arbitration: "By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial forum. It trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration."⁽¹⁷⁾

I. -- RELEGATING CIVIL RIGHTS CLAIMS TO THE ALREADY OVERBURDENED COURT SYSTEM WILL NOT FURTHER THE LAUDABLE PURPOSES OF THE CIVIL RIGHTS LAWS

It is counterintuitive to argue, on the one hand, that the goals of the civil rights laws are paramount while, on the other hand, blindly to insist that a system which is demonstrably slower and less fair, is the best means to further those goals. Yet this is precisely the illogical argument fostered by some who oppose arbitration. This being said, there is compelling evidence that the federal courts are not the purveyors of blind justice that plaintiffs' lawyers and other critics of arbitration would have us believe. The court system is far from the flawless, time efficient or impartial forum that opponents of arbitration claim it to be.

Indeed, the Federal Judiciary itself recently has acknowledged that, with respect to all manner of discrimination claims, there exists perceptible bias in the judicial treatment of parties, witnesses and counsels throughout the federal court system. Report of the Second Circuit Task Force on Gender, Racial and Ethnic Fairness in the Courts, June 1997 (the "Second Circuit Study"). The Second Circuit Study found that judges often express open hostility to employment discrimination claims and their litigants. In the study, trial judges "expressed their belief that the proliferation of small cases involving individual claimants, including employment discrimination cases, clog the federal courts and divert the attention of judges away from larger, more significant civil cases."⁽¹⁸⁾ Similarly, trial judges "exhibited impatience" with employment discrimination claims to the point where one district court judge is reported to have unexpectedly awarded summary judgment to the defendants despite the fact that neither side requested such a ruling, nor had addressed any of the significant issues in the cases other than jurisdictional ones.⁽¹⁹⁾ "These preliminary indications in the . . . study raise a concern that, when, an employment discrimination case is properly before a federal court, a judge's belief that the matter is too trivial for his or her attention may too easily translate into actual unfairness to a litigant as the case proceeds through the system."⁽²⁰⁾

In this context of judicial hostility to discrimination claims, a noted federal district court judge recently held, in dismissing a Title VII claim for racial discrimination:

This is another example where the nations anti-discrimination laws are being misused. Here, a U.S. district court is asked to involve itself in a minor internal employee assignment decision . . . It would be hoped that at some point Congress would review the law in this area and make the necessary adjustment to eliminate these meritless, lottery-type cases.⁽²¹⁾

Thus, while employees and their lawyers seeking to avoid arbitration contend that arbitration is unfair simply because it is not litigation, there is credible evidence to suggest that the crushing discrimination caseload in federal courts has caused judges to look askance at even meritorious discrimination claims, and that this attitude may result in unfairness in the eventual result.

Arbitration, by contrast, seeks to resolve disputes fairly, quickly and efficiently, as recognized by the statistics set forth below as well as in a 1996 study by the Arbitration Policy Task Force to the Board of Governors of the NASD, which stated that "arbitration of employment related disputes offers advantages in terms of speed and cost . . . [and that] arbitration's essentially equitable approach to dispute resolution is fully capable of vindicating the important public rights expressed in anti-discrimination statutes."⁽²²⁾

A. -- Arbitration Is Swifter And Less Expensive Than Court Litigation

Employees alleging workplace discrimination, potentially out of work and lacking in funds, would surely echo the truism that "justice delayed is justice denied." Claims brought in the overburdened court system typically are not resolved for several years. Even the staunchest of critics cannot genuinely contend that such delays serve the greater good of eradicating workplace discrimination as Congress intended with its passage of the various civil rights statutes.

The civil trial process for employment claims is long and burdensome. Even those employers who prevail after a jury trial sustain immense costs and disruption in doing so. Faced with the prospect of huge costs even if they win, many employers choose to settle meritless claims rather than fight them in court. Arbitration, by contrast, offers all parties a faster and more efficient means of resolving claims. We establish below, with reference to governmental and other unbiased third-party statistics, that:

(1) Employees prevail more frequently before arbitration panels than before juries;

(2) Discrimination claims brought in arbitration are resolved more quickly than court actions;

(3) In arbitration, employees are virtually assured that their discrimination claims will be heard insofar as pre-hearing dismissal motions are virtually non-existent. By contrast, in court, such motions are common and often granted;

(4) If arbitration is not an available alternative, employees' claims would be bifurcated, the cost prohibitions of which may result in the abandonment of otherwise valid claims; and

(5) The more informal arbitration procedures favor employees, who generally have more limited resources than do their employers.

A comparison of the results of discrimination claims brought before the New York Stock Exchange ("NYSE") and the National Association of Securities Dealers ("NASD"), with those brought in the United States District Court for the Southern District of New York ("SDNY") demonstrates that the important goal of eradicating discrimination is well served by the arbitration process, which results in awards to claimants more often than the court process.⁽²³⁾ After identifying all claims in which any type of workplace discrimination was alleged (including discrimination based on age, race and color, sex, national origin, disability and religion), SIA staff examined all decisions rendered since February 24, 1992 in arbitrations administered by the NYSE (the "NYSE Study") and by the NASD (the "NASD Study"). SIA staff compared these results with the results of all SDNY discrimination claims that culminated in a trial verdict since February 24, 1992 (the "SDNY Study").⁽²⁴⁾

Both studies examined cases completed through May 31, 1998. The results are as follows:

FORUM	LENGTH OF TIME FROM INCEPTION TO DISPOSITION	% OF CASES WHERE EMPLOYEE PREVAILED
NYSE	15.6 months	38.46 %
NASD	17.8 months	32.57 %
SDNY	27.5 months	22.12 %

The NYSE Study shows that the average length of time between the filing of a statement of claim in a discrimination case and the rendering of an award after hearing is 15.6 months. Similarly, the NASD Study reveals that, on average, discrimination cases are resolved in that forum in 17.8 months.

Conversely, resolution of discrimination claims in the overburdened court system is appreciably slower, taking more than two years (27.5 months to be precise) to resolve. Such a calculation is in accord with the fact that, in the SDNY, civil cases generally (that is, those not limited to discrimination cases) proceed from inception to trial in 27 months.⁽²⁵⁾ When the time associated with first exhausting administrative remedies in the EEOC and then fighting an employer's appeals are considered, it is even clearer that arbitrations afford aggrieved individuals much quicker resolutions of their claims.⁽²⁶⁾ In SRO arbitrations, claimants are not required to exhaust their administrative remedies before filing a statement of claim, and appeals from adverse arbitration decisions are rare.

Nor can it be said that overcrowded court dockets and increasing case delays are soon to be a thing of the past. Court statisticians openly recognize that the delays in court are on the rise due to the increased volume of civil cases in general and employment cases in particular. The number of new civil cases filed in the federal courts has quadrupled since 1960.⁽²⁷⁾ Employment discrimination cases commenced in the district courts have risen from 10,771 in 1992 to 23,796 in 1997, an increase of 121%.⁽²⁸⁾ This surge of new job discrimination claims has led a panel of federal judges to propose that the EEOC be required to investigate cases more thoroughly before allowing workers to bring lawsuits.⁽²⁹⁾

A faster resolution of employment discrimination disputes not only has the obvious direct benefit of compensating an aggrieved employee as quickly as possible but has several other tangible benefits as well. Many of the problems associated with delay, such as witnesses' inability to recall facts, difficulty of locating witnesses and documents and the attendant increases in costs and illogical results are reduced by a more expedient disposition. Delays can also result in substantial disruption of the employer's business and the employee's ability to earn a livelihood. These factors substantially increase the cost of litigating an employment discrimination claim in court, as compared to arbitration. Such a waste of resources, by both employers and employees, is to nobody's benefit and would be substantially reduced by continuing to permit less costly and more time efficient arbitrations to resolve discrimination claims.

B. Employees Alleging Discrimination Fare Better in Arbitration

The arguments against arbitration of employment discrimination disputes in the securities industry are grounded on the mistaken premise that the process yields unfair results to employees. This is not so.

Employees alleging job discrimination benefit substantially when their claims are heard in arbitration. Thus, employees alleging discrimination before NYSE and NASD panels prevail far more frequently than do employees whose discrimination claims are heard by juries. As established in the above chart, an employee who brings a discrimination claim in arbitration before a NYSE panel is almost twice as likely to prevail before a panel in that forum than would that same employee before a jury. These results put to rest the mistaken belief that employees cannot get a fair hearing before an SRO panel. Indeed, the fact that employees alleging discrimination prevailed in thirty-eight percent (38.46 %) of the decisions rendered by NYSE panels and thirty-two percent (32.57 %) of the NASD decisions, as compared with a twenty-two percent (22.12 %) win rate in the SDNY leaves little doubt that critics' concerns about so-called industry dominated arbitration proceedings are inaccurate, to say the least.

C. Employees Enjoy Numerous Other Benefits in Arbitration

In addition to these efficiency and fairness benefits, employees who utilize arbitration enjoy numerous other benefits than do their counterparts in court. In court proceedings, employers are frequently successful in having discrimination claims dismissed on a motion to dismiss or a motion for summary judgment. Indeed, according to statistics compiled by the United States Bureau of Justice Statistics, during fiscal year 1995, federal district courts dismissed 10,904 discrimination cases such that only 1,021 discrimination cases actually went to trial.⁽³⁰⁾ In fiscal year 1996, only 6.3% of employment discrimination cases reached trial.⁽³¹⁾ Similarly, a study of sex and age discrimination claims found that motions to dismiss were successful forty-six percent (46%) of the time and summary judgment motions were successful fifty-nine percent (59%) of the time.⁽³²⁾

Corroborating this fact is an analysis of 3.7 million federal district court cases done by the Administrative Office of the United States Courts, assembled by the Federal Judicial Center and disseminated by the Inter-University Consortium for Political and Social Research via the Internet. This data showed that of the 2,595 statutory employment discrimination cases terminated in 1994 that were not settled or dismissed on other grounds, almost 70% were decided on pre-trial motions. Out of that 70%, employers prevailed in nearly 98% of those pre-trial motions while plaintiffs succeeded in just over 2%.⁽³³⁾

Such is surely not the case in arbitration where employees in all but the rarest cases will have the opportunity to present their case at a hearing. As arbitration practitioners will readily acknowledge, pre-hearing dismissal rulings are rare. The rules of the NYSE, for instance, do not even provide for motions for summary judgment or dismissal and, in actual practice, pre-hearing dismissals are virtually nonexistent. The implication of this fact is that claims which would otherwise have been dismissed in court on legal grounds are presented to arbitrators, allowing the claimants an opportunity which he or she may otherwise not have had -- an opportunity to persuade the arbitrators that "fairness" dictates that relief should be granted, even where the strict legal elements may be lacking.

Moreover, since discrimination claims are often brought in conjunction with other employment claims, such as breach of contract, tort and wage and hour claims, removing discrimination claims from arbitration would cause a bifurcation of disputes between employers and employees. The resulting bifurcation is wasteful to all parties, risks the anomaly of conflicting decisions arising out of the same facts, and is particularly onerous to the party less able to bear the burden of parallel proceedings -- typically, the employee.

Another benefit of arbitration relates to the less stringent rules regarding the admissibility of documents at arbitration hearings. At the hearing, the strict rules of evidence used by courts do not apply. As the U.S. Supreme Court noted in Gilmer,⁽³⁴⁾ this is a distinct advantage for employees, as it allows them to put before the arbitrators all manner of "evidence" that would not be admissible in court. Similarly, the limited availability of hearsay objections and other technical objections and devices makes the process more "user-friendly" and therefore readily accessible to employees. In short, these reduced formalities of SRO arbitration favor the party with more limited resources; typically, the employee.

V. -- CRITICISMS OF THE ARBITRATION PROCESS ARE MISPLACED

As established above, there are many benefits of arbitration. Turning from the benefits of arbitration to the unfounded criticisms of the process itself, the following discussion endeavors to correct some of the more frequently espoused criticisms of arbitration.

Critics frequently claim that arbitrators who hear employment discrimination cases are not well trained. This is not true. The SROs that currently administer securities arbitration cases sponsor training programs on employment discrimination law for which they actively recruit participants. As the Ruder Report noted, in 1994 alone, the NASD conducted training sessions on employment arbitration that were attended by approximately 700 arbitrators.⁽³⁵⁾ As one example of the training that is given, both the NASD and NYSE have participated in a training program sponsored by the Association of the Bar of the City of New York, a neutral body made up of representatives of employers and employees. Lawyers representing both employers and employees conduct each training session. The result, in the words of an independent publication that reviewed one of the sessions of that program, was "commendably objective."⁽³⁶⁾ The NASD prepared professionally edited videotape of the Association of the Bar training program, which it uses in training sessions throughout the country. Other training efforts continue as well, as discussed below.

The criticism of the supposed lack of training by arbitrators is also logically unsound. Since juries have no training in discrimination law, there is no reason to suppose that a judge's instructions to a jury concerning the law leave the jury any more informed than arbitrators; particularly when arbitrators ­ unlike juries ­ frequently have received specific training in this area.

Critics also argue that arbitration is unfair because arbitrator pools are not as diverse as jury pools. The SEC, in commenting on a draft of the GAO Report, dispelled this very notion, stating that "GAO focused its attention on some aspects of the general operation of the forums, particularly issues related to the composition of the arbitrator pool, and again did not find problems that affected any particular cases"⁽³⁷⁾ In that same comment, the SEC further noted that there was not "any indication of bias in the administration of the [discrimination] claims" that the GAO reviewed.

Moreover, criticisms that many arbitrators are older, white males and the implication that this demographic profile precludes them from rendering fair decisions in discrimination actions are -- ironically -- based on discriminatory and offensive stereotypes. Indeed, it is just such an unfounded presumption that led the Supreme Court to hold that gender and race based exclusions of potential jurors is an unconstitutional practice.⁽³⁸⁾ Moreover, the Supreme Court repeatedly has "decline[d] to indulge the presumption that the parties and arbitral body conducting a proceeding will be unable or unwilling to retain competent, conscientious and impartial arbitrators."⁽³⁹⁾ In all events, such criticisms are misplaced in light of the commendable efforts by the NASD and NYSE to diversify their arbitrator pools and to increase the extent of training provided to arbitrators -- training which is certainly not available to jurors.⁽⁴⁰⁾ This criticism also ignores the practical reality that arbitration panels ordinarily include a lawyer and an experienced business person, both of whom typically have a reasonable understanding of what the anti-discrimination laws require in terms of conduct and behavior.

The "older white male" stereotype is also factually unfounded. In a survey that was done relative only to gender discrimination claims, the SIA analyzed every NYSE arbitration decision from January 1992 through September 1997 where a woman claimed discrimination. In 86% of those cases, the arbitration panels included a female arbitrator, as shown on the following chart. The NYSE has made concerted efforts to expand arbitration panels to include female arbitrators and, judging by the numbers, these efforts have succeeded.

Date of Decision

Total

Number of Awards to Claimants

Percentage of Awards in Favor of Claimants

Percentage of Panels Including Female Arbitrators

1992-1997

22

12

54%

86%

This same analysis of NYSE arbitrations evidences a strong track record of success by women in that forum. During the past five years, women asserting discrimination claims in NYSE arbitrations received an award in 54% of the cases that went to a hearing. This success rate is especially significant considering that, as previously noted, unlike claims litigated in court, claims heard in arbitration are rarely dismissed on motions prior to a hearing.

It also simply is not true that industry employees dominate arbitration hearings, as some critics assert. NASD and NYSE rules require that two of the three arbitrators assigned to hear each employment case must come from outside the securities industry. The one arbitrator who is from the industry cannot be associated with the firm involved in the case, and, like all arbitrators, must abide by rules requiring him or her to disclose "any circumstances which might preclude such arbitrator from rendering an objective and impartial determination."⁽⁴¹⁾ The fact that one impartial arbitrator is knowledgeable about how the securities industry works therefore serves to benefit all parties. Moreover, each party has the unlimited right to challenge the selection of any arbitrator for cause, as well as the right to make one "peremptory" challenge, i.e., to remove an arbitrator without having to offer a reason.

Critics also claim that the public nature of a court proceeding acts as a deterrent to discriminatory practices. This criticism is outdated in that arbitration awards are publicly available and are, in fact, often publicized. A finding of discrimination remains a deterrent to future discrimination, regardless of whether the proceeding itself is open to the public. In addition, the relatively private nature of the arbitration process may actually encourage employees to pursue their discrimination claims in arbitration rather than endure the public nature of a plenary trial.

The arbitration process also gives employees extensive opportunity to collect evidence. Employees are given broad leeway to demand and receive all manner of pertinent documents and information from employers prior to the hearing, often without the sort of limitations to which they would be subject in court cases.

Also misplaced is the suggestion that court is preferable to arbitration for employees because some jury awards are larger than arbitration awards. Moreover, even when jury verdicts are aberrationally high, they are frequently reduced or nullified by the court or on appeal, as confirmed in a recent study performed by the National Law Journal. This study examined employment discrimination verdicts of more than $1 million or more which were rendered during 1996 and 1997, and found that damages were fully reversed in about 80% of the 35 cases that had gone through post-trial motions.⁽⁴²⁾ Notably, this same study reinforced the pervasive judicial hostility to employment cases, particularly by federal judges, as discussed above. One of the reasons cited in the study for these frequent, and sometimes automatic, reductions or reversals is Title VII's $300,000 cap for punitive and emotional distress damages. In short, the suggestion that the interests of a small minority of employees who may win substantial jury verdicts should dominate over the interests of the vast majority of employees, who benefit from having a quicker, fairer and more efficient mechanism for resolving employment discrimination claims, should be rejected.⁽⁴³⁾

VI. -- The Securities Industry Is Working to Foster a Workplace Environment That Promotes Tolerance and Respect for All its Employees, Thereby Promoting the Very Goals of the Civil Rights Laws

As noted, SIA and its members deplore gender discrimination and intolerance of all kinds. Although it is important to punish discriminatory behavior, SIA believes that it is at least as important for the securities industry to recruit, hire, promote, and retain qualified women and minority employees. To that end, SIA itself has established a high level Diversity Committee to focus members' attention on these issues. SIA is actively working with its membership to increase the ranks of women and minorities in the industry and to assure that all employees enjoy a working environment in which they can maximize their success and advancement. SIA last year produced and disseminated a video focusing on the importance of creating diversity within our industry and stressing the commitment of our firms to that value. The video highlights the positive attitudes of senior management in our industry about diversity, both in terms of women and minorities.

Most importantly, the securities firms themselves are keenly aware of the importance of full participation by women and minorities in their industry. To that end, firms have take an energetic and proactive approach to developing programs and initiatives designed to recruit, train, develop and retain women and minorities. The securities industry has been aggressively pursuing a proactive agenda to help foster positive development, support and understanding of employment and diversity policies amongst its ranks of executives, managers, and staff. Those diversity efforts focus on all aspects of employment, including recruitment, hiring, development, retention and promotion.

While it may be beyond the scope of this hearing, we believe it may be helpful to provide general information about the numerous types of initiatives and programs undertaken by its member firms. Of course, the specific programs and initiatives that have been undertaken vary greatly based on the differing needs and resources of the firms. Indeed, since the size and business focus of SIA's 800 members do vary to such an extreme degree -- ranging from firms with 50,000 employees operating from 550 offices to firms with two employees -- it is simply not possible to describe the programs in terms that are applicable to all members.

Recruitment -- With an eye towards recruitment, securities firms have tailored and expanded traditional recruitment programs to attract more female and minority candidates. In the interest of diversity, and specifically, with respect to recruitment, some firms have created advertising campaigns targeted at female and minority candidates. Others publish career opportunity brochures that specifically target and encourage women and minorities to enter careers that in the past may have been considered inhospitable to women and minorities. Securities firms have increased their use of women-owned search firms that focus specifically on placing women in the industry and some firms hold special meetings on college and graduate school campuses for women students. Some have formed alliances with minority MBA associations at major business schools in an effort to become acquainted with their pools of qualified female and minority candidates. As part of some firms' recruiting efforts, securities firms have participated in community outreach programs, internships and internal programs designed to provide women and minorities with a head start in obtaining permanent employment positions in the securities industry.

Retention -- With respect to retention efforts, that is, programs designed to assure that a firm's culture encourages the advancement of women and minorities once at a firm, managers are encouraged to develop all their employees to increase their skills and chances for success within the firm. At many firms, diversity programs are complemented by mentorship programs to assist new employees and junior professionals in their early career development.

Environment -- Securities firms work hard to foster an environment that welcomes a diverse workforce. Programs designed to heighten sensitivity and awareness of diversity-related issues in the workplace have become an important part of training at many firms. Securities firms were among the leaders in American industry in developing such diversity programs. These programs include mandatory diversity and other training seminars to increase sensitivity to gender and minority-related issues in the workplace. At many major firms, such diversity programs are provided to line and support staff as well.

Policies and Procedures -- The strong written policies prohibiting discrimination that exist throughout the industry are also testament to the industry's focus on diversity related issues. In order to communicate a clear and strong message to employees and management that they will not condone a discriminatory work environment, most firms have policies specifically stating this value. The firms assure their employees that if discriminatory conduct is found to have occurred, prompt and appropriate remedial action will be taken. SIA's member firms urge employees who believe he or she has been discriminated against to come forward, make known their grievance, and take care to assure their employees that there will be no retaliatory action for lodging a complaint. Employees at many firms have a variety of paths they may follow to raise concerns and are free to choose whichever is most comfortable for them. For instance, an employee may have the option of speaking with their immediate supervisor, the next level of management, their human resources representative, or the legal department of the firm. The existence of established policies and procedures to air employment grievances is disseminated in new hire packages, by posting it in common work areas and/or by publication in regular internal employee communications. At some member firms, this message is delivered directly by senior management.

Investigating Allegations -- Our firms are committed to investigating claims of gender discrimination or harassment and in many firms, written internal firm procedures require a prompt and careful investigation once a complaint is received. Investigations are customarily led by human resources professionals supported by attorneys who are trained in conducting such investigations. Once the investigation is completed and if wrongdoing is uncovered, appropriate disciplinary action is taken. Some examples of appropriate action include counseling, reduction in compensation, demotion, and, of course, termination.

While the securities industry is committed to providing workplaces free of sexual harassment and discrimination, even the strongest of commitments cannot absolutely guarantee that there will never be any instance of discrimination. Our industry employs hundreds of thousands of men and women and there will invariably be isolated problems at a given firm or branch office. Despite the existence of individualized instances of misconduct, such misconduct is, unfortunately, not unique to our industry but is problematic in almost all industries, and even in government. While we will never be able to guarantee that isolated instances will never occur, we can state unequivocally that these problems are not systemic or pervasive. Thus, the point is not that instances of sexual harassment and other forms of invidious discrimination unfortunately exist in all industries and in society generally, but that securities firms actively address the issue and, to this end, cultures, work environments and procedures are progressing towards a sea change in the workforce in this country.

VII. -- WHOLESALE CHANGES TO A SYSTEM THAT WORKS WELL IS UNNECESSARY, PARTICULARLY WHERE IMPROVEMENTS HAVE BEEN IMPLEMENTED AND FURTHER CHANGES ARE BEING EXAMINED

While arbitration provides an attractive and fair alternative to court litigation, the securities industry is on record as being ready to work with Congress, the SEC, the EEOC, and the SROs to develop ways to improve the process. Rather than changing a system that has proven to be effective and fair, SIA has advocated that a concerted effort be made to improve certain aspects of the process. SIA letter, dated April 25, 1997, to Mary Schapiro, President, NASDR. Virtually all of the changes endorsed by the industry have been or are being considered by the SROs. These improvements include: (i) increasing the extent and quality of arbitrator training with respect to applicable employment law; (ii) mandatory and automatic pre-hearing exchange of relevant documents; (iii) increasing efforts to form a diverse pool of arbitrators from which panels are chosen to encourage demographic diversity of panels; and (iv) altering the method of arbitrator selection such as furnishing parties with an increased number of challenges or utilizing the list method of selection of arbitrators.

By way of background as to the changes that have been made and are being made to the arbitration process, in January 1996, the Ruder Report was issued. That report studied the NASD's securities arbitration process and recommended reforms. The eight-person task force, chaired by David S. Ruder, Former Chairman of the SEC, concluded their investigation by issuing over seventy-five recommendations for changes and improvements to the NASD's dispute resolution forum. Since mid -1996, the NASD has been reviewing and implementing those recommendations. According to a report recently issued by the NASDR, "the process has involved exposing the central recommendations to the constituents who use the forum in an effort to test the viability of the recommendations and to build a consensus for change." NASDR Dispute Resolution: Status of Arbitration Policy Task Force Recommendations, p. 1, April 1998 ("NASDR Status Report").

Among the areas covered in the NASDR Status Report, is arbitrator training. According to the report, NASD Regulation conducts over 200 arbitrator training programs annual in over 40 cities nationwide. NASD Regulation conducts training programs for new arbitrators and for more experienced arbitrators who want to chair panels. NASDR involves local practitioners in the development and delivery of training seminars on special topics such as employment law, discovery, or damage calculations. In addition, NASDR trains arbitrators to function as co-trainers with a comprehensive Train-The-Trainer course. To supplement the individual programs, NASDR publishes The Neutral Corner, a newsletter for all arbitrators and mediators. The Neutral Corner provides updates on new rules and policies and expert guidance on the dispute resolution processes.

Another area stressed in the NASDR Status Report which may have an impact on the arbitration of civil rights claims is mediation. NASD Regulation has worked hard to develop a voluntary, non-binding mediation program. In this format, the parties control the dispute resolution process, including case scheduling, neutral selection, and the outcome of the case. Investors, brokerage firms, registered representatives, and attorneys are beginning to explore ways to use and benefit from the mediation alternative. According to the NASDR Status Report, volume in mediation has grown steadily since the start of NASD Regulation's program. Since the beginning of the mediation program in 1995, over 1500 cases have closed, with a steady 80 percent settlement rate.

In sum it would be both frustrating and ironic if draconian change were imposed when the majority of the recommendations made by the GAO and by the Ruder Task Force have yet to be fully implemented by the SROs, and at a time when those changes are supported by the securities industry. The industry has been working with the SROs to craft change that will benefit the system and improve the perception that it is unfair while at the same time, maintaining the efficiency of the process. Until the modifications have been implemented and, perhaps more importantly, monitored in terms of their impact on public perception of the system, it is premature to abandon the process.

The suggested improvements will help make an excellent arbitration system even more effective. The changes proposed can only enhance Congress's efforts to combat employment discrimination and protect the Nation's employees.

VIII. -- CONCLUSION

In sum, maintaining the industry's ability to privately contract with their employees and maintaining arbitration as a viable forum for resolution of these disputes is essential to reduce the costs, in terms of both money and human resources, incident to court-based litigation, and to ensure the equitable resolution of discrimination claims in the securities industry. The arguments against permitting employees to arbitrate discrimination disputes ignore: (1) the confidence placed in the arbitration process by the Supreme Court; (2) the documented success of SRO arbitration panels in resolving discrimination claims fairly and efficiently; (3) the increasing inability of the federal courts to resolve such claims fairly, effectively and efficiently; and (4) the unwieldy bifurcation of claims that will result if plaintiffs are given the option of bringing employment discrimination claims in court.

Arbitration of discrimination disputes in the securities industry has been a success for all parties and should be permitted to continue since it provides an effective forum for vindicating statutory claims and does not diminish the employee's substantive legal rights.

We appreciate the opportunity to testify on this important issue and welcome any questions from the Committee.

Notes:

¹ The SIA brings together the shared interests of nearly 800 securities firms, employing more than 380,000 individuals to accomplish common goals. SIA members - including broker-dealers, investment banks, specialists, and mutual fund companies - are active in all markets and in all phases of corporate and public finance. In the United States, SIA members collectively account for approximately 90 percent, or $100 billion, of securities firm's revenues. They manage the accounts of more than 50 million investors directly and tens of millions of investors indirectly through corporate, thrift, and pension plans, and accounts for $270 billion of revenues in the U.S. economy.

² Fletcher v. Kidder, Peabody, 81 N.Y. 2d 623, 636, 601 N.Y.S. 2d 686, 692 (1993) (arbitrability of racial and gender discrimination claims governed by presumption of arbitrability established by the FAA).

³ As this Committee is aware, bills have been introduced in each of the last two Congresses that would have barred mandatory arbitration of employment discrimination claims pursuant to private agreements. No action was taken on the bills. See, e.g., HR 4981, 103d Cong., 2d Sess. (1994); S. 2405, 103d Cong., 2d Sess. (1994); S. 366, 104th Cong., 1st Sess. (1995).

⁴ 9 U.S.C. § 1, et seq.

⁵ Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983).

⁶ Pub. L. No 102-166, 105 Stat. 1045 (codified in 42 U.S.C. § 2000e, et seq. (1991).

⁷ Id. at § 118. Some critics of arbitration argue that Section 118 should not be construed as an endorsement of mandatory arbitration agreements. See Duffield v. Robertson Stephens & Co., 1998 WL 230891 (9^th Cir. 1998), appeal pending. We think the more compelling view is that which was expressed recently by the Third Circuit Court of Appeals in Seus v. John Nuveen, 1998 WL 294020, at *8 (3d Cir. June 8, 1998). Expressly disagreeing with the Duffield Court, the Third Circuit held that, "on its face, the text of § 118 evinces a clear Congressional intent to encourage arbitration of Title VII and ADEA claims, not to preclude arbitration. . . .Nor do we believe this straightforward declaration of the full Congress can be interpreted to mean that the FAA is impliedly repealed with respect to agreements to arbitrate Title VII claims which were executed as a condition of securing employment.) See also cases cited infra, fn. 8.

⁸ See, e.g., Seus v. John Nuveen, 1998 WL 294020, at *8; Austin v Owens Brockway Glass Container, Inc. 78 F.3d 875, 881 (4th Cir. 1996) (holding that the language of the 1991 Act "could not be any more clear in showing congressional favor towards arbitration" and that agreements to arbitrate both Title VII and Americans with Disabilities Act statutory claims were enforceable); Maye v. Smith Barney Inc., 897 F. Supp. 100, 107 (S.D.N.Y. 1995), request for leave to appeal denied, 903 F. Supp. 570 (S.D.N.Y. 1995) (referring to "seemingly unambiguous congressional endorsement of arbitration in § 118").

⁹ Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 115 S. Ct. 834, 838 (1995).

¹⁰ Kuehner v Dickinson & Co., 84 F.3d 319, 320 (9th Cir. 1996).

¹¹ Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).

¹² Id. at 20.

¹³ Id. at 30 (quoting Rodriguez de Quijas, 490 U.S. at 481).

¹⁴ Id. at 30-32.

¹⁵ Id. at 26-28.

¹⁶ See, e.g., Seus v. John Nuveen, 1998 WL 294020 (3d Cir. June 8, 1998) (Title VII); Patterson v. Tenet Healthcare, Inc., 113 F.3d 832 (8th Cir. 1997) (Title VII); Cole v. Burns International, 105 F.3d 1465 (D. C. Cir. 1997) (Title VII); Golenia v. Bob Baker Toyota, 915 F. Supp. 201 (S.D. Cal. 1996) (Americans with Disabilities Act); Williams v. Katten Muchin & Zavis, 837 F. Supp. 1430 (N.D. Ill. 1993) (Older Workers' Benefits Protection Act); Byrd v. Shearson/Lehman/American Express, Inc., 926 F.2d 116 (2d Cir.), cert. denied, 501 U.S. 1251 (1991) (ERISA); Nghiem v. NEC Elec., Inc., 25 F.3d 1437 (9th Cir. 1994) (Title VII); Saari v. Smith, Barney, Harris Upham & Co., 968 F.2d 877 (9th Cir.), cert. denied, 506 U.S. 986 (1992) (Employee Polygraph Protection Act); McNulty v. Prudential-Bache Sec. Inc., 871 F. Supp. 567 (E.D.N.Y. 1994) (Protection of Jurors' Employment Act ); Great Western Mortgage Corp. v. Peacock, 110 F.3d 222 (3d Cir.), cert. denied, 118 S. Ct. 299 (1997) (New Jersey Law Against Discrimination). But see Prudential Ins. Co. of Am. v. Lai, 42 F.3d 1299 (9th Cir. 1994), cert. denied, 516 U.S. 812 (1995); Duffield v Robertson Stephens, 1998 WL 230891 (9th Cir. May 8, 1998), appeal pending; Rosenberg v. Merrill Lynch, 995 F. Supp. 190 (D. Mass. January 26, 1998), appeal pending.

¹⁷ Gilmer, 500 U.S. at 26 (quoting Mitsubishi Motors Corp. v Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985). See also Kuehner, 84 F.3d at 316 (holding that NASD arbitration "does not affect [claimant's] substantive rights").

¹⁸ As noted in the Second Circuit Study, from 1970 to 1989, the number of employment discrimination classes filed in federal courts increased by a staggering 2166%, as compared with the 125% increase in the overall civil caseload for that same time period. Id. at fn. 82.

¹⁹ Id. at 90.

²⁰ Id.

²¹ King v. Georgetown University Hospital, 1998 WL 341556 (D.D.C. June 16, 1998).

²² January 1996 Report of the Arbitration Policy Task Force to the Board of Governors of the NASD ("Ruder Report"), at 119.

²³ The SDNY was selected because the largest number of employees in the securities industry are within the jurisdiction of that Court. Also, data necessary to analyze employment discrimination claims was available from the Clerk's office of the SDNY.

²⁴ The following methods were used to ensure that the list of employment discrimination decisions rendered by panels in the NYSE, NASD and in the SDNY during the time period studied was complete. For the NYSE, the Securities Arbitration Commentator ("SAC") ­ an independent publication -- provided us with all employment discrimination decisions. To be as complete as possible, we then reviewed every discrimination decision from February 24, 1992 through December 31, 1996 on file in the NYSE library at 20 Broad Street in New York, New York. For decisions rendered from January 1, 1997 through May 31, 1998, we requested and received copies from the Director of Arbitration, Robert Clemente, at the NYSE. The NYSE issued a total of 65 employment discrimination decisions during the time period. With regard to NASD awards, SAC provided us with all employment discrimination decisions. As a check on the completeness of SAC's compilation, we requested that the NASD provide us with all awards in which discrimination was alleged, which they did. The NASD issued a total of 132 awards for the period February 24, 1992 through May 31, 1998. Finally, with respect to the SDNY aspect of the survey, we relied on the Clerk's office of the SDNY to provide us with a computer printout of employment discrimination cases which had been tried by a judge or jury through March 1997. That printout included the necessary data regarding time to judgment and disposition. For the period April 1, 1997 through May 31, 1998, we utilized PACER, a court-based computer system, to obtain a list of all cases that had proceeded to judgment whose civil cover sheet categorized the action as an employment discrimination matter. For each of the 113 cases on the list obtained through PACER that went to trial, we studied either the docket sheets and/or other relevant court documents to ascertain the necessary data.

²⁵ 1995 Federal Court Management Statistics, Administrative Office of the United States Courts Leonidas Ralph Mecham, Director, p. 48.

²⁶ Appeals of adverse jury decisions add an additional 11.3 months from the filing of a notice of appeal to final disposition. 1996 Judicial Business of the United States Courts, Report of the Director Leonidas Ralph Mechan, p. 105.

²⁷ Judges Proposing To Narrow Access To Federal Court, NYT, 12/5/94, Section A, Page 1, Column 3.

²⁸ 1996 Judicial Business of the United States Courts, Report of the Director Leonidas Ralph Mechan, p. 139; U.S. Government Statistics published at www.uscourts.gov, Table C-2A, as of July 22, 1998.

²⁹ Judges Proposing To Narrow Access To Federal Court, NYT, 12/5/94, Section A, Page 1, Column 3.

³⁰ Letter dated April 15, 1997, from John Scalia, Statistician, Bureau of Justice Statistics.

³¹ 1996 Judicial Business of the United States Courts, Report of the Director Leonidas Ralph Mechan, p. 160.

³² Employment Discrimination Against Midlife And Older Women, Volume I: How Courts Treat Sex And Age Discrimination Cases, a report by the Women's Legal Defense Fund for the American Association of Retired Persons, 1996, p. 28.

³³ Theodore Eisenberg & Kevin Clermont, Federal District Court Civil Cases (ascertained from website at address: http://teddy.law.cornell.edu:8090/questata.htm, visited as of August 19, 1997).

³⁴ 500 U.S. at 31.

³⁵ Ruder Report at p. 117.

³⁶ Arbitration Training: Employment Law Seminar, Sec. Arb. Commentator, June 1993 at 8.

³⁷ Letter from Robert L.D. Colby, Deputy Director, Securities and Exchange Commission, to Linda G. Morra, Director, Education and Employment Issues, United States General Accounting Office (Dec. 30, 1993) (Appendix XII to 1994 GAO Report) (emphasis added).

³⁸ See, e.g., Batson v. Kentucky, 476 U.S. 79 (1986) (potential jurors not subject to peremptory challenges on account of race based on the assumption that a potential juror of a particular race cannot impartially consider merits of case is invalid and unconstitutional); Edmonson v. Leesville Concrete Co., 500 U.S. 614 (1991) ("Batson" rule extended to private civil cases such that the exercise of peremptory challenges to exclude potential jurors based on race deemed unconstitutional); J.E.B. v. Alabama, 511 U.S. 127 (1994) (gender-based exclusion from jury is unconstitutional).

³⁹ Gilmer, 500 U.S. at 30; Mitsubishi Motor Corp., 473 U.S. at 634.

⁴⁰ Arbitration Training: Employment Law Seminar, Sec. Arb. Commentator, June 1993, at 8.

⁴¹ See, e.g., NYSE Arbitration Rules, Rule 610(a); NASD Code of Arbitration Procedure, § 10312(a).

⁴² Judges Slash Worker Awards, National Law Journal, April 20, 1998, p. 1.

⁴³ While plaintiffs' lawyers may benefit from a system which dismisses many cases but which holds out the hope of million dollar verdicts, plaintiffs themselves benefit more in a system which gives them a better chance at having their "day in court" and at obtaining a rational judgment in their favor.

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