Report Finds No Evidence of Improper Agreement to Remove Arbitrators From Cases; FINRA to Implement Recommendations to Provide Greater Transparency
WASHINGTON – FINRA today published the report of independent counsel Lowenstein Sandler LLP, which found no evidence of an improper agreement to remove certain arbitrators from arbitration cases. FINRA also said it would promptly implement the report’s recommendations to provide greater transparency to the arbitrator selection process.
FINRA’s Audit Committee in February engaged Lowenstein to provide an independent review and analysis in connection with a Fulton County, Georgia Superior Court decision vacating an arbitration award in favor of respondent Wells Fargo Clearing Services, LLC.
The court decision found, among other things, that Wells Fargo and its counsel had manipulated the arbitrator selection process through an agreement with FINRA under which arbitrators from a prior case involving the counsel would be automatically removed from the list of potential arbitrators in any case in which the counsel appeared.
“After careful consideration of the evidence obtained during that review, Lowenstein does not believe that there was any agreement between Weiss and FINRA regarding the panels for Weiss’s cases,” the firm said in its report, referring to Wells Fargo’s counsel during the arbitration proceeding, Terry Weiss. The report added, “The evidence further demonstrated that FINRA personnel generally adhered to the policies and procedures and that their actions during the [relevant arbitration] were intended to be fair and reasonable at each step.”
Lowenstein conducted 29 interviews; examined more than 150,000 documents, emails, and telephone records; reviewed the FINRA Dispute Resolution Services (DRS) arbitrator database system; and listened to recordings of relevant arbitration proceedings. The report also stated that FINRA DRS personnel cooperated fully, and that neither FINRA management nor the Audit Committee dictated the methods of the inquiry or its conclusions.
The investigation was led by Christopher Gerold, a partner in Lowenstein’s Securities Litigation and Corporate Investigations & Integrity Practice Groups. Prior to joining Lowenstein in January, Gerold was Chief of the New Jersey Bureau of Securities and served as President of the North American Securities Administrators Association.
“The Audit Committee and the Board of Governors appreciate the thoroughness of Lowenstein’s independent investigation,” said Audit Committee Chair Lance Drummond. “This report provides the public with assurance that the arbitrator selection process in this matter was carried out in a fair and neutral manner.”
The report recommended a series of potential improvements to further enhance DRS:
- Implementing ongoing, mandatory training for staff;
- Requiring written explanations, upon a party’s request, of approval or denial of a causal challenge to the selection of an arbitrator or an arbitrator removal by the DRS Director for cause;
- Conducting an updated external procedural review of the arbitrator selection algorithm to determine if it is still the most effective means for creating random, computer-generated arbitrator lists; and
- Updating the DRS Manual and rules to clarify staff roles and procedures, and to ensure consistency and transparency.
“FINRA welcomes the opportunity to make the results of the independent review public, as we recognize the critical importance of maintaining the trust of all parties in the arbitration forum,” said FINRA President and CEO Robert Cook. “FINRA management agrees with the recommendations and commits to promptly deliver a plan for implementation to the Board. This report will also inform our ongoing evaluation of how best to continue modernizing the DRS arbitration system to serve all stakeholders in an evolving, complex investing environment.”
The report concluded, “Based on historic and anticipated enhancements that were reviewed by Lowenstein, it is clear that FINRA is continually striving to make the arbitration processes more transparent and uniform for arbitration participants. Overall, notwithstanding the proposed enhancements, DRS is continuing to function as intended—as a neutral forum to assist investors, brokerage firms, and individual brokers in resolving securities and business disputes.”
FINRA DRS administers an arbitration forum to assist in the resolution of disputes involving investors, securities firms and their registered employees. Although securities firms and investment advisers often include mandatory arbitration clauses in their customer account agreements, FINRA rules do not require this practice. The arbitration forum operates in accordance with rules that have been approved by the SEC, after a finding that the rules are in the public interest. The SEC regularly examines DRS’ operations.
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.