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The Report of the Independent Review of FINRA's Dispute Resolution Services – Arbitrator Selection Process

The Audit Committee of the FINRA Board of Governors engaged Lowenstein Sandler LLP to conduct an independent review 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 of Appeals of Georgia reversed the Fulton County, Georgia Superior Court decision finding no evidence of an agreement between Wells Fargo and FINRA. Furthermore, the Court of Appeals of Georgia found nothing that indicated Wells Fargo manipulated the arbitrator pool in the subject arbitration.

FINRA published the report of the independent counsel, Lowenstein Sandler LLP, which found no evidence of an improper agreement to remove certain arbitrators from arbitration cases. The report also stated that FINRA personnel generally adhered to policies and procedures and that their actions were intended to be fair and reasonable at each step of the relevant arbitration.

Download the Report (PDF - 569 KB)


Additionally, the independent counsel made recommendations to provide greater transparency to the arbitrator selection process. FINRA will implement all of the recommendations.

Status Report on Lowenstein Sandler LLP Recommendations

Status Recommendation
1a
Complete
Implemented on
Nov. 14, 2022

1b
Complete
Implemented on
Nov. 17, 2022

1c
Complete
Implemented on
Oct. 15, 2022

1d
In progress

1e
Complete
Implemented on
Nov. 28, 2022

Recommendation 1

  1. Update the DRS Procedures Manual (“PM”) to include a Code of Neutrality to codify the standards that DRS personnel are expected to maintain in their interactions with DRS participants and execution of their job duties.
     
  2. Update the PM to clarify the job title responsible for each of the procedures identified in the PM.
     
  3. Update the PM to clarify the duties and responsibilities of DRS managers and supervisors to ensure that the PM is being followed, including the types of audits and reviews that should be completed and how often.
     
  4. Update the PM to clearly identify the job title or, if it is the Director, his or her designee, that has authority to provide final approval when a decision is required.
     
  5. Update the PM to clarify the information, including the expected level of specificity, that should be entered into the Mediation and Arbitration Tracking and Retrieval Interactive Case System (“MATRICS”) when required.
 
In progress

Recommendation 2

Implement ongoing mandatory training for DRS personnel regarding the PM and interacting with DRS participants.

 
In progress

Recommendation 3

Amend Rule 12400 to specifically state that prior to sending the arbitrator list to the parties, DRS shall conduct a manual review for conflicts of interest.

 
In progress

Recommendation 4

Adopt a procedure whereby future changes to FINRA Rules, interpretations, and guidance in the PM are timely and uniformly reflected in publicly available documents.

5a
Complete
Implemented on Sept. 1, 2022

5b
In progress

Recommendation 5

  1. Establish a policy whereby DRS will provide a written explanation every time a challenge, or a party’s request to remove an arbitrator, is decided.1
     
  2. Add new language to the Code of Arbitration Procedure (“Code”) making clear that DRS will provide a written explanation every time a challenge, or a party’s request to remove an arbitrator, is decided.
 
In progress

Recommendation 6

Conduct an external procedural review of the Neutral List Selection System (“NLSS”) to determine if FINRA’s current technology is still the most effective means in creating random, computer-generated arbitrator lists for the arbitrator participants.

 
Complete
Effective September 15, 2022

Recommendation 7

Amend FINRA Rules to refer to MATRICS instead of NLSS.

On September 15, 2022, FINRA filed an immediately effective rule filing with the SEC changing the reference in the Codes from "NLSS" to "List Selection Algorithm."

Additional Steps Taken by FINRA Dispute Resolution Services

DRS plans to further emphasize in the Code that a challenge for cause can be made to arbitrators on lists.


1 The independent counsel recommended that DRS consider amending its policies to require a written explanation whenever a challenge is granted or denied, if a written explanation is requested by either party. DRS will be expanding this recommendation and will provide a written explanation every time a challenge is decided regardless of whether a party makes the request.