Law firm hired by Finra bats down criticism of its selection of arbitrators

In the face of criticism earlier this year of its process for selecting arbitrators who oversee and settle securities industry legal disputes, the Financial Industry Regulatory Authority Inc. said Wednesday that an outside law firm it hired in response made two findings: First, the law firm, Lowenstein Sandler, found no evidence of tampering or improper agreements to remove certain arbitrators from industry cases. Second, the firm cited the need for better transparency about how arbitrators are selected for specific cases.

Finra Dispute Resolution Services is the branch of the regulatory agency that oversees arbitration claims, which can range from those brought by investors against brokerage firms to those by industry employees seeking redress.

In January, a Georgia Superior Court judge took a serious whack at both Finra and Wells Fargo Advisors in a court order that dismissed an arbitration claim that Wells Fargo had won 2½ years ago involving a client who sued the firm for mismanaging his account.

At the center of the judge’s order to undo Wells Fargo’s July 2019 victory was her condemnation of alleged manipulation of the way arbitration panelists, who ultimately approve or deny damages in such claims, are selected under the aegis of Finra.

“Permitting one lawyer to secretly red line the neutral list makes the list anything but neutral, and calls into question the entire fairness of the arbitral forum,” Fulton County Superior Court Judge Belinda E. Edwards wrote in the order to vacate, or dismiss, the decision in favor of Wells Fargo Advisors. 

According to Finra's analysis, which was conducted by Lowenstein Sandler, that was not the case.

“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, Terry Weiss.

“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," according to the report.

Meanwhile, the report also recommended potential improvements to improve Finra's Dispute Resolution Services group, including mandatory training for staff; requiring written explanations of approval or denial of a challenge to the selection or removal of an arbitrator; and conducting an updated external procedural review of the arbitrator selection algorithm.

"I think this is a good first step," said Adam Gana, managing partner at Gana Weinstein. "I'd like to see the Dispute Resolution Services group updated, with the ongoing training of staff, and have Finra rules be more consistent in how challenges of arbitrators are handled."

"I'd also like to see a general, full review of the arbitrator appointment process, which is called the Neutral List Selection System, or NLSS," Gana added. "That's the algorithm. It should be entirely transparent as to how it works, and specifically as to how and why arbitrators are removed."

In April, Wells Fargo Advisors filed an appeal in Georgia’s Court of Appeals that argued the judge, Edwards, was wrong and that the arbitration decision it had won initially should stand and not be overturned.

Lowenstein Sandler conducted 29 interviews and examined more than 150,000 documents, emails and telephone records as part of the review. It also examined the Finra Dispute Resolution Services arbitrator database system and listened to recordings of relevant arbitration proceedings.