On June 29, 2022, FINRA published a report prepared by independent counsel which found no evidence of an improper agreement to remove certain arbitrators from arbitration cases.  The report was prompted by a much-publicized Georgia Superior Court decision vacating an arbitration award in favor of respondent Wells Fargo Clearing Services, LLC, which 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 conducting 29 interviews, examining more than 150,000 documents, emails, and telephone records, and reviewing the FINRA Dispute Resolution Services (DRS) arbitrator database system, and listening to recordings of relevant arbitration proceedings, the independent counsel concluded that there was no agreement between Wells Fargo’s counsel and FINRA regarding the panels for Wells Fargo’s cases.  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.”

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.

The report can be found here:  https://www.finra.org/sites/default/files/2022-06/report-independent-review-drs-arbitrator-selection-process.pdf

Winget, Spadafora & Schwartzberg, LLP is closely monitoring these developments.  Any questions can be directed to our Securities Litigation Practice Group at 212-221-6900.