This post first appeared on the Securities Arbitration Alert blog.  The blog’s editor-in-chief is George H. Friedman, Chairman of the Board of Directors for Arbitartion Resolution Services, Inc.

It’s been a year since the publication of recommendations resulting from the outside investigation of allegations that the FINRA arbitrator selection process was riggedWe thought we would check in on the progress.

Brief History: Award Vacated by Trial Court

To review succinctly, Fulton County Superior Court Judge Belinda E. Edwards in Leggett v. Wells Fargo Clearing Services, LLC, No. 2019CV328949 (Ga. Super Jan. 25, 2022), vacated the Award in what might be considered a primer on the basic Federal Arbitration Act grounds for vacating an award (i.e., fraud, arbitrator bias, arbitrator misconduct in not hearing relevant or material evidence or failing to grant a reasonable postponement request; or the panel exceeding authority). Although the Trial Court found all of these bases for vacating the Award, Judge Edwards weighed in on interference with the Neutral List Selection System with some scathing verbiage:

The Court’s factual review of the record evidence leads to its finding that Wells Fargo and its counsel manipulated the FINRA arbitrator selection process in violation of the FINRA Code of Arbitration Procedure, denying the Investors’ their contractual right to a neutral, computer-generated list of potential arbitrators. Wells Fargo and its counsel, Terry Weiss, admit that FINRA provides any client Terry Weiss represents with a subset of arbitrators in which certain arbitrators (at least three, but perhaps more) are removed from the list Wells Fargo agreed, by contract, to provide to the Investors in the event of a dispute. 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.

Award “Unvacated”

Wells appealed, and, in a unanimous decision, the Georgia Court of Appeals reinstated the Award in Wells Fargo Clearing Services, LLC v. Leggett, No. A22A1149 (Ga. Ct. App. Aug. 2, 2022). The unanimous decision rejects all bases upon which Judge Edwards vacated the Award. As to “secret deals” between FINRA and Wells’ then-attorney, the Court says:

Nothing indicates that Wells Fargo ‘manipulated’ the arbitrator pool. It simply asked that [Arbitrator] Pinckney be removed under FINRA Rule 12407. We fail to see how the Director’s decision to grant that request — which was made after all parties had a chance to address the issue — constituted manipulation by Wells Fargo.[] Although the investors claim that a ‘secret agreement’ existed between FINRA and Weiss to automatically exclude the Postell arbitrators from any arbitrator list generated on a case involving Weiss, there is no evidence that such agreement was at play here, given Pinckney’s inclusion on the initial list. Even if an agreement exists, the investors have not shown that it impacted this arbitration.”

Appeal to Georgia Supreme Court Filed … and Denied

Our past editorial comment was: “Dare we say it? Barring further appeals, this might be the end of this one ….” Alas, as reported in SAA 2022-42 (Nov. 10), Leggett on August 22, 2022 filed a Petition for Certiorari, seeking review by the Georgia Supreme Court. On April 4, a unanimous Court declined to review the case, stating: “Certiorari – Writ denied …. All the Justices concur, except Boggs, C. J., not participating.

Outside Investigator’s Report

As summarized in SAA 2022-38 (Oct. 13), FINRA on June 29, 2022 released a 37-page Report of the Independent Review of FINRA’s Dispute Resolution Services – Arbitrator Selection Processwhich was announced in a corporate Press Release and a separate statement from the Audit Committee. The investigation was directed by Christopher Gerold, a partner in Lowenstein Sandler LLP’s Securities Litigation and Corporate Investigations & Integrity Practice Groups.

Recommended Changes

After discussing methodology and the operation of the Neutral List Selection System, the Report concluded that there were no irregularities, and it closed with recommendations for improvement. The core recommendations were (ed: presented verbatim from the Release):

  • 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’s Follow-up: A Dedicated Webpage with Status Indicated

FINRA’s management accepted all recommendations, and now posts on its Website a live progress report on implementation. Status Report on Lowenstein Sandler LLP Recommendations shows that seven items have been implemented and the rest are “in progress.” We present the “completed” information below essentially verbatim, as of June 4:

Recommendation 1

a. 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.

Status: Complete. Implemented on November 14, 2022.

b. Update the PM to clarify the job title responsible for each of the procedures identified in the PM.

Status: Complete. Implemented on November 17, 2022.

c. 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.

Status: Complete. Implemented on October 15, 2022.

d. 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.

Status: Complete. Implemented on December 6, 2022.

e. 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.

Status: Complete. Implemented on November 28, 2022.

Recommendation 5

a. 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.

Status: Complete. Implemented on September 1, 2022. A footnote adds: “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.”

Recommendation 7

Amend FINRA Rules to refer to MATRICS instead of NLSS.

Status: 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.”

(ed: *Kudos to FINRA for this transparency. **Neutral Corner volume 2023-1 features a page-one story on this topic.)