Financial Advisor (March 10, 2022) - Sen. Elizabeth Warren and Rep. Katie Porter have accused Finra of failing to answer "key questions" about a court ruling that determined the regulator worked with Wells Fargo to manipulate the selection of arbitrators in a case against the bank.
In a letter to Finra CEO Robert Cook, the Democratic lawmakers said they were "disappointed" that the private organization, which acts a securities industry self-regulator, responded to a previous letter by only providing "an anodyne description of the [arbitrator selection] process."
“Your letter did nothing to dispel the concerns raised by a federal judge and by press reporting about Finra's handling of this case,” Warren and Porter said in a letter sent to Cook on March 7.
Warren and Porter began demanding answers from Finra last month, asking if the allegations of arbitration rigging were systemic.
The lawmakers called Cook’s admission that Finra had hired a law firm and was now seeking to “enhance” the oversight of its Dispute Resolution Services (DRS) decisions an act “that raises concerns.”
The lawmakers said their concerns about the case also stem from "the wide-ranging and long-lasting pattern of illegal and abusive behavior by Wells Fargo," as well as the impact it has on Finra's ability to regulate "abusive behavior by brokers and dealers."
“We welcome this [Finra] investigation and these reforms—but the fact that you have taken these steps raises new concerns about the extent of wrongdoing in the arbitration process in the Wells Fargo vs. Leggett case,” Warren and Porter wrote.
In the case, a state judge in Georgia vacated an arbitration award to Wells Fargo Advisors LLC and Wells Fargo Clearing Services LLC, finding that Wells Fargo’s outside counsel, Terry Weiss, had a secret arrangement with Finra to keep certain people off the list of arbitrators in all of his cases.
Cook has denied the charge. “DRS is not aware of any information indicating that any arbitrator was excluded from this matter except in accordance with established rules, policies and procedures,” he said in his letter to Warren and Porter.
Cook also said Finra has created an “enhanced oversight” internal process that will be used to review and double-check decisions to remove arbitrators at a party’s request.
Michael Edmiston, the president of the Public Investors Advocacy Bar Association, explained that Cook's decision “takes the final decision-making process of removing any arbitrator at a party’s request from Finra staff and places it squarely in the director’s hands alone and [requires] that it is double-checked by Finra's chief legal officer.”
Warren and Porter also asked Cook if the Finra review will encompass any cases besides the Wells Fargo case. “This question cuts to the heart of reviewing the internal processes used by Finra staff to decide whether to remove arbitrators from a given case,” Edmiston said.
PIABA is “hopeful the independent review will thoroughly explore the removal process and both the scope of the review and results be made public,” he added.
Edmiston noted previously that Finra arbitration wins by claimants dropped significantly in 2021. “Claimants only won 31% of cases that went to award. Normally the number hovers around roughly 40% to 45%. No one knows the scope of the secret deals,” he said.
When news broke of the Georgia court ruling, Finra denied the court’s findings. “There has never been any agreement between Finra Dispute Resolution Services and attorney Terry Weiss regarding appointment of arbitrators. Any assertions to that effect are false,” Finra spokeswoman Michelle Ong told Financial Advisor at the time.