AdvisorHub (February 22, 2022) - The Financial Industry Regulatory Authority has hired an outside law firm to conduct a review of its arbitrator selection procedures in a controversial case, according to an announcement issued by the regulator late on Friday prior to the holiday weekend. 

Finra, which previously denied any flaw in its process, hired lawyers at Lowenstein Sandler after scathing criticism from plaintiffs’ lawyers and politicians based on a Georgia state court judge’s ruling vacating an award in favor of Wells Fargo. The Judge had said Finra and Wells Fargo’s lawyer appeared to have a secret agreement to strike potential arbitrators from a neutral list and questioned the fairness of the process. 

The state court judge’s concerns were reiterated by the Public Investors Advocate Bar Association, which called for “an immediate investigation” by the Securities and Exchange Commission and hearings in Congress, and by Senator Elizabeth Warren (D-Mass.) and Rep. Katie Porter (D-Calif.) in a Feb. 10 letter to Robert Cook, Finra’s president and chief executive officer.

“We take this matter very seriously,” Cook said in a statement announcing the hire. “FINRA recognizes the importance of maintaining trust in the system and is committed to ensuring the DRS arbitration forum is operated in a fair and neutral manner.” 

Finra will make the results of this review public, he said.

Fulton County Superior Court Judge Belinda E. Edwards in Atlanta had based her ruling vacating the award in part on grounds that the Finra administrators had allowed Wells Fargo and an outside lawyer to “manipulate” the arbitrator selection process, according to her opinion.

“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,” Edwards wrote in the January 25 ruling. 

At that time, a Finra spokeswoman denied that there was ever any agreement between its representatives and Wells’ outside lawyer Terry Weiss, a partner at Maynard Cooper & Gale in Atlanta.

“We have reviewed all cases involving Terry Weiss as counsel and none of the three arbitrators in question was excluded or removed from ranking lists prior to sending the lists to the parties,” the spokeswoman told AdvisorHub. “As the neutral administrator, we continually strive to make the FINRA forum the fairest, most efficient program available and stand behind the integrity of our neutral list selection process.”

Christopher Gerold, a partner in Lowenstein’s Securities Litigation and Corporate Investigations & Integrity Practice Groups and former chief of the New Jersey Bureau of Securities, will lead the investigation. Gerold, who also served as president of the North American Securities Administrators Association, will report findings directly to the Audit Committee of Finra’s Board of Governors, Finra said.