AdvisorHub (February 17, 2023) - The Public Investors Advocate Bar Association is pushing for more transparency around how arbitrators are selected in the Financial Industry Regulatory Authority forums by providing public explanations when arbitrators are substituted due to a conflict of interest.
The plaintiff lawyer-membership organization wants Finra to create a database that would include an explanation about why challenges to proposed arbitrators based on conflict-of-interest allegations succeeded or failed.
“Such release would provide helpful precedents for future parties to consider in evaluating potential arbitrators,” PIABA’s President Hugh Berkson made the suggestion in a February 1 comment letter to the Securities and Exchange Commission. “Moreover, such a database would give parties insight that would help them in understanding what FINRA considers to be a legitimate ground for a challenge to a potential arbitrator and provide greater transparency, consistency and fairness to the process.”
PIABA’s suggestion comes in response to Finra’s proposal in December to refine its arbitration-selection procedures. Names of specific arbitrators could be redacted for privacy reasons, Berkson wrote.
Finra had submitted its proposal for approval to the SEC, which posted it on January 6 and sought comments from the public for 21 days.
The Finra proposal calls for rule changes to “enhance the transparency of the arbitrator selection” and other tweaks aimed at improving the resolution services it provides for disputes among brokerages, brokers and customers.
The regulator’s proposal is aimed at “addressing recommendations” made in a prior 37-page report issued in June 2022 by an outside law firm.
Finra’s audit committee had in February 2022 tapped Lowenstein Sandler, LLP, to review its arbitration processes after allegations arose in a Georgia state court case about an improper side deal that allowed a lawyer representing Wells Fargo to rig the regulator’s arbitrator selection process. The Lowenstein report rejected those allegations, but recommended Finra provide “greater clarity” to its arbitration process.
Under the Finra proposal, which the SEC still has to bless, Finra would codify its existing practice of using both an algorithm and “conducting a manual review for conflicts of interest prior to sending an arbitrator list” to disputing parties, it said in its filing.
In addition, the new proposal calls for a Finra director to “provide a written explanation” to both parties about any decision to grant or deny arbitrator removal requests. Under the proposal, Finra will also “clarify for forum users that parties may challenge an arbitrator for cause at any point after receipt of the arbitrator lists until the first hearing session begins,” the filing said.
Berkson wrote that he welcomed Finra’s plan to “explicitly reference conflict of interest checks during arbitrator selection” and better inform the parties about procedures related to challenging an arbitrator for cause.
That would provide “much greater transparency to internal FINRA processes,” as would requiring the Finra director to issue a written explanation when deciding a challenge to an arbitrator from one of the parties. Those explanations should just be made public as part of the database, he suggested.