Finra has launched an independent review of how arbitrators were selected to hear a customer dispute whose award was recently vacated by a state judge.
The Financial Industry Regulatory Authority Inc. announced Friday it has hired the law firm Lowenstein Sandler to conduct the probe, which will be headed by Christopher Gerold, a partner and former chief of the New Jersey Bureau of Securities.
The Finra arbitration system, or Finra Dispute Resolution Services, has come under pressure following a decision by Georgia Superior Court Judge Belinda E. Edwards to vacate an arbitration claim that Wells Fargo won in 2019 against a customer who accused the firm of mismanaging his account.
In her order, Judge Edwards said Finra allowed Wells Fargo to strike certain arbitrators from the roster of those available to hear the case, undermining the neutrality of the forum. Finra denied it had an agreement with Wells Fargo regarding the appointment of arbitrators.
“We take this matter very seriously,” Finra CEO Robert W. Cook said in a statement. “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. In keeping with that commitment, Finra’s Audit Committee has engaged an independent, outside party to review how the arbitrator selection process was carried out in this case, and to determine whether any improvements to the process may be warranted. Finra will make the results of this review public.”
Gerold, a former president of the North American Securities Administrators Association, will report the findings of the review directly to the audit committee of Finra’s Board of Governors.
“We trust Lowenstein’s ability to carry out an independent review of the arbitrator selection process administered in this matter and look forward to receiving their findings in the coming months,” Lance Drummond, Finra governor and chair of the audit committee, said in a statement.
In the wake of Judge Edwards’ decision, critics of Finra arbitration have been vocal. The Public Investors Advocate Bar Association called for an investigation by the Securities and Exchange Commission and congressional hearings. Sen. Elizabeth Warren, D-Mass., and Rep. Katie Porter, D-Calif., wrote to Cook demanding answers about the fairness of the system.
The Finra arbitration forum adjudicates disputes involving customers, Finra member firms and registered representatives. Almost every brokerage customer contract includes a mandatory arbitration clause.
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