Christine Lazaro, professor of clinical legal education and director of the Securities Arbitration Clinic at St. John's University School of Law, said “the thoroughness of the work and the report’s findings lend credibility to FINRA’s prior statements that there was no agreement to surreptitiously remove arbitrators from lists.”
But “the report does raise some questions,” Lazaro added. “While the algorithm to populate [arbitrator] pools seem to be functioning as intended, it is surprising that FINRA has not reviewed or sought to improve it at least 15 years. It also appears that policies are not being implemented uniformly across the regions,” she said.
Lowenstein recommended the following actions to improve DRS oversight of arbitrator selection:
• Requiring written explanations when a party request requests approval or denial of an arbitrator for causal challenge or by the DRS Director;
• Implementing ongoing, mandatory training for staff;
• Conduct an external review of the arbitrator selection algorithm “to determine if it is still the most effective means for creating random, computer-generated arbitrator lists,” according to Lowenstein; and
• Updating the DRS Manual and rules to clarify staff roles and procedures, and to ensure consistency and transparency.
“FINRA management agrees with the recommendations and commits to promptly deliver a plan for implementation to the Board," Finra President and CEO Robert Cook said in a statement.
Edmiston said PIABA “welcomes the report’s detailed recommendations and looks forward to working with FINRA in improving its arbitrator appointment process to prevent abuses, provide consistent results, and give greater transparency."
Lowenstein concluded that, “based on historic and anticipated enhancements that were reviewed ... it is clear that FINRA is continually striving to make the arbitration processes more transparent and uniform for arbitration participants. Overall, notwithstanding the proposed enhancements, DRS is continuing to function as intended—as a neutral forum to assist investors, brokerage firms, and individual brokers in resolving securities and business disputes.”
Both Lazaro and Edmiston said they did not believe the report or its conclusion would impact Wells Fargo’s appeal of Leggett v. Wells Fargo. “The report, and to a large extent the evidence it relies upon, is not part of the lower court record under review by the appellate court,” Lazaro said.