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Regulation and Compliance > Federal Regulation > FINRA

Sen. Warren Presses FINRA’s Cook on Wells Fargo Arb Ruling

By Melanie Waddell

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What You Need to Know

  • Warren and Rep. Katie Porter are pressing Cook to answer questions by March 22.
  • Independent review raises new concerns about the extent of wrongdoing in the arbitration process, the lawmakers said.
  • Cook said new enhanced oversight internal process will be used to review and double-check decisions to remove arbitrators at a party’s request.

Sen. Elizabeth Warren, D-Mass., and Rep. Katie Porter, D-Calif., are pressing FINRA CEO Robert Cook to answer questions by March 22 on the regulator’s independent investigation of a Georgia judge’s ruling that Wells Fargo and its counsel “manipulated” the Financial Industry Regulatory Authority’s arbitrator selection process.

In a March 7 letter to Cook, Warren and Porter said that they are disappointed with Cook’s Feb. 21 letter to them about FINRA’s arbitration selection process, as he “failed to answer key questions about the specific way that arbitrators were chosen in the Wells Fargo vs. Leggett case, the actions of Wells Fargo and its representatives, and communications between Wells Fargo officials and FINRA officials about the arbitration process.”

Instead, the lawmakers said, “you only provided us with an anodyne description of the process from FINRA’s Dispute Resolution Services (DRS).”

Cook’s letter “did nothing to dispel the concerns raised by a federal judge and by press reporting about FINRA’s handling of this case,” they said.

Wells Fargo said on Feb. 25 that it is appealing the Jan. 25 ruling by Atlanta Superior Court Judge Belinda Edwards that it manipulated FINRA’s arbitration process.

FINRA said on Feb. 18 that it is ordering an independent review of the arbitration decision in favor of Wells Fargo that Edwards had thrown out.

FINRA has hired the Lowenstein Sandler law firm to review how FINRA Dispute Resolution Services complied with its rules, policies and procedures for arbitrator selection in the proceeding, in which a panel denied an investor’s claim against Wells Fargo.

Warren and Porter stated that they “welcome this 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. To address these concerns, we reiterate our request that you provide full and complete answers to the questions that we asked in our February 9, 2022 letter.”

In their Tuesday letter, Warren and Porter asked Cook if the review will encompass any cases besides Wells Fargo v. Leggett.

They also asked Cook, “Will FINRA consider conducting new processes in these cases based on the finding of the independent investigation?”

The lawmakers note that FINRA’s response also explained that FINRA “is implementing enhanced oversight of its decisions in response to challenges by parties seeking removal of arbitrators.”

Cook explained in his Feb. 21 letter to Warren and Porter that while the investigation ensues, a new “enhanced oversight” internal process will be used to review and double-check decisions to remove arbitrators at a party’s request.

“It 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 double-checked by FINRA’s Chief Legal Officer,” Michael Edmiston, president of the Public Advocate Arbitration Bar Association, told ThinkAdvisor in an email.

“The enhanced oversight is designed to prevent any party-counsel from trying to tilt the table at the local office level to obtain a tremendous advantage, reconstituting an arbitration panel,” Edmiston said.

“If the Director’s removal decisions were made public, the additional transparency would provide consistent guidance for parties and counsel to understand what set of circumstances lead to successfully removing an arbitrator,” he continued.

‘Unwritten Agreement’

Edwards’ order centered on a 2017 FINRA dispute filed by Wells Fargo Advisors’ client Brian Leggett over more than $1.1 million in losses that he said he incurred at the hands of a Wells Fargo broker. In 2019, an arbitration panel denied Leggett’s claim.

In 2021, Leggett asked the Georgia court to vacate the Wells Fargo award, while Wells Fargo asked the court to confirm it.

On June 25, Edwards vacated the FINRA arbitration decision, finding that Wells Fargo and its counsel manipulated the arbitration process. The manipulation was accomplished with the help of FINRA Dispute Resolution, according to Edwards.

Edwards ruled that Wells Fargo denied investors their contractual right to a neutral, computer-generated list of potential arbitrators, saying its lawyer came to an “unwritten agreement” with FINRA to exclude certain arbitrators from consideration.

Melanie Waddell

@Think_MelanieW

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