The Wall Street Legal & Regulatory Feed
Securities Industry Commentator by Bill Singer Esq
June 20, 2022
February 18, 2022 FINRA Press Release122 days ago, FINRA published: "FINRA Hires Firm to Conduct Independent Review of Arbitrator Selection Process" (FINRA Press Release / February 18, 2022)https://www.finra.org/media-center/newsreleases/2022/finra-hires-firm-conduct-independent-review-arbitrator-selection. The February 18th FINRA Press Release stated in part that:FINRA announced today that it has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge.
"We take this matter very seriously. 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," said FINRA President and CEO Robert Cook. "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."February 22, 2022 BrokeAndBroker.com BlogIn response to FINRA's February 18th Press Release, I published: "Cynical FINRA Press Release Lacks Urgency In Response To Arbitration Fiasco" (BrokeAndBroker.com Blog / February 22, 2022)https://www.brokeandbroker.com/6302/finra-leggett-audit/ In my article, I offered this rebuke:[W]hat one would have expected from FINRA's Audit Committee would have been a explicit order -- a clear-cut demand -- that the Lowenstein law firm immediately initiate an investigation into the "arbitrator selection process," and not just limited to "this matter" (Leggett) as is stated in the Release by both FINRA's CEO and the Audit Committee's Chair. At a minimum, Audit Committee Chair Drummond should have promised that all stops will be pulled out to complete said investigation and to submit a FINAL REPORT to the Audit Committee within no more than 90 days. Chair Drummond should have made it clear that he will move heaven and earth and make all financial resources available to Lowenstein in a palpable attempt to purge even a hint of conflict from FINRA's arbitration selection process. Instead, we get tepid. We get trust. We get looking forward. We get coming months.FINRA's Regulatory DeadlinesAs to my suggested deadline for the issuance of a final investigative report "within no more than 90 days," today is now 122 days after the publication of FINRA's announced hiring of a law firm to conduct an independent review. Is 90 days too short a period of time -- is it too arbitrary a deadline? Keep in mind that an ample record has already been developed during the underlying FINRA arbitration proceeding and at the state court. Moreover, FINRA narrowed the scope of the investigation to how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge. The law firm hired by FINRA has a very focused question to investigate involving the selection of arbitrators in one arbitration. Consider these deadlines imposed by FINRA upon Respondents enmeshed in the self-regulator's disciplinary process:
- FINRA Code of Procedure Rule 9264: Motion for Summary Disposition provides that "All pre-hearing motions for summary disposition and supporting papers shall be filed at least 21 days before the time set for the hearing, or at such earlier time as ordered by the Hearing Officer. "
- FINRA Code of Procedure Rule 9215: Answer to Complaint provides that a Respondent named in a FINRA Disciplinary Complaint "shall serve an answer to the complaint on all other Parties within 25 days after service of the complaint on such Respondent . . ."
- FINRA Code of Procedure Rule 9311: Appeal by Any Party; Cross-Appeal provides that a "Respondent or the Department of Enforcement may file a written notice of appeal within 25 days after service of a decision."
- FINRA Code of Procedure Rule 9222: Extensions of Time, Postponements, and Adjournments, which states in pertinent part that "Postponements, adjournments, or extensions of time for filing papers shall not exceed 28 days unless the Hearing Officer states on the record or provides by written order the reasons a longer period is necessary."
- FINRA Code of Procedure Rule 9312: Review Proceeding Initiated By Adjudicatory Council provides that a Hearing Panel Decision "shall be subject to a call for review within 45 days after the date of service of the decision. . ."
Compared to the FINRA deadlines cited above, requiring the submission of a final investigative report to the FINRA Audit Committee within no more than 90 days isn't unfair or unreasonable. To the contrary, it's nearly three times longer than deadlines that FINRA imposes upon Respondents in its regulatory proceedings, and twice as long as the period of time during which the NAC can call a Hearing Panel Decision for review. Sort of the old what's good for the goose is good for the gander, no?Yet, here we are: June 20, 2022 -- 122 days after FINRA's February 18, 2022, Press Release.Not a sound.Not a peep.Heaven is unmoved.Earth remains in its orbit.Our trust was misplaced.We still look forward at nothing.The coming months keep coming.= = = = =FINRA has not been having a fun time in recent weeks when it comes to the purported integrity of its arbitration forum:Court Finds FINRA Arbitration Process Not Fundamentally Fair (BrokeAndBroker.com Blog / February 4, 2022)http://www.brokeandbroker.com/6265/finra-wells-fargo-arbitration/Brian Leggett and Bryson Holdings, LLC, Claimants, v. Wells Fargo Clearing Services, LLC and Jay Windsor Pickett III, Respondents (FINRA Arbitration Award / 17-01077 / July 31, 2019)https://www.finra.org/sites/default/files/aao_documents/17-01077.pdfBrian Leggett and Bryson Holdings, LLC, Petitioners, v. Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Jay Windsor Pickett III, Respondents (Memorandum of Law in Support of Petitioners' Motion to Vacate Arbitration Award, Superior Court of Fulton County, Georgia, 2019CV328949)https://brokeandbroker.com/PDF/LeggettMotVacFultonCo191030.pdfBrian Leggett and Bryson Holdings, LLC, Petitioners, v. Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Jay Windsor Pickett III, Respondents (Order Granting Motion to Vacate Arbitration Award and Denying Cross Motion to Confirm Arbitration Award, Superior Court of Fulton County, Georgia, 2019CV328949)https://brokeandbroker.com/PDF/LeggettOrderFultonCo220125.pdfFederal Court Can't Find Any Basis For FINRA Arbitration Decision In HSBC Managing Director Case (BrokeAndBroker.com Blog / February 10, 2022)
http://www.brokeandbroker.com/6280/finra-gross-expungement/In the Matter of the Arbitration Between Adam Gross, Claimant, v. HSBC Securities (USA) Inc., Respondent (FINRA Arbitration Award 21-00392 / September 3, 2021) https://www.finra.org/sites/default/files/aao_documents/21-00392.pdfAdam Gross, Plaintiff, v. HSBC, Defendant (Complaint, United States District Court for the Southern District of New York, 21-CV-08636 / October 21, 2021)https://brokeandbroker.com/PDF/GrossSDNYComp211021.pdfAdam Gross, Petitioner, v. HSBC, Respondent (Order and Opinion, SDNY, 21-CV-08636 / February 8, 2022)https://brokeandbroker.com/PDF/GrossSDNYOrdOp.pdfIn response to a firestorm of criticism and rumblings from Congress about its arbitration process and forum, FINRA hired what it says is an independent outside law firm to conduct a review. Rather than stand in the way of FINRA's self-serving press, let me offer it to you in full bloom:FINRA Hires Firm to Conduct Independent Review of Arbitrator Selection Process
(FINRA Press Release / February 18, 2022)https://www.finra.org/media-center/newsreleases/2022/finra-hires-firm-conduct-independent-review-arbitrator-selectionWASHINGTON-FINRA announced today that it has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge."We take this matter very seriously. 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," said FINRA President and CEO Robert Cook. "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."Christopher Gerold, a partner in Lowenstein's Securities Litigation and Corporate Investigations & Integrity Practice Groups, will lead the independent review and report the firm's findings directly to the Audit Committee of FINRA's Board of Governors. Prior to joining Lowenstein in January, Gerold was Chief of the New Jersey Bureau of Securities from 2017-2021 and served as President of the North American Securities Administrators Association."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," said Lance Drummond, FINRA Governor and Chair of the Audit Committee.DRS administers an arbitration forum to assist in the resolution of disputes involving investors, securities firms and their registered employees. Although securities firms and investment advisers often include mandatory arbitration clauses in their customer account agreements, FINRA rules do not require this practice. The arbitration forum operates in accordance with rules that have been approved by the SEC, after a finding that the rules are in the public interest. The SEC regularly examines DRS's operations.About FINRAFINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry-brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.So, lemme see here: FINRA's Audit Committee has engaged an independent, outside law firm 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. As set forth in part in FINRA's By-Laws Article IX: Committees:Audit CommitteeSec. 5. (a) The Board shall appoint an Audit Committee. The Audit Committee shall consist of four or five Governors, none of whom shall be officers or employees of the Corporation. The Audit Committee shall include at least two Public Governors. A Public Governor shall serve as Chair of the Committee. An Audit Committee member shall hold office for a term of one year. . . .The FINRA Audit Committee is appointed by the FINRA Board of Governors. Of course, I have long argued that FINRA's Board is a gerrymandered disgrace that is, at times, lackluster and lackadaisical; so, y'know, I'm just not all that encouraged to learn that a law firm hired by a committee appointed by FINRA's Board is likely to further any overdue Wall Street reforms. Why did it take a scathing Decision in Brian Leggett and Bryson Holdings, LLC, Petitioners, v. Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Jay Windsor Pickett III, Respondents (Superior Court of Fulton County, Georgia, 2019CV328949 / January 25, 2022) to prompt FINRA's somnolent Audit Committee on February 18, 2022, to investigate festering rumors about FINRA's arbitration forum? According to FINRA's Standing Committee webpage, the current Audit Committee compriseshttps://www.finra.org/about/governance/standing-committees#ac:https://www.finra.org/about/governance/finra-board-governors/lance-drummondJack B. Ehnes
https://www.finra.org/about/governance/finra-board-governors/jack-ehneshttps://www.finra.org/about/governance/finra-board-governors/christopher-flintLinde Murphy
https://www.finra.org/about/governance/finra-board-governors/linde-murphyEileen K. Murray
https://www.finra.org/about/governance/finra-board-governors/eileen-murrayAnd just where, exactly, were those five Audit Committee members the last few years when allegations of improprieties about FINRA's arbitration process were swirling around?Notably, FINRA's Chairman of the Board, Eileen K. Murray, is one of the five members of the Audit Committee -- not exactly a disinterested person with a likely burning desire to unearth embarrassing revelations about the self-regulatory-organization that she helms. As to the other sitting Audit Committee members, I see one is "retired," one is listed as a "former" CEO, and two are employed by FINRA member firms -- that's the composition of a robust, independent Audit Committee? Among the more disconcerting disclosures among the various Audit Committee's members' bios are multiple roles on other Boards, as if sitting on FINRA's Board of Governors -- and particularly that Board's Audit Committee -- should not require an exclusive service given that the organization is engaged in regulating the financial services community.As to that rousing call to action set out in the FINRA's February 18th Press Release , it was described by the Chair of FINRA's Audit Committee Lance Drummond (whose professional standing is preliminarily set forth on the FINRA website as Public Governor /Retired /Governor Since 2018 / Committees: Audit Committee (Chair), Conflicts Committee, Executive Committee, Management Compensation Committee):"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," said Lance Drummond, FINRA Governor and Chair of the Audit Committee.Seriously Chair Drummond? That's your direction? You "look forward to receiving their findings in the coming months?" You're merely looking forward -- as in hopeful and desirous but not much more? In the coming months as in maybe six or more or ten or eleven? And, no, I didn't miss the cynical attempt to confine the investigation to "this matter," as in the Leggett arbitration rather than allow the so-called independent, outside law firm free rein to consider the troubling issues raised by the court, no matter where that might take the investigators.The February 18th FINRA Press Release is a clumsy effort to manage a public relations nightmare. Painfully, lacking in the Press Release is any sense of urgency. What I would have expected -- what industry reform advocates demand -- is accountability on a fast track. For starters, the Audit Committee should not merely express a desultory desire for some kind of findings in "coming months," but underscore the mission-critical aspect of this blot on FINRA's reputation. No, you don't get to go to the old delay-of-game playbook and select the option of a report in a few months and then grant an extension and then deliberate on the recommendations and then publish a sanitized report to the public for extended comment and then undertake a reconciliation effort and then publish a proposed rule and then extend all of that nonsense to a point where FINRA's Chair, and CEO, and all sitting Board members have long-since retired and left the mess to another generation of wannabe self-regulators.Sadly, the February 18th FINRA Press Release engages in a bit of legerdemain by giving the impression that the desired outcome of the Lowenstein law firm's investigation is some sweeping reform of FINRA's belabored arbitration process; however, that's not what the release actually says:FINRA announced today that it has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge.My guess is that we need to read that opening paragraph in the Press Release very, very literally. The Lowenstein law firm was hired to conduct a review limited to the arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge -- as in Leggett and only Leggett. What one would have expected from FINRA's Audit Committee would have been a explicit order -- a clear-cut demand -- that the Lowenstein law firm immediately initiate an investigation into the "arbitrator selection process," and not just limited to "this matter" (Leggett) as is stated in the Release by both FINRA's CEO and the Audit Committee's Chair. At a minimum, Audit Committee Chair Drummond should have promised that all stops will be pulled out to complete said investigation and to submit a FINAL REPORT to the Audit Committee within no more than 90 days. Chair Drummond should have made it clear that he will move heaven and earth and make all financial resources available to Lowenstein in a palpable attempt to purge even a hint of conflict from FINRA's arbitration selection process. Instead, we get tepid. We get trust. We get looking forward. We get coming months.Some 23 years ago in 1999, we saw how long it takes for a self-regulatory-organization to go from investigation to report to action https://www.govinfo.gov/content/pkg/FR-1999-10-14/html/99-26793.htm:Federal Register Volume 64, Number 198 (Thursday, October 14, 1999)][Notices][Pages 55793-55796]From the Federal Register Online via the Government Publishing Office [www.gpo.gov][FR Doc No: 99-26793]-----------------------------------------------------------------------SECURITIES AND EXCHANGE COMMISSION[Release No. 34-41971; File No. SR-NASD-99-21]Self-Regulatory Organizations; Order Approving a Proposed RuleChange by the National Association of Securities Dealers, Inc. ToCreate a Dispute Resolution SubsidiarySeptember 30, 1999.On April 26, 1999, the National Association of Securities Dealers,Inc. ("NASD'' or "Association''), through its wholly owned regulatorysubsidiary, NASD Regulation, Inc. ("NASD Regulation''), submitted tothe Securities and Exchange Commission ("Commission''), pursuant tosection 19(b)(1) of the Securities Exchange Act of 1934 ("Act'') 1and Rule 19b-4 thereunder,2 a proposed rule change to create adispute resolution subsidiary. The proposed rule change was publishedfor comment in the Federal Register on June 17, 1999.3 The Commissionreceived one comment letter on the proposal from the SecuritiesIndustry Association ("SIA'').4 This order approves the proposal.---------------------------------------------------------------------------1 15 U.S.C. 78s(b)(1).2 17 CFR 240.19b-4.3 See Securities Exchange Act Release No. 41510 (June 10,1999), 64 FR 32575.4 Letter from Stephen G. Sneeringer, Chairman of theArbitration Committee, SIA, to Jonathan G. Katz, Secretary,Commission, dated July 8, 1999 ("SIA Letter'').---------------------------------------------------------------------------I. Description of the ProposalThe Association is proposing (i) to create a dispute resolutionsubsidiary, NASD Dispute Resolution, Inc. ("NASD DisputeResolution''), to handle dispute resolution programs; (ii) to adopt by-laws for the subsidiary; and (iii) to make conforming amendments to thePlan of Allocation and Delegation of Functions by NASD to Subsidiaries("Delegation Plan''), the NASD Regulation By-Laws, and the Rules ofthe Association.A. BackgroundThe Association's arbitration and mediation programs were operatedby the NASD Arbitration Department until 1996, when those functionswere moved to NASD Regulation following a corporate reorganization.This reorganization in part grew out of recommendations of a SelectCommittee formed by the NASD and made up of individuals withsignificant experience in the securities industry and NASD governance("the Rudman Committee'').5 The Rudman Committee reviewed theAssociation's arbitration and mediation programs from December 1994through August 1995. The Rudman Report was issued in September 1995.---------------------------------------------------------------------------5 Report of the NASD Select Committee on Structure andGovernance to the NASD Board of Governors (September 1995) ("RudmanReport'').---------------------------------------------------------------------------In September 1994, the NASD established the Arbitration Policy TaskForce, headed by David S. Ruder, former Chairman of the SEC ("theRuder Task Force''), to study NASD arbitration and recommendimprovements. The Ruder Task Force, composed of eight persons withvarious backgrounds in the area of securities arbitration, met from theFall of 1994 to January 1996, when its Report was issued.6---------------------------------------------------------------------------6 Report of the Arbitration Policy Task force to the Board ofGovernors National Association of Securities Dealers, Inc. (January1996) ("Ruder Report'').---------------------------------------------------------------------------Both the Rudman Committee and the Ruder Task Force maderecommendations that affected the arbitration program. The RudmanCommittee recommended that the NASD reorganize as a parent corporationwith two relatively autonomous and strong operating subsidiaries,independent of one another. The resulting enterprise would consist ofNASD, Inc., as parent, The Nasdaq Stock Market, Inc. ("Nasdaq'') as[[Page 55794]]one subsidiary to operate Nasdaq, and a new subsidiary, NASDRegulation, Inc., to regulate the broker-dealer members of the NASD.7The Ruder Report recommended that the dispute resolution program behoused either in the parent or in NASD Regulation.8 The ArbitrationDepartment was placed in NASD Regulation in early 1996 based on therecommendation of the Rudman Committee,9 and the name of thedepartment was changed to the Office of Dispute Resolution ("ODR'')shortly thereafter, to reflect the full range of dispute resolutionmechanisms.---------------------------------------------------------------------------7 Rudman Report at R-8.8 Ruder Report at 151-52.9 Rudman Report at R-8.. . .You notice the dates referenced in the above SEC Order? The Ruder Task Force and the Rudman Select Committee started their work in 1994. We got 1995 reports. We got 1996 reviews. Then we got more reports and recommendations and proposals. It was only in 1999, however, that the Ruder/Rudman work actually coalesced into the above SEC Order. If that's the course upon which FINRA has now embarked per the Lowenstein law firm's investigation, it may take until 2027 before anything of substance manifests. Which, like I noted above, may be the whole plan. Certainly, FINRA's Board of Governors doesn't give a damn.