January 16, 2011
Dear Secretary Murphy:
Thank you for the opportunity to submit comments to the Commission regarding this Rule proposal. Arbitration rules changes proposed by FINRA have an impact on the dynamics of its arbitration process and, while the aim of a change may be fairness or investor protection, in many cases, the consequences can impact cost, length of hearing, arbitrator competence, finality and balance. That the Commission solicits and considers comments from all participants in the process, I believe, adds to the wisdom with which they deliberate over these proposals.
I began by thinking, when SR-FINRA-2010-036 was first submitted, that it was non-controversial, but I have changed my mind. The more I think about it the more I believe allowing mid-case disciplinary referrals, in the way FINRA has set out, will be inimical to the arbitration process. I see it as exalting the regulatory imperatives of the Authority over its obligations as a forum provider -- and asking arbitrators to do the same. The proposed change may somehow be serving investor protection on a larger plane, but the certain impact on those seeking justice and the expeditious, less expensive benefits of arbitration in the affected proceedings will be significant and deleterious.
In the initial proposal, FINRA said that it would urge arbitrators to use this mid-case referral mechanism only in extraordinary circumstances, as when "a serious, ongoing, imminent threat to investors" requires "immediate action." Yet, in a recent NY Times article (see attached: "Arbitration, Litigation, Aggravation"), when challenged as to why it has not acted on a possible member violation of an arbitration rule (Rule 12209), FINRA reportedly responded that it needed a referral from the arbitrators, that the current rules do not provide for mid-case referrals, and that "it had proposed a new rule allowing arbitrators to refer complaints of egregious conduct to its enforcement division while arbitrations are in progress."
That response says a number of things that make me believe this rule change simply invites mischief and turmoil to the arbitration process. First, if FINRA believes there is a rule violation, it does not need a referral from arbitrators to act. It never has and, yet, the Authority apparently used the current regime as a shield in this article and cast the proposed rule as a cure that will permit it to act in future cases.
Second, the kind of conduct treated in the article is not the kind that can be readily deemed a serious, ongoing and imminent threat to investors. Does FINRA want the rule changed so that arbitrators can use a mid-case referral as a sanction tool to address process "violations" by members and associated persons? We hope not, but that is the inference one takes from the NY Times article.
The dramatic disruption that will be occasioned by the use of this "pull the plug" mechanism makes it tough to conjure up appropriate times for using this particular tool there are so frequently other alternatives than sole reliance upon a reporting arbitrator. Arbitrators should be virtually the only ones in a position to report the imminent threat, before a mid-case referral would be justified, but the parties and attorneys will all know and are free to take the same action.
Does the arbitrator have a higher duty to make a mid-case referral than to acquit herself ably of her arbitral responsibilities? Certainty must weigh in the decision to blow up the proceedings with a mid-case referral, yet we admonish arbitrators to weigh all the evidence and await all documents and testimony before deciding outcomes. We trust arbitrators to make appropriate decisions, but here they are being given mixed signals.
We have deputized arbitrators as whistleblowers in FINRA proceedings already. FINRA has not just invited arbitrators to make referrals the staff has introduced training and admonished arbitrators to make referrals. Now, they will be invited to act even if it hurts the arbitration proceeding and the parties they are sworn to serve. In my view, sitting arbitrators should be asked to wear one hat and that hat should be as decisionmakers on the case assigned to them. This proposal asks arbitrators to subordinate that role to the role of deputy enforcer. That's neither fair nor wise.
Richard P. Ryder
Copyrighted material redacted. Author cites Morgenson, Gretchen. "Arbitration, Litigation, Aggravation." New York Times. 15 Jan. 2011. Web. 19 Jan. 2011. http://www.nytimes.com/2011/01/16/business/16gret.html.