August 27, 2011
Dear Secretary Murphy:
Before relating my comments on the FINRA rule proposal concerning mid-case referrals, I want to express my gratitude and pleasure that the Commission has, for a second time, sought public comment on the Authority's ill-conceived attempt to deputize arbitrators as regulatory whistleblowers. In my view, that effort compromises the neutral's responsibilities to arbitrating parties and subordinates them to FINRA Regulation's priorities.
FINRA has made real strides in improving its proposal from the original iteration. The Authority has addressed, in its amendments, many of the negative comments that were presented in the dozen comment letters that objected to the original proposal. The SEC might have accepted these changes and approved the proposal. The Commission acted well in giving the public a second opportunity to opine on the new provisions proposed by FINRA.
I likely would have held my tongue, had the August 18 and 22 letters from Messrs. Mougey and Jacobson, respectively, not been submitted. Their comments have re-ignited my conviction that this proposal, while much improved, is wrong-headed and should be withdrawn, not revised.
I was prompted to write by Mr. Jacobson's suggestion that the proposal could be simply amended to satisfy the commenter's concerns while also serving FINRA's objectives. The primary saving grace of the FINRA proposal is that arbitrators will rarely invoke the dizzying procedures surrounding a mid-case referral. They will, instead, understand the significant and unnecessary disruption that a mid-case referral will cause and prudently await the conclusion of the case.
Mr. Jacobson's proposal foils that single virtue. His proposal would worsen the situation and invite arbitrators to make referrals at any time they learn of rule violations. Arbitrators are not police officers, as Mr. Mougey rightly observed, and it is in that observation that my objections to mid-case referrals, however unlikely to occur, are based.
I will try to add to the discussion by referring the Commission to my earlier comment letter and by adding in this letter the injury this proposal does to the Code of Ethics for Arbitrators in Commercial Disputes. This collection of ethical principles was devised by the American Bar Association and the American Arbitration Association and has been endorsed by FINRA as appropriate guidance for its arbitrators in FINRA proceedings.
This Code speaks in a variety of places to the importance of confidentiality to the arbitrator's role and to her effectiveness in that role. One could say it permeates the Code, but there are also specific provisions regarding confidentiality that apply directly to the mid-case referral proposal.
Canon VI of the Code states: "An Arbitrator should be faithful to the relationship of trust and confidentiality inherent in that office." Subparagraph A states: "An arbitrator ... should not, at any time, use confidential information acquired during the arbitration proceeding ... to affect adversely the interest of another." Subparagraph B states: "The arbitrator should keep confidential all matters relating to the arbitration proceedings and decision."
It is no accident that the Canon juxtaposes the important duty of confidentiality with the trust that parties invest in the people assuming arbitral roles. There are, of course, arguments as to why the arbitrator will not actually violate the Code by making a referral, such as the parties will agree in their submission agreements to FINRA rules and, by extension, to mid-case referrals. However, my concern is the collateral damage imposing the role of deputy enforcer will do to the other and more primary duties an arbitrator owes to her "clients" -- the parties to the arbitration proceeding.
It is enough that arbitrators are permitted under the rules to make disciplinary referrals after the arbitration is over. Sanctioning mid-case referrals fosters not only the delays and cost burdens other commenters fear, but also commits serious injury to the spirit of neutrality, trust and probity embodied in the Arbitrator's Code of Ethics.