September 8, 2011
The amended Rule proposal shows that Rube Goldberg is alive and living at FINRA.
The original proposal was designed to cure a real, if rare, problem -- arbitrators who had heard evidence of wrongdoing could not alert regulators until the case was over and the award rendered. So FINRA proposed that intra-case references could be made, and that makes sense. But then, unnecessarily, FINRA added that after such a reference, the arbitrators needed to resign and, a new panel appointed, and the aggrieved investor would have to put on his/her proof all over again, at increased cost.
The public's comments quickly showed the unfairness of that result, and now FINRA has amended the proposal. Intra-case referrals will be allowed, but an incredibly Byzantine procedure is then set up, involving, inter alia, an in-camera review and subjective judgment by the Director of Arbitration. The investor could be forced to start again, and the Rule is vague about the criteria that would be applied regarding costs, etc.
These elaborate procedures are not needed. The theory, it seems, is that if an intra-case referral is made, the impartiality (and thus "confirmability") of the award will be opened to question. I know of no authority under the FAA that would support such a proposition. But, even if one assumes that an intra-case referral renders an award against the Respondent open to attack, the best solution is to give the investor, and only the investor, the option of continuing with the existing panel or requesting a new panel.
The investor is in the best position to evaluate the risk/cost equation, and it is the investor's money (both the damages and the attorneys fees) that is at stake. The choice of what to do after an intra-case referral should be the investor's, not that of the Director.
Thank you for this opportunity to comment.