September 12, 2011
I would like to endorse the recommendation of William A. Jacobson, Associate Clinical Professor of Law, Cornell Law School. This is a truly stupid rule with little or no chance that it will provide any protection for investors while having the potential for great mischief. A rule allowing arbitrators to report possible imminent harm without the draconian penalties to investors is the least objectionable alternative. It would allow FINRA to provide the pretense of regulation without doing further harm to investors.
Arbitrators are not going to cure FINRA's enforcement incompetence. As Harry Markopolos testified, the SEC is merely incompetent, not corrupt, but he could not say that about FINRA. Investors have about a 40% chance of recovering 30% of their money in FINRA arbitration (less if its a "prominent" firm). At least half of the arbitrators make no pretense of neutrality. They are there to vindicate the industry members who recruit, train, pay, and often employ them. FINRA staff support and encourage that practice through the system of appointing arbitrators on a selective basis outside the list selection process.
To allow one of these arbitrators to stop an arbitration hearing that is going badly for the member while clothing himself (and more frequently herself) in the garb of customer protection is a really bad idea. FINRA Regulation allegedly looks at each statement of claim filed with FINRA Dispute Resolution. A more logical course would be for Regulation to do more than a cursory review, even if the member firm's employees are on influential FINRA committees.