June 25, 2014
No doubt FINRA, as regulator, needs to have sources and monitor the industry's members to keep discipline and insure compliance. FINRA, as forum for dispute resolution , has a seemingly powerful and relatively economical means to accomplish its regulatory goals: Arbitrators and neutrals in general, are at the forefront of receiving the investors' complaints and even intra-industry conflict claims. Even better, arbitrators are given the evidence in favor and against the dealer-brokers and the institutions they are trained to sift through and decide, among other things, wrongdoing. So, naturally, FINRA relies -to a certain extent- on arbitrators and the process to ferret out the potential bad guys.
Up to now, disciplinary referrals have had to await termination of the underlying arbitration matter. Now, FINRA has proposed to allow, under certain, controlled circumstances -stringently defined, mid-case disciplinary referrals. Basically, the rule would allow referrals were an arbitrator strongly believes that violation of the rules has occurred and danger to the investment community is stgrong and imminent.
Strong opposition has been voiced, however laudable the intention, not just from the financial industry community but also from the representatives of investors. Basically, the dangers of gamesmanship and delay due to the necessary safeguards in the disciplinary proceeding are large and apparent. So, this investor -the investor in whose case the alleged wrongdoing is found- will see his/her case seriously delayed and in upheaval, not obtaining perhaps certain discovery and certainly jeopardizing the swift potential, and economical, recovery offered by the arbitration process.
In conclusion, while there maybe some improvement and some discomfort if it is adopted, Partial Amendment No. 1 is more like a Band-Aid than the needed surgery FINRA may better serve the industry by squarely facing the distinction in its roles as enforcer and as dispute forum. Further mixing these functions doesn't really enhance the strength of the financial markets.