March 5, 2014
I am the immediate past FINRA Director of Arbitration, having retired in 2013. I submit this comment with respect to SR-FINRA-2014-05 (Proposed Rule Change Relating to Broadening Arbitrators' Authority to Make Referrals During an Arbitration Proceeding). For the reasons articulated below I believe the proposed rule should be approved.
The existing rule provides that arbitrators may make referrals only at the conclusion of an arbitration. The plain meaning of the rule is that arbitrators can make referrals only when the arbitration case is concluded -- no matter how potentially serious a problem they find. And, indeed, this is what arbitrators are trained to do. The proposed rule would strike the only at the end of the case limit, but only in the most serious circumstances that require immediate attention in the interest of investor protection. Specifically, the proposed rule permits mid-case referral of a matter or conduct which the arbitrator has reason to believe poses a serious threat, whether ongoing or imminent, that is likely to harm investors unless immediate action is taken.
FINRA has made strenuous efforts to craft a rule that balances its investor protection mission with the interests of the very, very rare individual claimant whose case may be disrupted by the rule. We must understand that, although this rule would very rarely be used, it needs to be in place. Imagine if you will an arbitrator coming into credible proof of massive investor fraud – in other words, another Madoff situation. The current rule says the arbitrator cannot refer the matter until the case is over. With each passing day, the investing public is exposed to an ongoing fraud. The proposed rule addresses this problem.
Some critics of the rule express concerns about how disruptive the proposed rule would be to an individual clamant in an arbitration where a mid-case referral is made by the arbitrators. These fears are misplaced. First, as I have said publicly before, this rule is intended to be used when its Send in the swat team – NOW time. Second, the rule references information discovered at a hearing. FINRA routinely reviews case pleadings, and arbitrators are specifically instructed by the rule not to make referrals based solely on allegations in the statement of claim, counterclaim, cross claim, or third party claim. Third, the referring arbitrator will not automatically be removed from the case. And fourth, the proposed rule permits arbitrators to hold off on the referral if the case is almost over and investor protection wont suffer because of the delay.
I agree this rule will hardly if ever be used. But if it more quickly terminates just one massive investor fraud, it will be worth it. Like Homeland Security, FINRA and the SEC cannot afford to be 99% effective. The investor protection mission of both organizations demands approval of this rule.