July 2, 2014
The purpose of this letter is to provide the Securities and Exchange Commission (SEC) with comments in connection with its release, dated May 20, 2014, which states that it will assist in the determination as to whether the SEC should approve or disapprove the proposed rule change, as modified by Partial Amendment No. 1, that was filed by the Financial Industry Regulatory Authority, Inc. (FINRA) on May 19, 2014.
I am an attorney whose practice is exclusively devoted to the representation of individual and institutional investors in their disputes with the securities industry. Moreover, I am a former President and current Director Emeritus of the Public Investors Arbitration Bar Association (PIABA), am the former Chairman of FINRAs National Arbitration and Mediation Committee (NAMC), am the current Chairman of FINRAs Discovery Task Force Committee (DTFC) and am a former member of the Securities Investor Protection Corporation (SIPC) Modernization Task Force.
First, it should be noted that, in connection with the proposed rule change, no information has been provided to the SEC which would indicate the historical correlation between the current provision in the Code of Arbitration Procedure, which permits arbitrators to make disciplinary referrals at the conclusion of a case Rule 12212(b), and the anticipated applicability of the proposed rule change that is now under consideration which would permit arbitrators to make disciplinary referrals in the middle of a case. I would suggest that this information – which may indicate whether the proposed rule change is a solution in search of a problem – should be obtained by the SEC before a decision is made on the approval or disapproval of the proposed rule.
Second, although not discussed nor otherwise mentioned in the proposed rule change, is the fact that, in the event that a mid-case referral were to be made, the potential impact that the referral would have on any subsequent criminal and/or regulatory investigations once the target of the referral received notification of the same. I would suggest that the potential for evidence destruction and/or other potential obstructionist tactics – which would provide a potential defendant/respondent with the opportunity to cover his or her tracks – would seem to be counter-intuitive to the efficiency of enforcement and/or regulatory functions and would strongly indicate that notice of a referral should never be given to the individual and/or firm target.
Finally, although FINRA asserts that the proposed reasonable belief standard would be appropriate for arbitrators to use in its forum because it would allow them to use their judgment, based on their assessment of the facts, evidence and testimony, when making mid-case referral decisions during the pendency of an arbitration hearing, the application of this standard, however, would be tenuous and inconsistent, at best, in view of the fact that a considerable number of arbitrators in the FINRA forum are neither attorneys nor otherwise trained in the intricacies that are associated with our legal system. There is a distinct difference between an arbitration panel that is tasked with the responsibility to decide an arbitrable dispute between two parties in a forum of equity and asking arbitrators to decide whether there exists facts and circumstances that may suggest a widespread threat to the investing public. I would suggest that one has to question whether this is really a function that should be delegated to arbitrators who, in their daily lives, are often businessmen, teachers and other just plain normal folks?
In conclusion, while the intentions that served as the predicate for this proposed rule change are sincere and commendable in terms of protecting the investing public at large, in view of the tremendous costs delays that its adoption would have on customers who are involved in arbitration proceedings, it is a proposed rule change that needs to be very carefully considered before it is potentially approved by the Commission.