Update on SR-FINRA-2014-005: SEC Institutes “Rare” Proceedings on Proposed FINRA Rule Concerning Arbitrators’ Mid-Case Referrals

In March, the Investor Advocacy Clinic, led by student interns Scott EvansBenjamin Stubbs and Patricia Uceda, filed a comment on SR-FINRA-2014-005.  As explained in Evans’ earlier post describing the proposal and the clinic’s comment, the proposed rule would permit arbitrators to speak up mid-case and refer up the ladder their belief, based on more than just the pleadings, that investors may be threatened by the continuing conduct of a wrongdoer.  While the clinic supported the proposal’s goal of protecting innocent investors, we raised concerns about the individual investor in the proceeding and how such a mid-case referral would impact the proceeding and the complaining investor.

After receiving comments on the proposal, FINRA responded to all comments, including those made by the clinic.  You can read FINRA’s response here.

In addition, the SEC instituted formal proceedings to consider FINRA’s proposal. Citing FINRA’s former director of arbitration, Investment News reports that the SEC’s institution of proceedings on a proposed FINRA rule change is rare.

You can read the SEC’s full notice in the Federal Register here.  Specifically, the SEC has asked interested parties to consider providing information in response to several questions directly related to the concerns raised by the clinic in its comments:

  • Would the proposal adversely affect retail investors?  If so, how?
  • Should FINRA propose a different standard for referral? If so, what standard(s) would be appropriate?
  • Does Partial Amendment No. 1 ameliorate commenters’ concerns that notifying parties of a mid-case referral could lead to adverse consequences to the claimant, including requests for recusal and challenges to an award? If not, should FINRA amend the proposal to preclude the Director, or anyone else, from notifying the parties of a referral?

Parties interested in providing information for the SEC’s consideration should do so by the June 26, 2014 deadline.

The clinic will continue to monitor SR-FINRA-2014-005 and other proposals that may impact individual investors.