Thursday, December 21, 2017
As a follow-up to my last post, the comment period on whether Non-Attorney Representatives (NARS), should be allowed to represent investors in FINRA arbitration has now closed. By my count, fifty-seven different commentators weighed in on the issue. Although securities industry groups and the plaintiffs' bar often disagree over the right course, they share concerns about the impact of NARS on the forum.
For example, the Securities Industry Financial Markets Association, an organization that styles itself as "the voice of the U.S. securities industry," cautioned against allowing NARS to represent investors in the forum, pointing out that "FINRA has no current means to measure or ensure competency, nor respectfully, should it put itself in the business of doing so" for NARS. The Public Investors Arbitration Bar Association (PIABA), filed an entire report, arguing that FINRA should significantly restrict NARS from representing clients in FINRA's forum. The PIABA report also points out that a NAR's appearance in an arbitration has resulted in an investor receiving no recovery because Kansas law prohibited the representation. That arbitration award explained that:
The Kansas Supreme Court and the Rules of Professional Conduct have consistently and firmly held non-attorney representatives are not authorized to practice law in its jurisdiction and individuals can only be represented by a lawyer, if they are not representing themselves…
Under FINRA Code of Arbitration Procedure, and as limited by Kansas law, the pleadings are stricken, as neither Cold Spring Advisory Group nor non-attorney Jennifer Tarr can represent Claimant in this arbitration, and even if we were to address the merits, Claimant has not met his burden of proof on any count, so all awards are in favor of Respondents
But Kansas is not the only state that frowns on non-attorney representation in securities arbitration. The Illinois State Bar Association filed a letter, reiterating its position that "non-lawyers representing parties in FINRA proceedings constitutes the unauthorized practice of law." PIABA's report explains that Alabama, Florida, Louisiana, and Washington have taken the same view.
Still, a real representation problem remains for small cases. Law school clinics fill some of this gap. Clinics submitting comments included St. John's, Georgia State, Cornell, and Pace. These letters reflect different views, but showcase the value of having law clinics comment in the public's interest.
And then there is a letter from a New York attorney that has me scratching my head and attempting to figure out my own obligations after reading it. Jonathan E. Neuman filed a comment letter arguing that FINRA should not restrict NARS from practicing in the forum. He starts by claiming that his letter should "be accorded some additional weight as [his] comment will be against [his] own interest." In the letter he claims that it's against his interest because "less competition in the forum [leaves] more clients potentially available for [him] to represent." He goes on to explain that he has a relationship of some kind with "an NAR firm by the name of Stock Market Recovery Consultants" (SMRC) and that he has "recovered millions of dollars for investors in cases that originally began as SMRC cases." If he has recovered millions because of cases sent to him by NARS, it seems unclear that the letter is truly against his interest. Presumably, he received significant compensation for recovering millions of dollars for investors. He might also anticipate future cases coming his way.
Yet his letter may be against his interest for other reasons. The language in it indicates that "SMRC began employing attorneys to handle the arbitration hearings in the event a case could not be resolved." (emphasis added) He continues and explains that "SMRC has retained me on a number of occasions to handle hearings in certain of their cases."(emphasis added). Later in the letter he describes "another case in which SMRC retained me to handle the hearing . . . " (emphasis added). In another instance, he uses less troubling language, referring to "cases that I have taken over from SMRC." (emphasis added).
I'm scratching my head over whether the relationship seemingly described in the letter is permitted by New York's ethical rules. Mr. Neuman is a New York attorney. New York's rules govern his practice. Even if arbitration does not constitute the practice of law in New York, a lawyer providing those services in a setting that is not "distinct from legal services" must follow New York's ethics rules. (Rule 5.7)
There are a few provisions that seem relevant. The first concerns fees. Rule 5.4 states that a lawyer "shall not share legal fees with a nonlawyer" subject to certain exceptions. None of those exceptions seem to apply here. Although Mr. Neuman claims to have recovered millions because of cases sent to him by SMRC, he nowhere states that he shares any of the fees from those cases with NARS. The SMRC website provides some information, seemingly indicating that they generally represent clients on a contingency basis:
STOCK MARKET RECOVERY CONSULTANTS generally works on a contingent fee.
We offer a NO RECOVER NO FEE alternative to other firms that will typically require a substantial up front retainer with no guarantee of a successful recovery.
The fee situation seems even more puzzling because Mr. Neuman goes on to say that "SMRC does not take any up-front fees from clients." If SMRC takes no up-front fees and the ethics rules prohibit Mr. Neuman from sharing fees with SMRC, one wonders how SMRC receives compensation in the instances where SMRC "retains" or "employs" Mr. Neuman to take over.
The language he uses raises questions about who he views as the client--the NARS firm or the underlying investor. It's difficult to tell from his letter and raises questions about professional independence. There are specific limitations on the ability of lawyers to practice with non-lawyers. Rules 5.4(c) seems particularly relevant. That provision states:
(c) Unless authorized by law, a lawyer shall not permit a person who recommends, employs or pays the lawyer to render legal service for another to direct or regulate the lawyer’s professional judgment in rendering such legal services or to cause the lawyer to compromise the lawyer’s duty to maintain the confidential information of the client under Rule 1.6.
The issue that has me scratching my head is whether it's appropriate for Mr. Neuman to be "retained by SMRC" on "their cases." By saying that he is "retained" by the NARS, it may be that the NARS retain some role in the representation or otherwise direct or regulate the representation. The rules do not allow "a person who employs or pays the lawyer to render legal service for another to direct or regulate the lawyer’s professional judgment in rendering such legal services." (5.4(c)) To be fair, Mr. Neuman does not say that he keeps the NARS informed after he takes over a case or that they have any influence on his representation. Rule 1.8(f) governs the conflict of interest when someone other than the client pays for representation. That rule provides that:
A lawyer shall not accept compensation for representing a client, or anything of value related to the lawyer’s representation of the client, from one other than the client unless:
(1) the client gives informed consent;
(2) there is no interference with the lawyer’s independent professional judgment or with the client lawyer relationship; and
(3) the client’s confidential information is protected as required by Rule 1.6.
In theory the dynamics described by Mr. Neuman's letter would be permissible if he did not share fees with SMRC, clients all consented, Mr. Neuman retained his independent professional judgment, and he protected client confidentiality.
The letter baffles me. Am I missing something?