Thursday, May 26, 2022

Regulatory Delays and a Proposal to Accelerate Certain FINRA Arbitrations

A FINRA comment period for a proposed rule to accelerate arbitration proceedings for seriously ill or elderly parties recently expired. The proposal recognizes that the existing voluntary expedited processing for elderly parties has not resulted in swifter resolutions.  The new proposal would allow persons over age 75 or who face some increased medical risk (e.g. cancer diagnosis) to seek expedited processing.  Often, the arbitration panel will need to hear from the customer to make an informed decision.  Dead customers don't ordinarily testify.

The comments to the proposal reveal real stakeholder concern about the speed with which FINRA has put forward rules to address known problems with the dispute resolution process.  A letter from Steven B. Caruso, a retired former chair of FINRA's National Arbitration and Mediation Committee (NAMC) makes for a compelling read.  Procedurally, FINRA has put the proposal out for comment on its website.  If it later seeks to advance it, it will need to appear for comment again when it is submitted to the SEC for approval.  Caruso questions why FINRA did not simply send the rule to the SEC for one round of notice and comment.  The rule may eventually make its way through this lengthy process and into effect, but heel-dragging delays will cause harm to the investors who die before their cases can be heard.

Caruso also raised questions about why other rules have not been formally proposed.  Here is an excerpt:

Regulatory Notice 17-34 (“RN 17-34”), entitled “FINRA Requests Comment on the Efficacy of Allowing Compensated Non-Attorneys to Represent Parties in Arbitration,” was issued on October 18, 2017 and requested comment on proposed amendments to the FINRA Code which would “further restrict [the] representation of parties” by nonattorney representative firms (“NARs”). As stated in RN 17-34, among the predicates for the proposed amendments to the FINRA Code were “allegations reported to FINRA [that] raise serious concerns” about the conduct of NARS in the FINRA arbitration forum as well as the fact that “investors who retain representation by NAR firms may be more likely to experience harm at the hand of their representative and have less legal recourse to receive compensation for that harm.”

The comment period for RN 17-34 expired on December 18, 2017.

Thereafter, in June 2018, the members of the NAMC expressed unanimous support for a prohibition on allowing compensated NARs from representing parties in all arbitration cases in the FINRA forum and, in December 2018, the FINRA Board approved the filing of proposed changes to the FINRA Code with the SEC to prohibit compensated NARs from being able to represent parties in all arbitration cases.

Notwithstanding both the unanimous support of the NAMC for a prohibition on allowing compensated NARs from representing parties in all arbitration cases in the FINRA forum and the approval of the FINRA Board for the filing of a proposed rule change with the SEC consistent with this recommendation, as of the present date, nothing has been filed in the subsequent forty (40) month period of time nor has any explanation been provided to explain this unconscionable delay.

This regulatory paralysis remains perplexing.  The NAMC unanimously approved the rule filing.  The FINRA board purportedly approved the rule filing.  Yet despite that, over three years have passed without any rule filing.

Some of this lassitude may be attributable to the Trump Administration's odd policies requiring twice as many regulations to be removed before any additional regulations could be implemented.  But a new administration has held sway in D.C. for some time without any rule proposals coming forward.  

Part of the rationale for embracing self-regulatory organizations is that their quasi-private nature and flexibility may make them more vigorous than traditional government agencies.  This has not translated into swift action along a range of investor protection priorities from expungement reform, barring non-attorney advocates from the forum, or discovery reform.

Caruso is not the only commenter to use the occasion to discuss regulatory delays.  The current chair of the NAMC, Nicole Iannarone, commented as well. In addition to providing thoughtful comments in support of the proposal for expedited processing, Professor Iannarone "join[ed] in the comments of former NAMC chair Steven Caruso that NAMC recommendations should be considered more expeditiously[.]". She also "respectfully request[ed] that FINRA dedicate additional resources to accomplish this aim."  

Hopefully we'll begin to see more activity on this front soon.

| Permalink


Post a comment