Thursday, March 14, 2024

The SEC Should Allow FINRA To Regulate Non-Attorney Arbitration Representation

For a long time, compensated non-attorney representatives (NARs) have been a blight on FINRA's securities arbitration forum.  PIABA released a report highlighting problems with these groups in 2017.  After considering the issue, FINRA moved to largely ban non-attorneys from representing investors in securities arbitration.  The proposed rule change expressly permits law school clinics or their equivalent to continue to appear on behalf of investors.  The proposal was even approved by the SEC's Division of Trading and Markets on January 18, 2024 pursuant to its delegated authority. 

Despite the lack of any opposition in the comment file, an unknown SEC Commissioner blocked the rule from going into effect under "Rule 431 of the Commission’s Rules of Practice" on January 19, 2024.  That rule provides that:

An action made pursuant to delegated authority shall have immediate effect and be deemed the action of the Commission. Upon filing with the Commission of a notice of intention to petition for review, or upon notice to the Secretary of the vote of a Commissioner that a matter be reviewed, an action made pursuant to delegated authority shall be stayed until the Commission orders otherwise. . . .

As it stands, the change has been indefinitely delayed.  Compensated NARs cause problems for investors because they operate in lieu of attorneys without being bound by the ethical constraints governing attorneys.  As one comment letter explained, this ethics gap leads to major problems.  The NARs charge non-refundable up-front fees and settle cases without client approval.  St. John's Securities Arbitration Clinic has filed multiple letters in support of addressing this problem.  As a 2017 letter from St. John's explained:

NARs are not governed by the same constraints governing attorneys. Most notably, there are no ethical rules limiting the conduct of the NARs. Individuals who fail to receive competent representation from an NAR may have no recourse.

If an incompetent attorney botches a case, the client has a claim for malpractice.  When an incompetent NAR does the same, the client cannot bring a professional malpractice claim because the NAR owes no professional ethical duties.

Hopefully, the SEC will allow the rule change to go into effect.

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